Why it still makes sense to rent.

Do the maths before you rush into any decisions. At least sometimes, renting is still the smart thing to do.

Consider this listing, and this listing, both for a lovely house in the picturesque town of Blackheath, just at the outer edge of the Sydney commuter radius. The house is on the market for rent, and for sale, simultaneously, with the owner clearly keen to test both markets and see where the interest is. This provided a perfect opportunity to do a side-by-side comparison of the costs of renting vs buying. At least in the short term, renting wins hands down. The overall monthly cost of renting $2400, is less than half what it costs to buy, which according to the domain mortgage calculator is $6,424, including interest and principal. An interest only loan would cost $5,254, according to the same source, implying 82% of the interest and principal payment goes to interest.

This flies in the face of the “common sense” argument that renting is dead money that you never get back, whereas paying off a mortgage is necessarily building equity — but that’s only true to the extent you are actually paying down that debt, and only assuming the house prices grow faster than other available asset classes, some of which can be accessed without the need to take on huge debts, with huge servicing cost.

If someone has $6424 a month to cover both housing and investment, they could rent for $2400, and invest the remaining $4024 a month in an asset class they can actually afford like stocks, or bonds, where they are the lender, rather than the borrower, and the interest payments go the other way.

The only reason to be sceptical of this position is a conviction that house prices will continue to outperform all comparable asset classes, as they have for the previous four decades, as interest rates fell to record low after record low. This is possible. But it is far likelier as we move from one historical epoch to another, a reversion to mean will occur, which will see housing underperform relative to other asset classes, and fall, at least relative to GDP, wages, and all the other indicators it has raced out ahead of for so long.