Home ownership boosts personal wealth

PROPERTY prices continue to rise in many parts of Australia, and that's likely to see long term renting become more common. However many renters aspire to owning their own home one day, and with good cause.

The latest figures from researchers RP Data highlight how challenging it can be to get a toehold in today's property market.

The median home value in Sydney is currently $630,000. Not far behind is Darwin with a median of $547,000. In Canberra the figure is $526,000 and in both Melbourne and Perth the median value is $515,000.

Values are slightly more affordable in Brisbane (median dwelling value: $435,000), Adelaide ($390,000) and Hobart ($338,000).

Faced with these sorts of high property prices, it's understandable that some people sideline the goal of home ownership altogether and opt to rent indefinitely. It may be more affordable but there can also be significant long term downsides.

Look at it this way. Every dollar you pay in rent goes into someone else's pocket. It temporarily buys you a place to live but gives you little financial benefit in the long run. If you have to pay to have a roof over your head, you may as well pay the 'rent' to yourself - which is a less painful way of looking at your home loan.

I know this line of thinking is open to criticism because in the short term at least, the economics of renting versus buying tend to favour renting.

The loan repayments when you first buy a place are likely to be more than if you were renting in the same area. Buying also involves hefty costs like stamp duty and legal fees plus ongoing expenses like building insurance, rates and repairs and maintenance - none of which apply to renters.

However from a purely financial stand point renters are likely to be worse off over the very long term. That's because paying off a mortgage is a form of forced saving - something that tenants also don't face.

The Australian Bureau of Statistics (ABS) looked into this issue last year, and its findings were compelling.

The ABS found that across Australia, there is a strong link between personal wealth and home ownership. It crunched the numbers to show that home owners who had paid off their home have an average net worth of $1.2 million. Among home owners still paying down a mortgage, average net worth is $790,000.

Renters on the other hand had net worth averaging just $160,000. Even allowing for tenants who rely on low cost public housing, the ABS found those people who rent from a private landlord have an average net worth of $179,000.

The bottom line is that there can be an argument for renting. And yes, there's no doubt it can be very tough to get into the housing market, often with some compromises on where you'd like to live and where you can afford to buy. Despite this, planning to buy a property to live in is likely to be more beneficial in the long run.

A well-selected property for which you paid a fair market price should continue to rise in value over the long haul, and the time will come when you own your home mortgage-free. If you plan to rent long term you need to be very committed about putting aside and investing the money you may save in the short term by renting, to avoid sacrificing your long term financial security.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.