Property prices have fallen significantly during the past two years, making houses much more affordable than they have been for some time. Despite this, buyers are still in short supply. The most logical reason for this is that buyers expect prices to either continue dropping or to at least stay
flat for some time. This creates a dilemma for first home buyers and people moving towns; is it better to rent or buy in the short term?
Whether you are buying a property to live in or to rent out, there are two factors to consider. The first is the extra income you will have if you buy, either because you are no longer paying rent or by renting to someone else.
The second is the capital gain you can expect from owning the property. Property prices are not expected to increase significantly over the next three to five years.
At the same time, rents are still low in comparison with property prices. If you can rent a property for an annual rent of 5 per cent of its market value, why would you borrow money to buy when the interest rate is around 7 per cent and there is little prospect of capital gain?
In the short term, with no expectation of prices increasing, renting makes sense unless you can buy a property well below market value. For first home buyers, this allows more time to save a bigger deposit and for others who have sold, it is an opportunity to live more cheaply in the kind of house that might have been out of reach to buy.
In the long term, it makes sense to buy a property for security and to ensure you don't get left behind when prices rise.
Liz Koh is a financial adviser. Her disclosure statement can be obtained free of charge by calling 0800 273 847. Author of Your Money Personality; Unlock the Secret to a Rich and Happy Life, Awa Press, March, 2008.
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