Rock bottom mortgages makes it cheaper to buy than rent

New research from the REA claims that it is cheaper to buy than rent over a 10-year period across most markets outside of NSW and Victoria.

The findings are based on the assumption that buyers have a 20% deposit and factors in the costs of buying, holding a mortgage and the overall costs of renting.

The research also assumes 3% annual price growth over the decade.

From the REA report:

Analysis suggests it is cheaper to buy than rent around 57 per cent of dwellings across Australia. This is based on only modest housing price growth of 3 per cent per year over the next decade.

The results differ by property type. Just over half of houses are cheaper to buy over the next 10 years, but the share of units that are cheaper to buy is almost 75 per cent.

Buying conditions are particularly favourable outside of New South Wales and Victoria. More than 80 per cent of houses, and almost all units outside of the most populous states are estimated to be cheaper to buy than rent.

Where it is cheaper to buy than rent

The findings of this report makes sense. Mortgage rates have collapsed below 3% for new owner-occupied borrowers:

Average mortgage rates

New mortgage rates for owner-occupiers are below 3%.

At the same time, gross rental yields outside of Sydney and Melbourne are above 4%:

CoreLogic gross rental yields

Gross rental yields are well above mortgage rates outside of Sydney and Melbourne.

The big issue, however, remains saving for a deposit. This helps to explain why borrowing from parents – the ‘Bank of Mum & Dad’ – has hit a record high 60% of first home buyer mortgages, with the average parental assistance totalling around $90,000:

The Bank of Mum & Dad

A record share of first home buyers are receiving financial assistance from their parents.

Repaying one’s mega-mortgage has also become increasingly difficult due to record low inflation and wage growth.

Thus, it may never be cheaper in most markets to service a mortgage, but never more expensive to save for a deposit or pay off the loan.

Unconventional Economist

Comments

    • boomengineeringMEMBER

      It will be a toss up between inflation eating your mortgage away and interest rate hike after the locked period. Anyone who can hang on to a huge mortgage will do well in hyper inflation but the secret is to survive the accompanying problems.
      Btw the wife brought home a tiny rabbit kitten yesterday with a broken back which is getting stronger and stronger dragging its back legs around so I’ll be making some wheels for “,Weelie ” soon.

        • boomengineeringMEMBER

          Trials and tribulations come with the territory when you marry a vet nurse. It’s eating, drinking ,defecating well and very mobile. Keeping Weelie from our 3 and neighbors cats will be a challenge.

          • Fattening it up and keeping it out of the cacciatore pot would be the challenge for me.

          • PalimpsestMEMBER

            make a spiked wheel chair chariot with a spiky leather harness. Wheelie could become the terror of the neighborhood.

      • Ryan Houlihan

        Um – the only reason people can have mortgages today is because of low interest – if we get inflation the system is going to break due to rate rises.

        Serious inflation will NOT be looked through despite RBA mutterings.

      • working class hamMEMBER

        Inflation via RE price boom has already eaten up 1/3 of some mortgages. When sales happen and profits solidified, people that were once highly leveraged aren’t so anymore. Inflating this debt away has already begun, anyone in the game is reaping the windfall already, buying in just gets harder everyday.

      • Inflation might eat that mortgage away but the real inflation that isn’t being reported is also eating away at their ability to service the loan. Assuming they’re buying food, insurances, utilities, medical, education and the odd piece of wood at Bunnings. Whilst the ABS fiddles and pay rises don’t reflect the true CPI, households are going backwards.

      • I’m hearing businesses are running on low stock (security, camping), they should be raising prices, small business will complain, but they just need to raise their prices, end consumer should be picking up the inflation…

      • Nice. I took the 2.09% because one a mate of mine is very senior in that bank’s mortgage team and he said he just locked in at that rate. They aren’t a major so not surprising that CBA would be even lower.

  1. ErmingtonPlumbingMEMBER

    Well people are forced to “Save” through the mandatory Superannuation system.
    Why not use the power of the State to force em to buy their own property as well.
    Our plutocratic overlords like Indebted servitude.
    Helps to keep the plebs the fk out of the way.
    Anything to keep the Ponzi going must be embraced!

  2. “Repaying one’s mega-mortgage” is the point. Even with super-low rates, the size of the loans is staggering. Also, does the REA research assume no interest rate hikes for the next 10 years?

