Cheaper to rent than buy in 93%+ of locations

By Leith van Onselen

RP Data this week released its Buy versus Rent Report for October (available for download here), which has received some positive press for the seemingly large increase in the number of locations where it is supposedly cheaper to buy than rent – from 238 suburbs and towns in August  2012 to 388 suburbs and towns in October.

While 388 suburbs and towns sounds like a lot, it actually represents only 7% of locations around Australia where buying a home is supposedly cheaper than renting, according to RP Data’s own figures used in its report. A breakdown by state of the results is provided in the below chart and table:

RP Data’s assumptions and methodology are as follows:

  1. A loan to value ratio (LVR) of 90% which means that the purchaser is borrowing 90% of the value of the home (i.e. they have a 10% deposit).
  2. A variable mortgage rate of 5.9% per annum (i.e. the current discount variable mortgage rate published by the RBA).
  3. The loan period is 30 years.
  4. The repayment schedule is monthly.
  5. The principal is calculated based on the suburb’s median house and unit value as at June 2012.
  6. Rental costs are based on the median weekly advertised rental rate across the suburb over the past 12 months to June 2012.

The analysis also does not provide consideration for costs associated with either home ownership or renting which may include but are not limited to:

  1. Maintenance
  2. Council rates
  3. Electricity
  4. Water and sewerage
  5. Land tax
  6. Body corporate levies
  7. Stamp duty
  8. Legal and conveyancing fees

Clearly, RP Data’s methodology is a bit simplistic and skews the results in favour of buying.

In particular, not including the buyer’s assumed 10% deposit in its analysis is curious given that it represents a true opportunity cost. For example, a $40,000 deposit on a modest $400,000 home could buy around 90 week’s rent in a typical Melbourne house. It could also earn the buyer around $1,700 a year in interest (pre-tax) if placed in a one-year term deposit account, which could then also be put towards rent or other consumption.

Similar criticisms can be made about not including costs like stamp duties, which can also be significant. Although, to be fair to RP Data, its analysis also does not include government incentives and subsidies provided to first home buyers, such as first home buyer grants and stamp duty concessions, which obviously provide benefits to first-time buyers over renters.

Put simply, RP Data’s analysis can best be considered an initial guide only. If you are looking at entering the market, do your own research, consider all costs and benefits of buying versus renting, and work out which option works best for you.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

 

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Comments

  1. Renting should be far more costly than owning before this comparison carries any decision making weight.The intangible costs of property damage, non-tenanted periods and imposition on mobility should make the cost of renting, say, 7% more than owning before the cost outweighs the benefits. What other ‘business’ engages in such,’flat’? The historical theory of ‘capital gains outweighs any short term loss’ is likely to have become a theory of the past.

    • Exactly. It should be more expensive to rent than buy a house. The only reason it is the other way around is that the market is so distorted by government interference it has thrown things out of whack.

      When you hire a car, the costs is higher than the repayments if you borrowed the money to buy it.

      When you hire anything I guarantee you 99% of the time it is more expensive to rent than buy.

      Whats better for the government?

      1)have a mobile population that can travel with no obligation to sit down and keep a stable job for 25 years or else lose the house?

      or

      2)have a population heavily indebted as to keep them in order, stay at home, pay their taxes, keep a job or go broke, get bored, have kids to create meaning in their life?

      Option 2 sounds exactly what governments would love from its population.

      • Not so sure it helps the government, but it certainly helps the banks and corporates that own the parties (that currently run the government). And it is certainly a by-product of the retail duopoly that stands most to gain from unfettered population and urban growth.

        Remember however when you hire a house you hire a depreciating asset (the house) and a capital asset (the land). I think if you take the land out of the equation you get your model to 100%.

        Also re the comments below, using interest only is probably not that bad because it is a truer cost of just leasing the house

          • Never cheaper to rent than buy for me, because when I buy I’ll pay cash, the full amount. That’s why I’m so pissed about these astronomic prices that are predicated on the question “how much will this cost me in monthly repayments?” 🙄

          • GunnamattaMEMBER

            I’m a cash man too buddy – waiting in a foreign currency as well. Just hold off a while longer.

