Record low-interest rates combined with a widespread housing downturn have led to a relatively rare opportunity for Aussie renters. There is currently a surprisingly high number of suburbs around the country where it is actually cheaper to buy than to rent, according to recent analysis by CoreLogic.1 In fact, the number of suburbs where buying is cheaper than renting has more than doubled over the September quarter.

Areas where property prices have remained low for some time are tending to dominate this trend. Lower prices mean buyers need to borrow less, making principal repayments lower. And with interest rates lower than they have been for decades, the interest portion of repayments on a typical home loan is also significantly less. This translates into a golden opportunity for renters to consider buying a home.

Where is it cheaper to buy?

The results of CoreLogic’s analysis are based on the median value of suburbs in October, and assume a 20 per cent deposit on a 30-year principal and interest loan at 4.25 per cent. Here’s what it found:

  • In Greater Brisbane, there are now 138 suburbs where it is cheaper to buy a house than rent one; around 43 per cent of the market. Of the 206 suburbs that make up the unit market, it is cheaper to buy than rent in a massive 86 per cent of them. Oversupply in the Brisbane unit market over the last few years has kept growth low and brought good affordability to the sector.
  • Greater Sydney has experienced significant price rises over the second half of this year, but there are still some opportunities. It is cheaper to buy than rent a house in 20 of the city’s 608 suburbs (just 3.3 per cent) and in 18 out of the 401 unit markets (only slightly higher at 4.7 per cent).
  • In Greater Melbourne, where prices have also shown strong growth over the past four months, there weren’t any suburbs where it was cheaper to buy a house. However, there were a number of suburbs where the difference between buying and renting was very small. In only 10 per cent of the city’s 303 unit markets was it cheaper to buy than rent.
  • Greater Adelaide has 100 suburbs where it is cheaper to buy a house than rent one; about 35 per cent of the market. In the unit market, it was cheaper to buy in 87 per cent of suburbs.
  • In Perth and its surrounds, houses in 38 per cent of the 283 house markets were cheaper to own than rent, and units were cheaper to buy in 81 per cent of the market.
  • In Canberra, it was cheaper to buy than rent in 16 of the 80 housing market suburbs and in 55 out of the 61 unit market suburbs.
  • Even in Hobart and its surrounds, where prices have surged by over 40 per cent in the last five years, it is still cheaper to buy than rent in 67 per cent of the 45 house markets. Units in Hobart were cheaper to buy than rent in 91 per cent of suburbs.
  • In Greater Darwin, houses and units were cheaper to buy than rent in all suburbs.
The top three suburbs in each city where savings are greatest when making mortgage repayments compared to paying rent
Source: CoreLogic

These figures are quite unusual and will not last forever. It is far more common for the cost of buying to exceed that of renting, due to the cost of borrowing. The current gap between rental costs and mortgage repayments should start to close as some of these renters realise the financial benefits of owning in the current market conditions, and transition to becoming homeowners. Once house prices and interest rates start to rise again, we would expect a more normative balance between mortgage repayments and rental costs, that is, where rental costs in most areas are less than mortgage repayments.

Factors to consider before buying

The financial benefits of buying are largely due to the capital gains made by the property over time; the hope is that these gains will exceed the interest paid plus the other costs of buying. This outcome depends on many variables – the economy, the property market, interest rates and so on – and isn’t guaranteed. A recent study by big four accounting firm EY found that in some cases, particularly during periods when house prices are not increasing significantly, renters can be financially better off.2

So before you consider purchasing a home, here are a few key considerations.

  • Can you service the loan? If you are already renting in a suburb where buying is cheaper, it’s likely you will be able to service a loan given your mortgage repayments will probably be less than your current rental costs.
  • Do you have enough money for the upfront buying costs? You will need to be able to pay a deposit (ideally 20 per cent of the purchase price), stamp duty and other government fees, legal costs, loan establishment fees, building and pest inspection costs, home insurance costs, moving costs and, if you have less than a 20 per cent deposit, lenders mortgage insurance.
  • What are the capital growth prospects for the area? If prices are low, there may be a reason for this. For example, properties in some mining towns have lost a significant amount of value and are currently cheaper to buy than rent. But purchasing in these areas may be risky from a capital gains perspective as it depends on the future of the resources sector. Your Smartline Adviser can provide you with reports on property in your area of interest, which will give you a good idea of where the property is in the cycle and the forecast for price growth.

If you can tick all these boxes, the market forces currently in play mean that now could be a golden opportunity to break free from the rental cycle and purchase a home of your own.

SOURCES: 1CoreLogic Report – Rent vs. Buy: Capital City markets – November 2019, 2

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DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.