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:
- 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).
- A variable mortgage rate of 5.9% per annum (i.e. the current discount variable mortgage rate published by the RBA).
- The loan period is 30 years.
- The repayment schedule is monthly.
- The principal is calculated based on the suburb’s median house and unit value as at June 2012.
- 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:
- Council rates
- Water and sewerage
- Land tax
- Body corporate levies
- Stamp duty
- 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.