            At some point the Australian Real estate world or the AUD (and probably both) skates off the edge of the cliff, keeps skating on momentum for a bit, and then pulls out the ‘oh no’ sign.

    • You have to take into account the cost of inconvenience related to renting which is rather hard to measure. In our dysfunctional rental market it is not easy to find a long term rental which means that if you are unlucky you may be getting kicked out from your rented place quite often. It not only means physically moving your possessions but also going through the hassle of changing address details for typically about half a dozen of institutions, diverting your mail etc. If I was to borrow to buy I’d do it even if rent was about the same as my loan repayments.

      • It not only means physically moving your possessions but also going through the hassle of changing address details for typically about half a dozen of institutions, diverting your mail etc.
        It can also cost several hundred dollars and take a few weeks to get the Internet reconnected. Don’t forget moving children to a new school, cost of getting keys cut, damage to furniture during the move, cost of getting furniture that fits….

      • I recently moved rental places and I was really surprised at how cheap moving costs have become. I bought a livingsocial voucher and the whole move ended up costing $120.

        Changing addresses is also pretty easy now that everything is online.

        Moving possessions I’ve found is not any harder than the yearly spring cleaning that you have to do anyway. And if you’re organised and store stuff in plastic tubs it’s a synch.

        But I get your point. I’d buy a house just so I can plant some fruit trees in the garden.

  2. I’m not sure if we both saw the same article but I thought that the model they used also employed an ‘interest only’ loan – therefore you were never going to actually own the house/flat that you were ‘purchasing’ anyway?

    In places like Ballarat or Bendigo you could possibly get a cheap house for under $200,000 in which case if you planned to stay for a number of years you would probably be better off buying. However the formula changes substantially when you buy are more expensive house or move to a larger city.

    In my part of Melbourne rental returns wouldn’t be much higher than three or four percent so really landlords around here are only doing it for projected capital gain or the negative gearing. If I wanted to buy the house that I live in at the moment I’d be looking at about $1200 a week in interest alone so (as you rightly point out) their formula doesn’t apply to the vast majority of the country.

    • I also saw this study in an article in the Daily Telegraph which stated the comparison was based on an “interest only loan” I fired off The following reply to the editor:
      “What a load of dishonest rubbish! This is an absolutely specious argument.
      If you are taking out an interest only loan, you are not buying. You are paying interest and will never own this item (Not even 10,000,000 years) which is the same as renting .
      It is cheaper than renting but I presume that one could not obtain an interest only loan for a property in which to live. Correct me if I’m wrong and let me know where I could obtain such a loan without a substantial deposit which also must be taken into consideration as part of the overall cost. If loan application fees apply, these should be included I would also presume and how about inspection fees, legal fees?”
      This is typical of the Property Spruikers usual spin. Hopefully people aren’t taken in by such dishonesty

  3. First of all RPData used interest only payments to compare buying vs. renting. This does not provide any other financial benefit of buy but speculation. It doesn’t provide security of owning a home, just ability to speculate on house price. That can easily turn into financial disaster while it is hard to imagine any large financial gain under current conditions (homes are already prohibitively expensive).

    Number of suburbs where this kind of “buying” is cheaper is almost negligible (mostly remote areas with no mining or tourist developments). When all the considerations are included renting is almost always cheaper.
    http://popping-bubble.blogspot.com.au/2011/05/rent-vs-buy-calculator-australia.html

    In current situation, buyer has to stay in the house for more than 20 years to be financially better off than the renter even under optimistic assumptions for price growth with CPI. If for any reason they sell home sooner, time resets to zero. Australians sell homes on average every 10 years or so, so there will be not so many of buyers who will financially benefit from buying compared to renting.

    When buying is compared to renting for 10 years and than buying the same home, result is always in favour of delayed buyer.

    • If the comparison uses interest only, then the field is even more tilted in favour of renting, surely, as most owner-occupiers don’t use interest only (at least that’s the impression I have – anyone to correct?)