    • ErmingtonPlumbingMEMBER

      Without mega wage inflation many of these mortgages will never be paid off.
      Its something Boomers are loath to admit.
      That most of them got an easy ride.
      Sure many of them struggled to get a deposit and continued to struggle in the first decade or so of their home ownership goal.
      But high wage inflation made their mortgage debt laughably small compared to income by the time their kids were going to high school.
      No such life line is coming for the current generation just wanting the same security of owning their own Home like their parents did.

      • Yeah. I’ve been a critic of over-inflated property for years because of the unnecessary pressure it puts on younger people.
        Gone from crazy to completely insane.

      • Spot on Ermo, not to mention the political system was yet to discover the value of bullying agencies like the ABS into hiding real inflation and beating the RBA into a dovish bias. Inflation was high but so too were pay rises. Tell me what real inflation is using the same measuring methodologies as the late 1980s.

  3. reusachtigeMEMBER

    What I’ve discovered by being a major land owner is that renters almost always have something wrong with them. When you talk to them they never seem to be all there. So I’ve concluded that renters just aren’t able to make successful decisions and it’s all part of life’s winners and loosers!

  4. mikef179MEMBER

    Short-term outlook though. Also, if you are young, why tie yourself down to an Australian economy that is becoming more and more concentrated in certain sectors and looking more and more uncertain in the longer term? If I was young I would be considering my options elsewhere. Pandemic won’t last forever.

  5. pfh007.comMEMBER

    Cheaper to Buy than Rent?

    Mind those assumptions re the deposit miss the most important one…credit worthiness.

    No bank money for you unless Mr Banker says so.

    Considering that the public are providing a massive subsidy to the banking industry business model is that really surprising?

    And that includes all the policy decisions specifically designed to generate those 3% per annum guaranteed price increases.

    But allowing the general public to operate deposit accounts at the RBA?

    Too hard.

    • The Traveling Wilbur

      I don’t think the target market for the article included the ‘unworthy’. Valid point though. Without getting with the program, exiting Looserville and improving their social/credit score they’re sure to remain behind.

      50 months int. free @ hardly normal – it’s their only hope.

      • You are both confusing serviceability with creditworthiness. If you make your repayments on any credit contract you are generally creditworthy. The issue during rapid price increases is serviceability. If you are not as creditworthy, but have decent income, there are plenty of near prime lenders out there like Liberty and Pepper money.

        • Most BNPL firms dont check the credit bureau and they dont report to the credit bureau. As such, any person using a bulk of these services (Afterpay, ZIP, Klarna etc) vs say a credit card from a bank is going backwards when it comes to credit scores.

    • Jumping jack flash

      This.

      Also “cheaper to buy than rent” is utter crap.
      While saving our deposit we rented an old house which was cheap for the sole purpose to minimise housing costs.

      When we bought, we bought a house we wanted so it was much expensive and also cost a lot more in repayments than what we were paying in rent.

      We wouldn’t be the only ones doing this because saving the deposit is much, much harder than paying the mortgage repayment.

        • My old rental may as well have been derelict, it was an utter heap. The only good thing about it was that when shyza broke I didn’t have to fix it (neither did the landlord mind you lol). Where as now that I own, my mortgage is cheap, but I spend money fixing things like the pool pump/filter system needed replacing and I found some termites (before they did any major damage) which was $3k to resolve with bait traps etc..

          My brother in law’s neighbours house looked like the render was cracking when I saw it on the weekend, I said what’s the go with that? He said lady living there had been quoted $200k to fix her roof and rectify structural problems. Yikes! Then again when I looked up the price she had paid 20 years ago it was about $200k. The same house is now $1.2M probably. So I guess paying $200k to fix a roof may not be an all bad investment. Although I’d probably sell and move on.

    • Still not easy to get a loan, we have $500k in equity but couldn’t borrow much on one income (2 dependents) wife not going back to work. Really is based on income (or using a guarantor)…

  6. The issue with low rates is the convexity of the interest rate curve. Small movements either way have a large impact on price. As we are seeing small movements down makes the debt cheaper and prices rise rapidly. Small movement up, well that will cause untold pain and hence the reason that interest rates are not going up for years.

    • pfh007.comMEMBER

      The RBA can only control rates while China is delivering us a nice trade surplus. If we lose the trade surplus and have to start borrowing off shore again the RBA’s ability to run ZIRP will be limited to what foreigners are willing to accept for our IOUs.

