Rent money increasingly becoming dead money

With no end in sight to historically low interest rates, it is becoming increasingly more affordable to buy a house than rent in many areas.

New analysis shows renters with secure employment and access to a deposit are better off buying a house than paying someone else’s mortgage.

“When it comes to houses, the preferred dwelling option in most areas of the country, in many cases it is cheaper to buy than rent, and rent money is 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 if you are in a good position to negotiate well and buy a ‘Grade A’ property that will serve your family for many years to come”, RiskWise Chief Executive Doron Peleg said.

The research shows interest-only repayments for both owner-occupiers and investors are lower than the annual rental cost in most of the Australian Bureau of Statistics’ 88 areas at the statistical area level 4 (ie. SA4s). Therefore, funding costs are now lower than rental payments across all states and territories.

Further, in all states and territories – excluding Sydney and Melbourne – even the principal and interest repayments are lower than the annual rent, assuming the buyer has a 20% deposit and using interest rates on new loans funded in June 2020.

For example, in Brisbane the median house price is $559,975 and sees a median rental yield of 4.3% and rent of $23,995. According to the research, looking at the annual difference between rent and buy, an owner-occupier paying interest only would come out $10,915 better off. Meanwhile, an owner-occupier paying principal-interest would save $1,567.

For an investor, interest only repayments would save them $9,799, while principal and interest sees a saving of $1,447.

Buying a house in Darwin sees the biggest savings; a median house price of $473,861 with a rental yield of 5.4% and annual rent of $25,541, repaying principal and interest would save $6,557.

“No interest rate rises are expected in the foreseeable future and the intense competition between the banks is only going to intensify, meaning that buyers are in a very strong position to continue enjoying ultra-low interest rates,” Peleg said.

Further, 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, RiskWise said.

Over the medium and long term, Peleg said solid price growth is highly likely for houses, particularly due to a systematic undersupply in the inner and middle ring suburbs, and more affordable outer areas of CBDs.

“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,” Peleg said.

“Once the COVID-19 issue fades, most likely in 2021, the traditional connection between low interest rates and an increase in dwelling prices is likely to reassert itself.”

 

Source: RiskWise (www.financialstandard.com.au, 28 September 2020)