  4. “Put simply, RP Data’s analysis can best be considered an initial guide only.”

    I can think of a somewhat more simple phrase to sum up their methodology.

    Dishonest.

    • reusachtigeMEMBER

      You’re too kind. Bullsh*t is more like it! But don’t worry, the spruiking propaganda is really starting to fail the property industry. They’re just making things worse for themselves – people are copping onto them more and more.

      • Is it dishonest or is it bullsh*t?

        Let’s see, who is the source? cRaP Data?

        Ah, that makes it dishonest bullsh*t. 😀

        (My response may seem a bit lawless, but let it pass, mods 😉 )

  5. Good stuff, that article was an amusing read first time around but less amusing when a couple of friends, who use the front pages of newspapers and their websites for economic analysis, asked if it had ‘changed my mind’ about buying a house.

    Don’t underestimate the influence those articles have on people who are not following economic analysis other than at pixel level.

    Grubby stuff that ‘news’ organisations should not be running.

    The sooner the current advertorial model of ‘free’ news fully collapses and is replaced by genuine news services paid for by subscription, if necessary, the better.

    At least it will make it clearer that if you want news and not self interested spruik you need to actively seek it and probably pay for it

    • a couple of friends, who use the front pages of newspapers and their websites for economic analysis, asked if it had ‘changed my mind’ about buying a house.

      God help us all !! The amount of shallow reporting and readership that goes on, is just breathtaking.

  6. In many suburbs there will be properties for sale at prices well below the suburb median price that will offer accomodation with an interest/holding cost at or below rental costs for that area.

    Home ownership is not a birthright, it has to be paid for.

    • Spot on, Peter! And paid for by that owner, not the next bunny who is convinced to pay more for the same thing. Upgrade? Of course. But again when you’ve earned the right ( better job, mor skills etc) to buy a better place, not just by ‘asking’ the new owner of your last place to pay for the up-grade for you.

      • It never works like that Janet, if the value of your house has increased, then so has the value of any house that you wish to upgrade to.

        What you are really trying to say is that house prices should never increase, but the reality is that they do. I would agree that if the increase in prices becomes rampant then it quickly becomes a problem, but some increases are inevitable.

        • The real value of a house should go down as it ages. What happens to the real value of the land it sits on depends on market forces. (And zoning restrictions!)

        • “What you are really trying to say is that house prices should never increase, but the reality is that they do.”

          That may be correct, but lets quantify any real housing growth over very long term data sets to come to a conclusion on what housing growth can be drawn.

          Respected US housing economist Robert Shiller has strongly proven that house prices generally DO NOT have a substantial/strong upwards trend over the long term when he looked at hundreds of years of data for the US (1890-2005), Norway (1819-1989) and Amsterdam (1628-1973):

          http://home.comcast.net/%7Emarkthoma/Graphics/shiller1.gif

          Key quote:

          “Do real home prices have a substantial long-term uptrend? The chart suggests not. First, what about the United States? It’s notable that until the recent explosion in home prices, real home prices in the United States were virtually unchanged from 1890 to the late 1990s.

          The Amsterdam data show lots of ups and downs, but only the slightest hint of an uptrend. Prices approximately doubled, but it took nearly 350 years to do so, implying an annual average price increase of only 0.2% a year.

          The Norway data do suggest such an uptrend, but viewed from the longer perspective of the Amsterdam data, that uptrend seems to be merely part of a long cycle from the early 19th century to the late 19th century. And even leaving the context added by Amsterdam aside, Norway’s real price growth is, on average, negligible: only 1.3% a year.”

          So, contrary to RE propaganda, growth in real house prices over the long term is muted, as exhibited by the whopping 0.2% growth over 350 years in Amsterdam or the blistering 1.3% a year in Norway over 170 years!