      I suspect the Chinese are watching very closely.

      • Not entirely true. As a currency issuer they can issue debt as cheaply as they want. The risk they face (as I think you are inferring) is that the currency gets annihilated on the global FX markets as countries see price fixing in action and see sovereign risk in AU’s credit rating.

        • While it is true that FX traders will front run any change in fundamentals, I suspect the real damage will be done by a changes in the currency flow and the momentum associated with established flow patterns.
          So the sovereign can create all the liquidity that it desires, but it cant force anyone outside the country to accept this paper as a payment for goods or services delivered. This fact will result in various form of foreign currency hoarding as we’ve seen many times in the past with countries such as Argentina.
          But if you ask me this is all secondary to the more serious problem of Productivity specifically Capital Productivity or more to the point the lack of real world capital productivity observed within our cities. Most of the Capital deployed in our cities simply chases asset revaluations rather than creating wealth from products or services deployed outside the bubble. The absence of real world Productivity gains is the root cause of ZIRP and NIRP

        • pfh007.comMEMBER

          “.. The risk they face (as I think you are inferring) is that the currency gets annihilate….”

          Yes that was the inference.

          Everyone seems to have just assumed that our current exports volumes and prices to China are a new normal.

          Or dare I say.

          They have reached a permanent new high plateau.

          It is hard to see how China will require their current levels of iron ore imports from Australia for more than another 5 -10 years or so and should be getting ready for that right now.

          They actually have loads of iron ore but are choosing to import ours.

          It’s a choice we tend to forget they are making.

  7. On the drive home recently a counselor on the radio was discussing his conversations with Grandparents who had lost contact with their Grandchildren because their son or daughter was no longer allowing them visits etc. Upon questioning the grandparents admitted that they had loaned the kid and his/her partner money towards a house deposit. The amounts varied from $20K up to $600K+ but had not bothered to have a legal contract written up.
    The kid and his partner had come to the conclusion that if they had no contact with the grandparent then paying back the borrowed amount was not necessary. Concocting a reason for denying them access meant they would not have to listen to continual reminders of the debt they owed.
    The counselor said he had seen many examples of this distressing situation.

    • reusachtigeMEMBER

      This is why I don’t want to know any of my kids, if I have them still. The risk of them leeching off my success is too high.

    • Michael Stevenson

      The problem is that this money should just be gifted – not loaned. Typically baby boomers are not financially competent.

      I had the same problem when I borrowed $50,000 from my parents a few years ago. Originally the interest rate was 5% – reasonable at the time – but I wanted to reduce it to 2% – in line with today’s rates. The resulting fallout destroyed the relationship.

      Keep in mind this is $50,000 of their total net worth of $3.5million – including $1million they inherited from their own parents. This is also after I saved them $4,000/year on utilities, as well as overhauled the interior and exterior of their house, and buying them all new electronics.

      Its best not to loan money between family – just gift it, or act as a guarantor of a loan. At least if they don’t pay back a bank, the bank will hound them, and ruin their credit history.

      • Michael,
        You let a $50K debt destroy the relationship with your parents? Why not borrow it at the current low rates and pay it all back?

        I think that you might get the kind of shock some kids get when the parents leave it all to a charity. They only have to leave you $10K and you cannot contest the will. I’m a Boomer but I’m far from “financially incompetent ” as you put it.

      • Buttzilla Returns

        very sad. problem is, when you’re given everything & helped out at every single turn even into your 70’s…. boomers – the baby c-nt generation.

    • In order to avoid Mortgage Lender’s Insurance, Mom and Dad have to provide a letter stating that there is no legal obligation for the loan to be paid back. Whether there is a moral or informal obligation to pay it back will depend on the family, and the personalities involved.

  8. TheRedEconomistMEMBER

    If you were made redundant In the 70s and 80s you paid off the house.

    These days .. if you have been somewhere for 20 years and your services are no longer required, the payout might be enough for a deposit.

    • Excellent point. Job security doesn’t seem to get factored in. It’s also a bit mad seeing 30 year loans taken out.

      I’ve gone from a highly secure high paying job, to one which looked secure and paid even more but folded, to 10 months unemployed and now just contracting. My income is variable week to week and I’m not sure where the next gig is coming from. These aren’t the conditions under which I have any confidence to buy.

