Increasingly, a mortgage is cheaper than rent (if you ignore costs)

Posted on 10/03/2009  

It was inevitable, based on recent market trends, that we would arrive at a point where growing numbers of urban Australians found it cheaper to buy than to rent.

 

With prices soft and interest rates down at a time when vacancies are low and rents high, the equation for buying versus renting has been shifting.

 

In an increasing number of locations, buying is now cheaper than renting, according to a new report – as long as you ignore buying costs, ongoing maintenance and the need for a substantial deposit to get a mortgage.

 

A simple comparison between typical mortgage repayments and typical rents in a given area overlooks many complexities but it does say something about where the market is heading.

 

And, looked at from a different angle, it’s really the same as saying that these locations have homes that provide positive cashflow investments for landlords – which is nothing new, but one way to get publicity is to take an old idea and re-package it with a new label.

 

Let’s also not forget that the source of the report, the Commonwealth Bank, has a vested interest in having people believe that it’s cheaper to buy than to rent.

 

So the bank has put together a list of locations around Australia where mortgage payments, theoretically, are lower than rental payments. It says there are 74 such locations, based on figures provided by RP Data.

 

Any real estate calculation spat out of a computer without careful scrutiny is fraught with risk of error – particularly when the information fed into the computer includes two sets of rubbery figures, median prices and median rents.

 

Often the result is nonsense – and in the case of the Commonwealth Bank survey, most of the 74 locations are mining towns where the normal relativities are distorted by accommodation shortages leading to extremely high rents. And for most of the people renting in these places, the fact that it may be cheaper to pay a mortgage than to pay rent is irrelevant because they’re only temporary residents working short-term in the local mine.

 

Really, what they are saying is that mining towns often provide high yields sufficient to create cashflow positive properties for investors. Did we really need to new report to tell us that?

 

It’s probably also true that many of these resources sector locations are currently undergoing an adjustment in the opposite direction, as mine closures or downsizing threaten to turn accommodation shortages into over-supplies, leading to sharply lower rents.

 

However, 34 of the 74 locations are suburbs of capital cities.

 

The Commonwealth Bank study is based on the median price for units and houses within each location, versus the median rents in that location. It uses the median home price to work out how much money would need to be borrowed (assuming a 15% deposit) and what the monthly repayments would be for a 30-year loan at 5.74%.

 

On this basis, the study finds that there are 34 metropolitan locations (18 in Sydney, 7 in South East Queensland, 4 in Canberra, 2 in Melbourne, and 1 each in Adelaide, Perth and Darwin) where the mortgage repayments would be cheaper than the median monthly rent. (For the purposes of this research, Tasmania doesn’t exist).

 

In most of the city examples, it is units rather than houses that provide the right scenario. An example, according to RP Data, is provided by Rushcutter Bay units in Sydney, where the median price is $341,403. With a loan of $290,193 (85%), monthly repayments over 30 years with an interest rate of 5.74% are $1,692. The median rent for Rushcutter Bay units is $1,800 per month, which means it’s (theoretically) $108.36 cheaper to have a mortgage than to rent – assuming the various medians in the equation are realistic.

 

This scenario ignores the reality that a buyer will have to come up with a deposit of over $50,000 and fork out many thousands of dollars in stamp duties, legal fees and bank charges. The First Home Owners Grant will only get them a fraction of the way.

 

RP Data says in its report that we have arrived at the scenario of buying being cheaper than renting because property values have fallen (albeit only a modest 2.9% in 2008), interest rates have come down to 45-year lows, while rents have recorded “several years running of dramatic growth”.

 

“The effect of these combined factors is that many renters are now doing their sums to work out whether paying off a mortgage is actually going to be cheaper than paying a landlord,” it says.

 

Areas where this is so include Melton West in outer Melbourne, Gilles Plains in Adelaide and Sunnybank Plains in Brisbane, all places where the units are cheap and the rents are relatively high.

 

ENDS

  

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