          It is simply impossible to expect house prices to outpace real income growth and inflation consistently over the long term. Note the long periods (decades often) when house prices were falling in the US and Amsterdam; anyone born in those times would have thought that house prices always fell as real house prices continued to tank year after year…

          As for the RP Data report, it is simply contemptible with its flawed methodology and looks like it has been designed by a first year theology double major, given you could drive a semi-trailer through the swiss-cheese logic that concludes those 7% of homes are cheaper to buy than rent.

          Maybe they are actually cheaper to buy in an alternative universe where you can default on all your home owning financial obligations and get away with it…

          • Bobby – you make some brilliant points. We have a whole generation of people aged under 40 who have never experienced a recession or prolonged economic problems – house prices (as history shows us) don’t really appreciate by much more than incomes.

            There’s an inherent risk in investing in residential property that many people are completely blind to because they only know the boom times we’ve had since the late 90’s.

          • > Respected US housing economist
            > Robert Shiller has strongly
            > proven that house prices generally DO NOT have a
            > substantial/strong upwards trend
            > over the long term …

            but, but Australia is different, at least for the time being 🙂

          • By alternative universe do you mean USA? Jokes aside, good points. Also if you look at residential property as an investment, over the long term the income stream is confined by wage growth.

        • Peter, with respect, this is bunkum. Back in the real world, this is what has happened for the past 20 years.

          Say “homeowner” buys their first place for $400,000 with 10% down, makes the minimum payments and moves on after 7 years, during which time there has been a 50% price increase (a very conservative number going by what we hear from the RE industry). That person has saved through principal repayments on his/her $360,000 loan something like $40,000. Meanwhile, the greater fool has tipped $200,000 into homeowner’s pocket, giving him/her a total of $280,000 of equity (I’ll ignore transaction costs for the sake of simplicity). So this homeowner can now hop into a place that was 50% more expensive than the first one was at the time of the original purchase (now selling for $900k) with $280k of equity (rather than the $80k actually saved) purely through market magic and leverage (ie. risk).

          A rising market favours speculators – even if they don’t realise that’s what they’re doing. Of course, none of that is real money until you decide to exit the market. And when a lot of people decide to (or are forced to) do it at once you have the situation we are now seeing.

          • And with equal respect to you McPaddy, I said ” if the value of your house has increased, then so has the value of any house that you wish to upgrade to”

            If what I said was bunkum, why did you spend your time proving exactly that?

            A rising market costs every player except the player that doesn’t move, or the one who sells and exits the game.

            If you want to do well in real estate, buy a house that fulfills all of your needs and stay there a long long time.

          • You said: “Home ownership is not a birthright, it has to be paid for.”

            Janet made the point that, yes, it should be paid for by the person living in the home, not the greater fool.

            What I was trying to show was that the fact that the second home is more expensive than the first home does NOT mean that the person upgrading has actually earned or saved that money. They have speculated. Quite different from the concept of earning the right to live in that home, unless we acknowledge that the spoils of gambling are on an equal footing with the spoils of labour and contribute the same to society.

    • I wouldn’t disagree with you on that one Peter. Look at the mess the US got into by trying to turn it into a right.

      But the flip side of this is that it shouldn’t be a financial asset either.

      Getting the regulation right on the property speculation market just creates winners.

      1. Turnover wouldn’t probably change much so industry guys like you would still earn a biscuit.
      2. There would be more money for actual building and asset creation.
      3. Young people wouldn’t be sold into a life of debt servitude in the hope of having some home stability;
      4. Our urban environment wouldn’t be getting rooted up because we would have capital going to utility not to pointless mis-allocation projects.

      The reason this isn’t fixed is the same reason it took so long to get the cigarette companies out of our under-7s sports. Frustrating to watch that’s for sure.

      • Thank you for your reply aj. I wholeheartedly agree that the USA got into the situation with all of the best intentions, but I wouldn’t say that those good intentions of trying to bring home ownership to a larger demographic were all of the issues that caused the problem – I focus more on the all too easy credit that came as a result, and the counterparty risk that it ultimately created.