      • I totally understand how you feel, it’s why I was so conservative when I bought and took out a loan. I have moved on from a $250k p/year job to earning half that.. and my wife was out of work after our first child (now working 3 days). Always plan for a rainy day is my moto. 30 year loans assuming you can afford $3k per month+ are crazy IMHO.

  9. FUDINTHENUDMEMBER

    Cheaper FOR NOW.. maybe. If ya think yer rate will stay at 1.84 percent for the next 30 years yer dreaming tho.

    Also is it just servicing the mortgage we’re talking about? Are they including rates, maintenance costs, insurance, buying and selling costs in their calcs?

    • Are you new here or something? All Rent vs Buy calculations include a correction factor for being able to hang your pictures on the walls and not being denied the joy of a pet. These are priceless considerations so they just get number-wangled to the upside.

    • chuckmuscleMEMBER

      None of the buy vs rent comparisons ever consider incidental and unavoidable expenses. It makes the comparison redundant. Cameron Murray pulls this stunt regularly on this site. At the very least, they could be honest about such expenses not being included in the analysis, another alternative would be to add 2% to the cost of carry for ownership and recognise that the 2% figure is a rough estimate.
      Nevertheless, to take some upside from analysis like this, it’s a good way to spot a narrative peddler/fraud/intellectual yet idiot, who you can avoid paying any attention to ever again.

      • Cameron Murray pulls this stunt regularly. Yes, he did so last year and showed that house prices would boom whereas this site was forecasting Armageddon. Who ended up correct? Whose forecast should I listen to: bcnich or Cameron Murray?

        • Still haven’t seen any soup vans driving around en masse, or forced evictions en masse, nor people stealing each other’s copper wires, nor any Mad Max action.

          TLDR : not the sun lover.

          • Hmmmm, I wouldn’t write off the possibility. Then again everyone keeps telling me $BTC will blow up and it keeps going up! Nobody knows is the takeaway I guess..

    • Mining BoganMEMBER

      I read it as mortgage repayments plus buying costs only. Don’t know if its interest only or P&I they’re working on…some mobs throw that curly little interest only in to make things look better.

      All I know is I pay less than 2% yield in rent and yesterday I didn’t have to pay for the plumber to unclog my pipes.

      • Good point. If the loan is P&I (even for years 6-10), then you have to factor in the opportunity cost of putting that money into shares, superannuation, etc.

      • If you owned that house you’re probably more likely to care about its state of repair: gutter guards, etc etc.

        My house is in much much better condition and I GAF about maintaining it than a landlord ever has in my renting past, with 1 notable honourable exception.

        • Mining BoganMEMBER

          Funnily enough we get it cheap because we look after the place. She doesn’t back down from repairs while we keep things smicko. Can’t remember the last rent increase. Must be three years ago.

          Reusa wouldn’t like our landlord at all.

          • Mining BoganMEMBER

            Ha! That’s how flame wars start.

            I’ll save the landlady terminology for the Hyacinth Bucket types. Although, it does kind of fit…

    • Don't Need a Vaccine

      Have you factored in moving costs every few years when you’re in a rental? Would you really want to be looking for a rental in the current market in most parts of Australia? Do you really think rent will stay $500 per week for the next 30 years?

      Now I don’t advocate tying up all your wealth in real estate or taking on a massive loan that requires every going to plan in terms of career, health, etc over the next 30 years, but buying is a no brainer for most people if can afford it.

      Plus it’s not like any of you have been killing the pig with the stockmarket over the past year and a bit you’re waiting for stocks to crash as well, missed the biggest bull run of all time.

      But you get your 0.75% from the bank champ.

  10. Jumping jack flash

    Pure propaganda.

    Debt has been super cheap for a long time which enables people to service enormous debt on modest incomes.

    The real problem is saving the deposit which is absurdly set at a percentage of the purchase price of the property!

    This very fact means that the barrier to buying houses will not be the repayments of the debt – debt is super cheap. The barrier to buying houses will be saving the deposit, which approaches the cost of an entire house just a few short years ago!

    Now, we all know what incomes have done for the past decade or more. Since 2008 they’ve pretty much flatlined, so how is anyone expected to be able to save up the total price of a 2008 house as a deposit for a 2021 house, if everyone required debt to buy a house in 2008?

