Is it cheaper to rent or buy property?

It is one of the age-old questions asked by property buyers. In a particular area, is it cheaper to rent or buy? Property analysts CoreLogic has come up with the answer.

Servicing a mortgage is now cheaper than paying rent on 36.3 per cent of Australian properties. Which means for 64 per cent of properties you’re better off renting than buying.

Of course, it depends on the individual property and the region. I’ve always said to people who complain to me that they can’t afford current property prices that I can present a very convincing financial argument that it’s better to rent than buy.

But that’s based on the assumption you invest the difference between the rent and the cost of financing the purchase of that same property. You don’t blow the difference.

Cheaper to rent or buy?

The CoreLogic analysis was undertaken at the individual property level. They used a set of mortgage assumptions and valuation estimates to approximate mortgage repayments. These were then compared with rental estimates at the individual property level. Using these estimates of mortgage and rent, the data reveals striking differences in housing costs across different parts of Australia.

The highest proportion of properties where paying a mortgage is cheaper than rent is across Regional NT (96.4 per cent). Darwin at 86.5 per cent was the next area.

Source: CoreLogic. Mortgage assumptions used were an 80% loan to valuation ratio, ie, it assumed the buyer had a 20% deposit saved. An interest rate of 2.4% (based on the average new lending rate for owner occupiers reported by the RBA at May 2021). And a 25 year loan term. No mortgage fees or transaction fees are assumed. The Loan value is derived based on the individual property value estimate. Rental repayments are based on the CoreLogic rental estimate of the individual property.

Aside from Darwin, regional Australia generally has a larger proportion of suburbs where it’s cheaper to service a mortgage than pay rent.

Across Australia, the increase in areas where it is cheaper to buy than rent reflects falling home loan interest rates. Average new mortgage rates for owner occupiers have fallen from 3.21 per cent in February 2020, to 2.40 per cent in May 2021.

Where it’s cheaper to rent

However, reduced interest costs have not led to cheaper mortgage serviceability relative to rents in every instance. This is especially the case in Sydney, where property values have increased markedly against low interest rates.  This has pushed up the amount being borrowed, outpacing growth in rents.

Since February 2020, Sydney dwelling values have increased 15.2 per cent while Sydney rents only increased 2.1 per cent. The relatively subdued rental growth may be largely due to a loss of rental demand from stalled overseas migration, where Sydney and Melbourne have traditionally been the most popular destination for international arrivals.

The combination of lower rent growth and very strong dwelling value growth has meant that just five per cent of Sydney properties are cheaper to pay down a mortgage than rent. So in 95 per cent of Sydney properties you are financially better off renting than buying.

But as I mentioned earlier, it’s what you do with the savings that is critical. Blow the savings on lifestyle spending and you’ve wasted the advantage. Invest the difference and you’re building real wealth.

But, would you want to live there?

This kind of analysis historically has also shown that just because an area sees cheaper mortgage costs than rents, does not mean people would necessarily want to buy there. Regional Northern Territory and Outback Western Australia are prime examples. Rental costs tend to be higher in these regions because accommodation that suits a more transitory lifestyle is in higher demand. For example, in proximity to FIFO mine sites.

This dynamic is echoed to a small extent across larger, east coast cities. The regions where rent payments are more likely to outstrip mortgage repayments generally reflect lower socio-economic areas within a city. These are areas where property is not as expensive, but there is demand pressure on rental markets. This could be because of affordability constraints on barriers to entry around home ownership (such as a deposit hurdle, professional services or stamp duty payments).

CoreLogic says the analysis is a good reminder for renters to weigh up housing costs and savings, to see if it is time for a change in tenure.

This article contains general information only. It should not be relied on as finance or tax advice. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and issues.