        I hear what you are saying about a house not becoming a tradeable item. However that cup of coffee and slice of toast that most of us had for breakfast contains ingredients that are all tradeable items. The coffee, the sugar, the milk, and of course the flour, the butter, the jam, etc. – and yet the markets that bring us those ingredients work efficiently for the most part. If you compare what we paid for those items to what was paid years ago we are all better off with an efficient market system.
        Regulations create winners and losers. I believe that we have got it wrong with our regulations and our reliance on housing income at the three levels of government. If you look at how emotive housing is, it’s no wonder we have such competing interests that all add to the cost of housing with ever better building regulations, safety regulations etc.

        I don’t have the answers aj but until someone does have the answers and the political will to effect real changes, then I think that we will just have to cope as best we can.

        • PF – i think a house can be an asset that can be traded, without being a financial asset.

          It does start with recognising the social good that comes from enabling home-ownership and limiting rent-seeking for established homes for it’s own sake.

          I really struggle to see why anyone should own more than two homes (and one in any given city). If people want to do it sure, but they should have to overcome the social hurdle that says we will preference people that own a single entity for their residence.

          Encouraging people to save for retirement by merely turning them into a rent-seeker from established housing stock just has no social benefit.

    • Home ownership is not a birthright, it has to be paid for.
      Same goes for water and air. But who must we pay? Pick me, pick me.

      • Shades of Romney…

        Once again, just for those who were ‘dissapointed’ that Romney didn’t win, please have a reality check 101 and praise God/Allah/preferred garden fairy that the following sociopath is not Commander-in-Chief:

        ROMNEY: There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it — that that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what. … These are people who pay no income tax. … [M]y job is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives.”

        Home ownership may not be a birthright PF, but neither are the many loopholes exploited by the filthy rich the world round to enrich themselves at the expense of greater society e.g. did you know that approx 4000 out of the 13,000 richest Americans didn’t pay income taxes in 2011 (estimated by the Tax Policy Centre)? Do you also think that is a birthright?

        The point is there are no guarantees in life, but political and economic structures are heavily favoured towards the elites in contemporary developed societies as a result of the failure of our sell-out two-party kleptocracy.

        It is through addressing these injustices and introduction of fairer and more equitable taxation and financial systems that people can easily stand on their own two feet and achieve an affordable roof over their head without government assistance or intervention.

        Heaven forbid that people should expect some ownership of dirt in their lifetime, without paying for it in blood…

        • Romney was such a plutocrat I’ve got no idea why the Republicans picked him except to say that maybe his millions of dollars successfully bought the nomination? The above comment demonstrated that he had no idea what ordinary Americans were experiencing and that in fact he was going to make things a whole lot worse for the sub-millionaire population.

          Things started to go seriously wrong from Romney when his wife (Ann) was trying to tell the media that they had no money when they were in college – as it turns out they had $400,000 to ‘scrape by’ on. Clueless.

        • So the rich paid no income tax? What DID they pay? That’s right, corporate and investment taxes. The tax system is hardly weighted towards the rich, it’s weighted towards business owners, same as here. Many business owners are taxed as individuals as well, but they too have lots of deductions.

          Yet, somehow I don’t see any solution you propose being “we should make it easier for people to start businesses! We should reduce red tape and make starting a business as easy as finding a job!” Somehow I see it as “tax those rich b***ards!”

          Why is ‘fairer and more equitable’ always an excuse for justifying theft? Break up monopolies and regulate the financial system better definitely, but you simply cannot create wealth by dividing it. You just simply can’t.

          Has politics really descended into the politics of “that guys rich he must be evil” really?

          We are in trouble if this is the case. Europe should serve as a warning, not an instruction manual!

          • but you simply cannot create wealth by dividing it. You just simply can’t.

            LOL.

            The most successful era of creating wealth was the 30 years after WWII.

          • “The most successful era of creating wealth was the 30 years after WWII.”

            It also happens to be when the fastest growth rates in oil flow occurred.

            I’m not saying that social/economic policies are irrelevant – but we put way too much stock in them and sometimes forget that economic growth is mostly just how fast we can dig s**t out of the ground.