    This recent surge in debt activity is directly related to the release of super in the name of COVID, which was used for deposits, in part or in entirety. As quickly as it all ramped up on the back of this windfall, it will disappear as the super is spent or leveraged or squirrelled away with the intention of adding to it (lol) to save up the deposit!

    Simple maths shows that while they insist that the deposit is a fraction of the purchase price their system for infinite debt cannot be sustained to infinity and beyond.

    • kannigetMEMBER

      I have been seeing heaps of mortgage brokers advertising they can arrange 0% deposit home loans, and also claiming the loans are with big bank lenders….

      Back in 2004-2008 it was not unheard of to get 105% loans, deposit was just to show you could save and rent t the same time…. I had friends that used this method to pay for a kitchen remodel before they moved in…

  11. Not even close in my area. Buying is about double the cost of renting a typical 2 bed apartment. The stamp duty alone for the average 2 bed apartment covers 2 years rent. Your paying 65k year on repayments plus strata and rates. Renting is about half that.

    • Our repayments are 2300pm. I could rent our place out easily for 900pw less REA fees.

      Obviously the deposit etc are an issue, just talking about servicing.

    • Jumping jack flash

      This.
      Nobody rents the quality of the house they buy.

      If you buy a house thats worse quality than the one you rent then that’s depressing.

      If you buy a house the same quality as the one you buy, then that’s meh.

      I would hope that most people buy a house that’s far better quality than the one they rented prior. The psychological impact of anything else wouldn’t be good.

      • The house we bought is half the size of our last rental and significantly worse (older one story instead of brand new two story). It’s also 40 minutes drive further out to the North West of Sydney than our last place.

        With that said, it’s 1/4 acre (last rental was 350sqM) with a 40,000L pool and a large American-style barn shed.

        Depending on how you look at it, this place is worse than our rental (wife’s opinion) or far better (my opinion).

        The huge upswing in Sydney property prices since we bought (end of October 2020) has gone a long way toward convincing my wife that we’ve upgraded.

        • Paper gains until you sell and then you are buying back into an inflated market (unless you move regional). That’s the problem with Australian real estate, it doesn’t actually make anyone richer if you only hold one asset. It merely transfers inflated priced ownership from one debt server to the next.

          The game was won by the boomers who bought many properties at dirt cheap prices, held them and then flipped off a few to pay of all debt. Anyone buying in the last 10 years isn’t really getting ahead.

          • Of course you are correct RE paper gains and buying back into the same market (area/size, etc.).

            That doesn’t change the fact that it’s objectively harder to get into the market now than it was when we bought, so if we’d waited we might not have been able to do it at all. If that and the paper gains help my wife feel better about moving into an older, smaller house, that’s fine by me.

      • Disagree. When we first got married we rented a place much better than we could ever afford. It was wonderful.

        Then we had kids and it was downhill from there.

  12. The RBA has proven to an entire generation that they have nothing to fear but fear itself, Fear of Missing out (FOMO)that is.
    We’ve trained this generation to expect our government and financial intuitions will do what’s needed to make sure the game continues, but nobody wants to answer the question:
    What happens when this game is no longer within their control?
    What happens when something truly unexpected comes along?
    Is global Liquidity still a relevant? or can our government/RBA create all the local liquidity that it needs?
    Confusing questions and questions that nobody has ever really needed to answer because, in the past at least, we’ve steered well clear of ZIRP and NIRP. Yet today ZIRP is the new corner stone of every western governments monetary policy and even NIRP isn’t considered a dirty word. Just doing the needful.
    Confusing to say the least, but who is going to rescue us from our own insanity? who is left to rescue the world from Modern Monetary Insanity?
    Interesting times for sure, but is this really the time that you want to be focused on Missing out? It seems to me that monetary conservatism can’t possibly return to the market until FoMo get replaced by something to really fear like FoE Fear of Eviction, or FoB Fear of Bankruptcy.

  13. I am now old and as impotent as the Royal Commission into the banking sector but if I were you I would borrow as much as the bank allowed and make a generous offer to secure my dream home. It doesn’t matter what you pay today, it won’t make a difference in a decade or two.

    • Seeing statements like this shows how the audience of MB has changed their opinions over time (incl myself). The bulls without all their analysis and data in the end won.

      Just goes to show – we don’t have a free market really. Its hard to bet against the herd when the herd and the government’s interests are well aligned.

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