Mortgage Choice has released some highly questionable “research” claiming that it is now cheaper to buy than rent in all of Australia’s capital cities, except Melbourne. From the AFR:
It’s cheaper to buy a home than rent in almost every Australian capital city…
Thanks to cheaper loan repayments as interest rates have come down, mortgage broker Mortgage Choice points out that based on the average loan size for each state it costs less to make a mortgage repayment than pay the rent in every city apart from Melbourne…
The figures are based on house prices rather than units, and assume a basic variable interest rate of 5.9 per cent…
“The small difference between rent and loan repayments within some areas is encouraging for many potential buyers,” said Belinda Williamson of Mortgage Choice. “Of course, home-ownership costs such as land tax, strata fees, council rates, water consumption, insurances and maintenance need to be factored in.”
There is a lot that is wrong with Mortgage Choice’s analysis. First, it has chosen to compare the average first home buyer (FHB) loan size against rental payments, and conveniently chosen to ignore the buyer’s deposit, which represents a true opportunity cost. The below table, which adds to Mortgage Choice’s data, illustrates this point:
Column [A] shows RP Data’s median dwelling values as at December 2012, whereas column [B] shows the difference between the median dwelling value and the average loan size. Obviously, the figures added above are for illustrative purposes only, since your typical first home buyer would not buy a median priced dwelling and would instead opt for a cheaper house or apartment.
Nevertheless, in Sydney, the $271,946 difference between the median dwelling price and the average loan size could buy 543 week’s rent at the prevailing rental rate ($500 per week). It could also earn the buyer $11,286 a year in interest (pre-tax) if placed in a one-year term deposit account (at 4.15% interest), which could then also be put towards rent or other consumption. The key point is that a housing deposit represents a true cost to the buyer as the funds tied-up could be used for other purposes. As such, these costs cannot simply be ignored.
Second, if we ignore the required deposit and instead calculate the required weekly interest-only mortgage repayment on a 30-year loan at 5.9% interest, you see that it is more expensive to buy a median priced dwelling in all of Australia’s capitals, except Darwin, than it is to rent (see columns [C] and [D] above).
Finally, Mortgage Choice’s analysis does not take into consideration the many costs associated with owning a home: rates, maintenance etc, though these might be offset by capital growth, if it occurred.
In any event, RP Data’s October Buy versus Rent report, which assumed a 10% housing deposit and also ignored the costs associated with home ownership, found that it was cheaper to rent than buy in 93% of locations across Australia (see next table).