          • It also happens to be when the fastest growth rates in oil flow occurred.

            Humanity has increasingly sought to use a lower carbon-intense fuel throughout history.

            Dung->Wood->Coal->Oil…

            now it looks like we are onto widespread use of Gas.

            Oil is just a link in the chain, and the oil age wont end because we run out of oil.

            Coal fired locomotives were their most efficient just before they were replaced by diesel locomotives… those same coal ones replaced wood fired before it.

            So…

            I’m not saying that social/economic policies are irrelevant – but we put way too much stock in them

            I’d say you place too much stock in liquid hydrocarbons, and not enough in socio-economic policies.

            and sometimes forget that economic growth is mostly just how fast we can dig s**t out of the ground.

            No, wealth is how much product we bring to market. We may not value it properly on a basis of durability or renewability, but it is the quantum of product none-the-less.

            Sure, efficiencies aid this (re: energy sources as you have mentioned), but product is brought to market by people exerting their labour.

            We had full employment policies in the 30 years post WWII, giving rise to the optimistion of product brought to market.

            One can (quite rationally) argue that marginal tax rates increase in a progressive system because the rich get paid too much. This impacts the demand for labour and leaves some labour inert that would otherwise be productive.

            NAIRU policies also give us less than optimal wealth increases.

            Thus a redistributive method is used to enable this inert labour.

          • Why is ‘fairer and more equitable’ always an excuse for justifying theft?

            So… You are arguing taxation is theft ?

            Break up monopolies and regulate the financial system better definitely, but you simply cannot create wealth by dividing it. You just simply can’t.

            So… You are arguing the amount of wealth in the world is fixed ?

    • True, in almost every suburb somebody can buy small shoebox with lower repayments than median rent in that suburb just because he/she can rent 3 bdr house for the median rent (not a shoebox).

      Home ownership used to be “birthright”, for all hard working Australians. That is not true any-more. What happened in recent years?

      We became “the wealthiest nation in the world” where hard working people cannot afford to buy a home – something their parents could.
      How is that possible? Are we wealthier at all if we cannot afford even basic needs? Who is benefiting from this “wealth”?

      “Something is rotten in the state of Australia”

      • It was never a birthright rav – my parents had to work hard to own a home, their parents had to work hard to own a home, and I don’t think that the generation before that could afford a home at all no matter how hard they laboured.

        You whimisical romantic view of the past is flawed.

        • you just confirmed my statement that it was “birthright”, for all hard working Australians.
          Even the minimum wage working people were able to afford to buy decent house in past. Single, median wage was enough to buy a house relatively close to work.

          Today, that is not true. Even median paid couples are struggling to buy small unit far from everything.

          • I reckon that is correct Rav. The politicians and the boomers that are sitting in their nice big pads are just not tuned in to the carnage that is going on with the younger generations.

            They have no idea what they take for granted and which was (in relative terms) gifted to them.

            Yes they worked hard but they did not to be debt slaves just to have some house stability.

        • And as a matter of interest ,Peter, how many did they have, the previous generations? Mine had….one at a time. That’s the way it should be if housing is to return to being what it is; a necessity and not an asset to be speculated with. “But what about those who can’t afford one? Where will they live?” Rental stock is an important part of a balanced property market. It should be provided by those that own it on the same basis as any business. Wjilst it is ‘given’ to all and sundry by banks ‘as if it were a home’ ( 90% LVR etc) that won’t be the case. If go to the bank, this afternoon, and ask for a loan to build a business, they may advance me 50% of any collateral that I may have ( even cash is rated at 80% as I’ve mentioned to you!). Any property beyond one each, should be rated similarly @ say 50%. Just a thought.

          • Janet – your bank will advance you a sum of money that entirely depends upon the security that you offer and your capacity to service the debt. The LVR will range from 40% to 100% depending on the class of security. For the right client they may be prepared to lend beyond their security cover.

            Banks can lend 100% less interest cover against cash, but their risk assessment might lower what they are prepared to offer.

