How much does a house need to appreciate to beat renting?
Less than most people assume when rents are high, and far more when they are not. Here is the break-even growth across a range of rents and mortgage rates, and how to work out your own.
Updated · Figures calculated with the rent vs buy calculator
The short answer
It depends mostly on two things: how much rent you would pay compared with the price of the home, and the mortgage rate. For a $700,000 home with $140,000 down, a 6% mortgage and rent of $2,500 a month, buying beats renting over 10 years if the home grows by more than 1.98% a year, before buying and selling costs. Halve the rent to $1,250 and it needs 4.29%.
The comparison is between two households with the same money. One buys; the other rents and invests the down payment, and whichever is cheaper each year invests the difference. The break-even growth is the rate at which they finish with exactly the same wealth.
Break-even growth by rent and mortgage rate
For the same $700,000 home, over 10 years, with 3% yearly rent rises and a 5% return on invested cash:
| Mortgage rate | $1,750/mo | $2,250/mo | $2,750/mo | $3,250/mo | $3,750/mo |
|---|---|---|---|---|---|
| 4% | 1.9% | 0.9% | -0.3% | -1.7% | -3.2% |
| 5% | 2.7% | 1.7% | 0.6% | -0.6% | -2.0% |
| 6% | 3.4% | 2.5% | 1.5% | 0.3% | -0.9% |
| 7% | 4.1% | 3.2% | 2.3% | 1.2% | 0.1% |
| 8% | 4.8% | 3.9% | 3.0% | 2.1% | 1.0% |
Each figure is the yearly price growth buying needs to draw level; each links to that scenario in the calculator. A negative figure means buying wins even if prices fall by that much each year. Read across a row and the effect of rent is large: every $500 of monthly rent moves the bar by roughly a percentage point. Read down a column and each point on the mortgage rate adds a little under one point of growth.
Use the price-to-rent ratio to find your row
The price-to-rent ratio is the price of a home divided by a year's rent for a similar one. The calculator's default is $700,000 against $30,000 a year, a ratio of 23.3. Low ratios, where rent is high for the price, favour buying. High ratios, common in expensive cities where rents have not kept up with prices, mean the home has to grow quickly before buying pays.
To use the table for a different price, scale the rent with it. A $1,400,000 home rented at $5,000 a month has the same ratio. The mortgage, the down payment and the rent all double, so the table is a fair guide, but it needs 1.52% rather than 1.98% because the same $6,000 of yearly ownership costs is a smaller share of a dearer home. In practice those costs rise with the price too, so check your own figures in the calculator.
How long you stay
| Years before selling | Break-even growth |
|---|---|
| 3 years | 2.3% |
| 5 years | 2.2% |
| 10 years | 2.0% |
| 15 years | 1.7% |
| 25 years | 1.1% |
With no buying or selling costs counted, the time horizon matters less than you might expect. It matters a great deal once those costs are included, because a short stay has to recover them in only a few years of growth.
Buying and selling costs change the answer most
The calculator leaves out stamp duty or transfer tax, agent and legal fees, because they vary so much between countries and states. Here is a rough allowance for them on the default scenario, with buying costs treated as money the renter would have invested instead:
| Buying and selling costs | Break-even growth |
|---|---|
| None (as in the calculator) | 2.0% |
| 3% to buy, 2% to sell | 2.6% |
| 5% to buy, 3% to sell | 3.0% |
Over 10 years these costs add a fraction of a point to the growth needed. Over 3 years, 3% to buy and 2% to sell takes the break-even from 2.27% to 4.06%, which is why the usual advice is not to buy somewhere you expect to leave soon.
What else moves it
- What the renter's investments earn. At a 3% return the break-even is 1.3%; at 5% it is 2.0%; at 7% it is 2.7%. Renting only benefits from this if the money really is invested.
- The size of the deposit. With 10% down the break-even is 2.1%, with 20% it is 2.0%, and with 40% it is 1.8%. A bigger deposit means less interest but more cash that could have been invested, and which wins depends on whether the mortgage rate is above or below the investment return.
- Rent rises. The faster rent rises, the more each year of owning saves, so faster rent growth lowers the bar.
How to work out your own
- Find the asking price of the home and the rent for a similar one nearby.
- Get a realistic mortgage rate, then try it a point or two higher as well.
- Estimate yearly ownership costs: rates, strata or body corporate, insurance and maintenance. One per cent of the price is a common starting point.
- Enter them in the rent vs buy calculator and read the break-even. Then ask whether homes like this one, where you are looking, have grown faster than that over a long run, and whether you expect them to keep doing so.
The limits of the answer
These figures are before tax and nominal, and they treat both households as disciplined savers. They also price only money. Owning brings security and the freedom to change the home; renting brings the freedom to move. A break-even tells you what the financial bet is, not whether it is the right one for you.
More guides
- Is it better to pay cash for a car or finance it? It comes down to one comparison: what your cash would earn against what the loan really costs. Here is how to make it properly, and the two offers that can flip it.
- Does a rental property beat a savings account? Only if it grows fast enough to cover the gap between its rent and its interest. Here is how fast that is, across yields and loan rates, before tax.
- Should you pay off your mortgage early or invest? Overpaying earns your mortgage rate for certain; investing has to beat it after tax and risk. Here is where the line falls, and what moves it.