Owning a home has been part of the Australian Dream for decades. It was a sign of attaining a certain level of wealth, and the stability that comes with it. And for many, it was a great investment.
But the realisation of that dream is more an aberration now. As housing costs rise to unattainable levels across the country, an increasing number of people under the age of 40 have to come to terms with the fact that they’ll never own a home at all.
Instead, they continue to rent well past the time their parents were home owners, spending more than half of their monthly incomes on a place they’ll never own.
And while that’s used as an (appropriate) example of the decaying state of the average Australian’s finances, a new working paper from the US National Bureau of Economic Research argues that, actually, renting is a good investment in its own right.
It makes sense. As the authors of the paper, Esteban Rossi-Hansberg and Adrien Bilal, an economics professor at Princeton University and PhD student, respectively, argue, “the location of individuals determines their job opportunities, living amenities and housing costs”.
Rather than investing in a property to flip in a few decades, tenants are investing in a location asset. And like any asset, you need to think in terms of the rate of return — what are you getting out of living there?
Many people rent in places with a high cost of living for the job opportunities, good schools, cultural offerings and so on. (On a personal note, as I wrote recently, living in New York not only puts me at the epicentre of the media world, but in close proximity to any number of classes and workshops hosted by experts in every profession imaginable.)
“Buying more of the asset involves moving to better locations that cost more today but give better returns tomorrow, while selling the asset implies moving to cheaper locations with little opportunities,” the authors write.
CityLab breaks down the paper’s argument:
[W]hen you choose to move to a pricier and amenity-laden city, you’re transferring resources into the future — i.e., saving! — by establishing yourself near opportunities for higher pay and human capital, Rossi-Hansberg and Bilal argue. On the flipside, when you relocate to a community with a lower cost of living but fewer economic advantages, you’re pulling resources into the present that you might have gained in the future — i.e., borrowing.
It should be noted, of course, that not everyone can afford to “save” in this sense, just like not everyone can afford to set aside money each month for their emergency fund or superannuation.
But as CityLab writes, it could be a nice psychological trick for the perennial renter out there: Think of your rent as an investment gain in your and your children’s future opportunities, rather than a loss because you’ll never own the property.