            You and others keep suggesting that housing should not become a market, but have you ever considered that the problems may be that housing isn’t a free market, and that the right mechanisms are not in place for that to happen. Everytime some well meaning person tries to fix it, it get’s more broke.

          • I’m not quite with you, Peter!”…have (I) ever considered that the problems may be that housing isn’t a free market (Yes I have! Isn’t that what I am on about!), and that the right mechanisms are not in place for that to happen (Yes! The right mechanisms aren’t in place!). Everytime some well meaning person tries to fix it, it get’s more broke.” (Well I, and many others, are trying to do what we can to suggests ‘they’ fix it. I don’t see how it could be much more broken than what it is!) And re lending? Let’s no forget that lending institutions in many other places lent against property fully believing that they had collateral cover. It turned out they didn’t. No one, banks or otherwise, sees what’s coming, as coming. If they did, it wouldn’t arrive!

        • It was never a birthright rav – my parents had to work hard to own a home, their parents had to work hard to own a home, and I don’t think that the generation before that could afford a home at all no matter how hard they laboured.

          My socio-economic group (white-collar, Bachelor degree, IT) is a step up from my parents (Teacher & Insurance broker/SMB), my individual income is probably roughly equal in real terms to what theirs was combined (and if not, certainly more than 75% of it).

          However, the house I grew up in would be worth something around 5x my gross income.

          They never struggled to buy that house, either. We went on overseas trips about every 3 years or so, back when travelling overseas was expensive, new cars every 5 years, eating out probably once a fortnight, etc.

          Not “working hard” is not the problem.

          • +1. By any measure that kind then and now analysis to try and show some kind of housing equality is bogus.

  7. Does this study also take into account that 41% of tenants receive rent assistance.
    Personally I believe that this is one of the biggest causes of distortion in valuation.
    Rental assistance should be targeted to areas that require population growth ie away from the major cities and coordinated with land release and development

    • removal of rental assistance will further reduce rents and make buying even less desirable.
      It would eventually hit “property speculators” and drive prices down, but it will take the same time as time required for this bubble to burst.

  8. The main issue with the report is that the properties available for rent are not the same as the properties for sale.

    Their sale prices are also wildly optimistic. For example, the Sydney suburb of Enmore is listed as having a median unit rent of $450 and a median unit price of $284K. I can believe the rent, but the absolute least you’ll pay for a unit in Enmore is $400K, and that will be at the bottom end of the range (and therefore at the bottom end of the rent scale).

    So the dodgy assumptions are irrelevant. The report is quite simply wrong.

    • Phil, I noticed in their previous report that in some suburbs (Hackett ACT for example) they compared the median *unit* purchase price with the median *dwelling* rent. They justified this on the basis of data availability. So their analysis effectively said that it’s cheaper to buy a 2 bedroom ex guvvie flat than rent a 3 bedroom freestanding house on a decent size block.

    • Yeah I noticed this too when I started backward engineering the valuations from the article in the Telegraph. Started getting implied prices in the 200-300,000 range.

  9. It is rather dumb to compare a rental payment with a mortgage payment. Renters are treated like scum and can be uprooted by their landlord at short notice.

    • Rubbish Claw.

      Good tenants are usually highly valued by landlords.

      And no tenant with a valid lease with time remaining can ‘be uprooted at short notice’. A lease is a legally binding covenant on the property. And you will find good landlords offer good tenants long leases – several years at a time.

    • On month to month leases in Victoria, landlords needs to give 120 days notice before asking someone to move out.

      No landlord will get rid of a good tenant. Some will try to increase the rent, which the tenant can accept or regect, but no landlord kicks people out when they are maintaining a place well and paying their rent on time evey time.

      • but no landlord kicks people out when they are maintaining a place well and paying their rent on time evey time.
        Bullshit. My landlord decided to sell and cash out.

        • Your landlord selling the property does not give them (or the new buyer) any right to terminate your lease. Some tenants do not know this and just accept the agent’s word. Big mistake. Know your legal rights.

