Where it is cheaper to buy than rent
Doron Peleg
04 Sep 2020

Ultra-low interest rates have created a unique environment where buying a house in many areas is cheaper than paying rent on one, according to RiskWise Property Research.

In many areas, rent money is dead money, says RiskWise CEO Doron Peleg, stating renters with secure jobs are better off buying a house than continue paying someone else's mortgage.

"When it comes to houses, that are a preferred dwelling option in most areas of the country, in many cases it is actually cheaper to buy than rent, and rent money is literally dead money. Whereas, if you buy a house you can start building equity straight away, particularly when you take a long-term strategic view and are in a good position to negotiate well and buy a ‘Grade A' property that will serve your family to many years to come," he said.

"Our research shows that the interest only repayments for both owner-occupiers and investors is lower than the annual rental cost in most of the 88 areas at the statistical area level 4 (i.e. SA4s). Therefore, funding costs are lower than rental payments across all states and territories.

"And, with the exception of Sydney and Melbourne, in all other states and territories, even the principal and interest repayments are lower than the annual rent, assuming that you have 20 per cent deposit.

"No interest rate rises are expected in the foreseeable fortune and the intense competition between the banks is only going to further intensify, meaning buyers are in a very strong position to continue enjoying ultra-low interest rates."

Mr Peleg said the biggest savings were in the capital cities where rental returns were the highest.

"A sustained period of ultra-low interest rates seems almost certain in the foreseeable future and is likely to have a positive impact on the market during 2021. In fact, RBA research has found that for every 1 percentage point reduction to the cash rate, property values may increase 8 per cent over the following two years."

Ultra-low interest rates have led some lenders to offer introductory home loan variable rates of 1.99 per cent, a move which follows the launch of the first fixed rate of less than 2 per cent.

Mr Peleg said in all capital cities interest only loans were cheaper than rental payments which meant funding costs were simply lower than the rental payments. 

In addition, in some areas, even when taking into consideration full mortgage repayments (principal and interest), the repayments were still lower than paying rent. 

Over the medium and the long term, he said solid price growth was highly likely for houses, particularly due to a systematic undersupply in the inner and middle rings, and also in the more affordable outer areas with good access to the CBD, such as the western suburbs.

"What this all means is now is the time to buy if you are a first home buyer or an owner-occupier as this current slowdown in the property market is only temporary, with houses in popular areas likely to experience solid capital growth in the medium to long term.

"Once the COVID-19 issue is resolved, most likely in 2021, the traditional connection between low interest rates and increase in dwelling prices is likely to take place."

In Sydney, for example, Ryde is the only area (at the SA4 level) where rental payments are less than interest only loan repayments. He said, on average, if there was an additional payment for interest and principal in some SA4s, it would only be "very small" and areas such as the city's western suburbs and the Central Coast had offered exceptional capital growth over the past 10 years with further positive projections in the medium to long term.

He said the ACT offered excellent opportunities thanks to a combination of properties that held their value well, with healthy price growth of 4 per cent for houses, and lower mortgage repayments compared to renting.

Southeast Queensland is also enjoying the same property fundamentals and is becoming increasingly popular thanks to its lifestyle, stretching from the beachside areas of the Gold Coast in the south to the Sunshine Coast in the north, and the increasing ability of workforces to work remotely.

Mr Peleg said investors with a long-term view could also benefit despite interest repayments for investment properties being slightly higher.

"If the rent covers their monthly interest repayments, they are in a good situation. There is a relationship between low interest rates, low out of pocket expenses and stronger demand and this is very attractive to investors," he said.

NOTE: Our calculations of the rental cost is based on the median house price in each area, multiplied by the rental return (i.e. yield), in %. The calculation of the mortgage repayments is based on 80% LVR (i.e. 20% deposit) of the median price in each area. The interest rates are based on the actual variable interest rates for owner occupiers and investors, as published by the EBA, and as follows:

Homebuyers: 2.92% for all loans 

Investors: interest only: 3.17% and principal and interest: 2.96%