Buy a property with our panel
 
Why it's cheaper to buy in Greater Melbourne than to rent
Doron Peleg
07 Sep 2020

Apart from one standalone area, it is cheaper to buy a house in Greater Melbourne than it is to rent, according to RiskWise Property Research.

Inner East is the only SA4 where the interest-only loan repayments for owner-occupiers in all of Greater Melbourne are below the annual rent. In all other areas interest-only loan repayments are low, and in some cases well below the annual rent. There are also areas where only a small additional amount is required to also cover the ‘full mortgage', i.e. both the principal and the interest repayments. 

RiskWise CEO Doron Peleg said ultra-low interest rates had created a unique environment where buying a house in many areas was cheaper than paying rent on one.

He said in many areas, rent money was dead money, and that renters with secure jobs were better off buying a house than continue paying someone else's mortgage.



"Except for Inner East, interest-only loan repayment amounts for owner-occupiers in Greater Melbourne are below annual rent, so it makes no sense not to take advantage of the current ultra-low interest rates and continue to rent," Mr Peleg said.

"In addition, again except for Inner East, it's also cheaper to buy than rent for interest-only property investors in the whole of Greater Melbourne."

He said for principal and interest loans, owner-occupier repayments were higher than the annual rent of Greater Melbourne, however, the monthly difference was less than $500 in six SA4 areas, especially in Geelong, with only $193 extra required, and also outer areas such as the North West and Western suburbs.

"Incredible capital growth over recent years has put Geelong on the map and the forecast remains extremely positive despite the major impacts of COVID-19," he said.

"Add to that it only takes an hour to drive to Melbourne and housing is significantly more affordable, it is ticking plenty of boxes for a lot of people with their eye on capital growth in the future.

"If you buy a house you can start building equity, 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.

"Our research also shows that nationally 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.

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. However, it must be stressed that units carry a higher risk and at this point of time so this strategy should only be considered for houses.

"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."

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%