          But if your lease is month to month, that’s a different matter. You can’t expect any certainty on a month to month lease. Get a 12 month lease (or a three year lease!)

  10. Here is some data.

    Australian house prices are 48% overvalued when measured against rent – (The Economist Global House Price Index 2012)

    • is that aus wide or city by city basis.

      a 450k brand new house in perth will rent out for 450-500 a week and be filled in no time.

      How does that compare to melb/syd? (im unfamiliar with these markets anymore)

      • That’s still not an economically viable investment.

        A quick mortgage calc – $400,000 loan, paid weekly for 25 years = repayments of $627 a week.

        Investor pays $627 but only gets $450-500 a week in rent. Investor still has to pay rates, property insurance, maintenance and tenant insurance.

        Five extra expenses on top of an investment that is loosing a minimum of $127 a week. And that’s not including the initial purchase costs such as conveyancing and stamp duty.

        It’s not a sound investment. The numbers simply don’t add up and anyone that thinks they do needs to go to remedial math classes.

        As for capital gains, we accelerated 15 years of growth between 2002 and 2007. Expecting it to continue is a bad bet on a bad debt.

        • why does it have to be an investment?

          Some people like their own home because its exactly that, theirs.

          Doesnt mean you need to rent it out and make a prophet from it.

  11. The simple fact RP published this dross at all is a huge red flag about their bias! This bias brings all their data into question!

  12. Thanks for this UE. Great to see percentage reporting as opposed to a number with no reference to overall number of suburbs and towns in the original reporting in the MSM.

    In case some readers have not seen this nice rent vs buy calculator from New York Times, take a look. Good fun.
    http://www.nytimes.com/interactive/business/buy-rent-calculator.html
    For me it shows that buying not better after 30 years if value flat or up 2% p.a. and rent flat or rise rise up to 5 % p.a. If value rises 4 percent p.a. while rent flat, again buying not better after 30 years! If value up 9% p.a. and rent up 10 % p.a. it would be better to buy after 2 years.
    Pretty clear which way to go for now.

    • Given the criticism of the RP data model (and I agree it is useless/misleading/simplistic) does anyone have an Excel spreadsheet on a website that is more useful with some standard assumptions about rates, variable rate repayments, maintenance, levies etc (and preferably for a few different types/locations of properties eg Eastern suburbs, middle rings, outer suburbs (Sydney)?

      Can anyone program an android app?

    • The NYT assumes the renter moves only once. I am not sure what assumptions are built in re deductability of mortgage interest (allowed for some in US, not in Australia for owner occupiers).

      Basically just about everyone who bought in US after about 2003 or 4 would have likely been financially better off to have rented until now.

  13. You need to do the same calculation for a 20% deposit on a 450k loan that will be paid back in 10 years.
    The numbers are a bit more suprising.

    I just did that nytimes calculator and it says i am better off buying in 20 years. since i plan on living at least twice as long as that i think its fine…

    not everyone takes a massive loan/over reaches and repays it over 30 years.

    If you can minimise your interest repayments the owning becomes a bit more enticing.

    For what i am going to pay (disregarding capital growth if any, rent rises, or savings in the bank) i can rent for 20 years or so, or i could just buy (read build) the place now. 20 years wont get me very far in life.

    There are benefits to renting like having the cold hard cash and being able to spend whenever you want. No maintenance required etc. In the end isnt it just personal choice??

    As long as people make a well informed decision good luck to them.

  14. Another rising cost of home ownership is building insurance that is compulsory if you are mortgaged.
    I just got my renewal, ouch

  15. These calculations also ignore two important factors

    1) Opportunity cost of having equity invested in Real Estate.
    {a negative for buyers}

    2) Rent prices will follow inflation to some extent.
    Whereas interest charges are either i) fixed or ii) likely to fluctuate around a mean or iii) unknowable.
    {could be a positive or negative for buyers depending on what point during the interest rate cycle they choose to buy}

    Since this is an economics based assessment it also leaves out the non-quantifiable dimension of home ownership.
    e.g. reduced mobility v freedom from landords