How renters can avoid fear of financial failure
Whether or not it’s always true, renting your home rather than owning it is seen as a marker of financial struggle in Australia.
Likewise, home ownership is widely regarded as an indicator of financial independence – or at least a step towards it.
If someone owns their home, either alone or as part of a couple or group investment, there is a perception of personal wealth versus the relative lower net worth of a renter.
Of course, it’s not always true. People have many different reasons for renting – often because they are only in a town temporarily.
But for those living permanently in a town, renting – especially in some parts of a city – is associated with a lower socio-economic position and financial stress.
“Unlike some of our European counterparts, Aussies have always had this desire to own their own piece of turf. I think there is a stigma if you don’t own your own home,” says Hamish Ferguson, Newcastle Director of Vision Property and Finance.
This is arguably especially even truer in Australia’s big cities than its regional areas – where property values and price growth are usually much lower than in big towns and cities, often based on demand.
It’s a painful reality for renters that the median Sydney house price increased by $1,100 a day in 2021 – dramatically more than most could hope to save.
Overall Sydney median house prices grew an astonishing 33 per cent in the previous 12 months to $1.6 million.
In Canberra, median house price growth was even higher at 36.6 per cent (to $1.18 million), in Adelaide, it was 27.5 per cent (to $731.547) and it was 25.7 per cent in Brisbane (up to $792,065). In Melbourne, prices grew 18.6 per cent (to $1.1 million).
This of course has a positive impact on home owners’ financial positions.
Their investments look safe and savvy and in a powerful practical reality, they can borrow against their increased equity to purchase more property or capitalise on what they already have.
So long as property prices do not tumble many homeowners’ financial futures look reasonably assured.
But what impact does price growth have on renters, apart from making owning homes look more and more out of reach in capital cities?
Can renters get caught up in negative belief systems and perceptions of a two-tiered system extending to financial instability.
Can and do they begin to ‘give up’ on financial independence because of this?
For many, the answer would be a resounding ‘yes’.
How to avoid the mindset traps around home ownership
The polar opposite perception of financial independence is financial struggle, which is provocative and emotive.
There’s little wonder that positive and negative mindsets come with these positions – whether they are totally true, partly true or just perceived.
“Often people place the stigma of not owning a home on themselves,” notes Mr Ferguson.
He says the first mindset trap to avoid is that if I owned a home “it would solve all my problems”.
This belief is simplistic.
Owning a home is a huge commitment, often a lifelong one and it doesn’t guarantee financial success when you sign a contract.
In fact, any big contract that involves large sums of money requiring a long-term commitment to make repayments is inherently a financial risk.
You need to be well prepared to enter such a contract and have contingency plans in case your personal situation changes.
So, what can renters do about the negative mindset they might fall into?
Is it possible to avoid self-defeating patterns that might ingrain financial difficulties just because you’re a renter?
The reality is if someone is not really ready to buy that renting – within your means and with a savings goal – is by far a better option than scrambling to buy a home and that could instantly put you into mortgage stress.
Mortgage stress is most commonly defined as a household spending more than 30 per cent of your pre-tax income on home loan repayments.
“You can avoid the mindset traps by not thinking that you have to ‘keep up with the Joneses’ and realise that often the picture people show is not the real or true picture,” Mr Ferguson says.
Mindsets that tell us either home ownership is straightforward, or that it is out of reach, are unhelpful. Both are types of ‘black and white thinking’ that can lock us out of seeing other possibilities.
Getting into financial reality to overcome black and white thinking
We need to be in reality about our financial position and what’s involved with all the steps towards buying a home – and alternative investment options.
An absolutely vital first step is to learn how to monitor and measure your own wealth, ongoing financial position, and get advice around this.
Do you have a clear idea not just of your current income versus expenditure, but of how this might change in the next 5-10 years?
Factors influencing this include:
- Your health and that of loved ones;
- Whether your employment is stable;
- The likelihood of increasing or losing income;
- Having a family, schooling; and
- The stability of your other financial commitments, i.e. business ownership.
“A good example is if someone comes to me wanting to purchase a property but I tell them they are up to two years away from doing this,” Mr Ferguson says.
“The hard decision is to either work towards this for two years or ask what else can be done.
“Often people give up as the goal is too far away and it is too hard to break a big goal up into smaller goals.”
The real benefits of renting
Can renting be a good thing, can it have positive outcomes financially?
Absolutely yes it can – provided renters maintain discipline around their personal finances.
“Home ownership is often only good because it forces people to pay down the loan and create equity,” Mr Ferguson says.
“If you don’t choose property then it is important to psychologically apply the same level of discipline to putting money away.”
This is hard to do in today’s society where immediate gratification and appearing successful on the outside seem too important and prevalent.
The benefits of renting include:
- More freedom to travel the country and the world;
- Less of a financial commitment, especially upfront;
- No maintenance costs or repair bills;
- No property taxes;
- Greater ability to reduce living costs if your situation changes; and
- You are likely to have more disposable income.
It’s worth noting that there are downsides to home ownership too. Remember the point about ‘keeping up with the Joneses’. That clichés has survived so long because it’s true.
- Huge upfront costs and high-pressure transactions;
- High costs of maintenance, many of which are ‘hidden’;
- Mortgage stress is a constant pressure;
- Chaos caused by defaulting on mortgage; and
- Relationship breakup can mean you lose a house anyway.
How renters can still work towards financial independence without owning a home
Once you let go of the mindset that you’ll be a failure if you don’t own your property, you make room for other investment options and choices.
An exchange-traded fund (ETF), managed funds including shares are seen as a successful alternative by many experts.
Vanguard Index Report said shares averaged 9.31% in gross returns each year in a 10-year period to June 2021 in Australia. This makes it the second-highest-returning Australian asset behind residential property.
Around $2,000 is enough to get started with a share portfolio, but you shouldn’t expect returns for around five years.
There is no need to borrow to get going and in a crisis, you can remove your investment in a matter of days.
They can start a managed fund or shares portfolio or they can purchase their first property in a lower priced area and rent it out as two examples.
A renter can also focus their savings on some sort of small business or side hustle to create a better income stream
It all starts with budgeting and recognising your own negative mindset so you can become more open to other investment options.