The property market’s in a fickle spot at the moment. On one hand we have reports from within Australia saying the market is close to bottoming out, while at the same time overseas observers are saying there’s a huge property bubble that’s about to burst.
While these arguments both have some weight, there’s no point trying to predict when the bubble will pop or prices will bottom. Like timing the stock market, it’s pretty much impossible.
But the question you can be answering is whether you’re better off financially renting or buying.
Sure it’s not the easiest answer to arrive at, but by looking at the latest property data and some excellent research by property research house RP Data, you can come to a firm decision one way or the other.
Since property prices peaked in 2010, house values have trended downwards while rental rates have continued to increase.
This divergence has come about as Australian households have tried to ditch their debt habit, started saving more and become increasingly reluctant to take on big ticket loans like mortgages.
All of this has been prompted by the Global Financial Crisis, ongoing uncertainty about the economic outlook and a tightening of bank credit policies.
And the domino impact these shifts in attitude have had on the dynamics of the property market has been huge. Sales transactions have dropped significantly, now 14% lower than their 5-year average, while stock on the market has climbed to be 8% higher than at the same time last year.
In response to the stagnant property market and soft retail conditions, the RBA has aggressively cut rates. But so far buyers aren’t biting.
While RP Data says the rate cuts have contributed to capital city house prices picking up by 1% in June and 0.6% in July, they remain a long way off their 2010 highs.
Compared to two years ago, home values in Brisbane are down 11.5 %, Darwin 10.7 %, Hobart 9.4% and Melbourne 8.3%. Other capital cities have recovered a bit better, but Sydney is still down 2.9% from historic highs, Canberra 3.6%, Adelaide 6.9% and Perth 7.7%.
On this basis, and knowing rental yields have gone the other way, it would appear a no-brainer to buy instead of rent. And in many cases it is. It just depends on where you want to live, the type of loan you’re looking at and your ability to save.
In a fantastic and very helpful analysis, RP Data has looked at the difference between buying and renting for every suburb across the country by comparing median rents to mortgage payments.
The comparisons were based on a 30 year loan with a 10% deposit, monthly repayments, a variable interest rate of 6.15% and three year fixed mortgage rate of 5.9% per annum. The going mortgage terms basically.
They identified 1,320 suburbs where it is currently cheaper to buy than rent with a variable rate, interest only mortgage. But when comparing a principle plus interest repayment schedule, there were just 238 suburbs cheaper to buy than rent in.
For fixed rate loans the numbers are about a third higher at 1,759 and 328 respectively.
The findings certainly dispel the long held perception that buying should be the default option if you can afford it. But, and this is a big but, renting where it’s cheaper to is only a better financial decision if you invest the difference between the cost to rent and the cost to buy.
If you blow the money saved from renting instead of investing it, you’re better off servicing a mortgage and having an asset to show at the end of the day. Think of it as enforced saving.
With these findings and a frank assessment of your savings habits you can now make a confident, informed financial decision on whether to rent or buy. So set the economists big calls aside, look at your circumstances and make an educated assessment.
It’s a big financial decision, so give it the research and honest opinion it deserves.
To see how your suburb squares up check out the full report, suburb by suburb.
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