Home- To buy or Rent?

In the past week, the Reserve Bank of Australia released a statement saying that it would be better to remain a home renter than to be a home owner.

When I first came to Australia about five years ago, I noticed that Australians like Malaysians (or Asians) in general, are home owner obsessed. As a kid growing up in Malaysia, I always hear my dad saying we must always own a home regardless of our situation. Even a small roof would suffice as it will always protect us, come rain or shine.

Being new to the Australian market, I decided to do some research and I came to the following conclusion:

1) Renting a similar home in the same suburb will generally cost less than home ownership in terms of cash outflow

2) Renting means not having to deal with the challenges of home ownership including repairs, maintenance, strata fees, neighbours (in a strata property) etc.

3) Renting provides flexibility to the tenant, they can move in or out easily or on the opposite site, less certainty as well as the landlord may sell, increase the rent or give notice to vacate for whatever reason

4) Not having your own home, means not being able to renovate, expand or change the configuration of the house or even put nails or change the colour of the walls

Most people have the notion that paying rent is "dead" cash outflow as compared to mortgage repayment which goes towards reducing the loan. I tend to compare rent payments no different from interest repayments, both are "dead" cash outflow. Only the payment of the principal loan amount reduces the loan and as we all know during the early part of any long term loan, most the payment goes towards interest rather than principal unless one borrows little.

I did read similar essays back then which provided some evidence under certain assumptions, renting was better than buying/owning financial wise. I won't be discussing about the non-financial or intangible benefits of owing vs renting and limit myself to the main assumption what I believe then, was the main reason why renting was financially better than buying/ owning.

As stated in (1) above, one will generally be expected to have some "surplus" cashflow arising from renting compared to buying using a mortgage i.e. paying off the loan. The only situation where one will not be in this situation is when one has a small or no loan from buying a home i.e. a cash buyer having 100% equity or near to 100%, say 80% or so. Most home buyers will generally be geared up to at least 80-90% when buying a home in the form of a mortgage.

The main reason or assumption why renting can be better than buying a home financial wise is when one invests the surplus cash which then provides a positive return in excess of the rise in the capital value of your home.

For e.g. if renting costs one $500/ week but mortgage repayment will costs one say $700/ week, the renter will financially be better off than a home owner IF, the $200/ week surplus is:

i) Invested wisely and properly
ii) Grows and reinvested wisely and properly
iii) Invested over a long term period similar to a home mortgage, i.e. 20-30 years which is a typical mortgage period

The challenge however in reality is most renters, will not however be investing the surplus $200 cash wisely and diligently each week. I can probably bet my last $, that the surplus funds will be going somewhere else rather than being invested.

Hence if one is unable to invest diligently, properly and wisely whatever surplus one may obtain from renting vs paying a home mortgage, having a home mortgage forces one to save for the old age with a certain level of security in terms of investment assets.

Optometrist and the price of glasses

In Australia unlike Malaysia, most healthcare insurance provides an option for prescription glasses (spectacles) every calendar year. As my healthcare insurance includes this cover, I visit an optometrist every 1 or 2 years.

This time round due to my age, multi focal lenses were prescribed to me for the first time. Due to the price of multi focal lenses, it appears that I would have to pay i.e. top up beyond what is covered by my healthcare insurance provider.

In Australia it is not unusual for one to see advertisement that says you only pay say $199 for two pair of glasses including lenses. As insurance cover is usually around $200/year, one would assume that one would not be required to top up any extra costs i.e. no gap, as it is called in Australia.

This visit however I decided to ask more question (unlike the past when I was not out of pocket i.e. no gap).

Firstly, $199 (sticker list price) for two pairs usually cover a limited range of frames and only include the "standard vision" lenses. If you wish to buy one pair, this retailer I went to will only deduct 25% off the $199 i.e, a cost of $199 less 25% or about $150. Looks like my maths have failed me here where if you take 1 pair instead of 2, you pay 75% off the two pairs sticker price.

My prescribed multi focal lenses were also priced on a two pairs basis, so if I choose only one pair, I get penalised by getting only 25% off the pricing for two pairs.

Secondly, there is also the other lens option which is then priced on a per pair basis by usually "recommended" including ultra clear, sun protection, thinner & lighter lenses etc. The price for this ranges from $50 to as high as $280 per pair where I shopped.

In total my 1 pair of glasses cost me around $500 before my insurance or around $300 after insurance coverage.

In future if I ever were to start my business venture, I  may consider pricing my products or services on a two or more quantity basis and if anyone wishes to buy one, it will be only less 25% or something else.

I wonder where ACCC is, on this issue?