As costs soar, is it cheaper to rent or buy?
Finding a place to rent right now is tough. The number of advertised rentals across the country last month was about 98,000, well below the decade average of 147,000. As skilled migrants, overseas students and tourists return to our shores, fresh demand has pushed rent values 10.1 per cent higher in the past year in an already tight rental market. Since rents started climbing in September 2020, rent values have risen 24.1 per cent, or the equivalent of $110 per week.
But even taking all this into account, it’s generally still more expensive to pay a mortgage than rent.
Despite the surge in rents, mortgage repayments have still risen faster.Credit: Peter Rae
This is because, despite the surge in rents, mortgage repayments have risen faster. Based on Australia’s median home value, the median weekly mortgage repayment for a new, owner-occupied loan has risen 54.4 per cent in the same period rents rose 24.1 per cent.
This surge in mortgage repayments has been driven by the 3.5 per cent increase in the official cash rate since May last year. Even with home values falling over the past year, it has not been nearly enough to offset the fastest rate-hiking cycle on record.
In fact, recent CoreLogic research found that only 9.1 per cent of house markets nationally had cheaper mortgage repayments than rent as of February this year. This was down from 30.1 per cent in the same month of 2022. For units, only 16 per cent of suburbs were cheaper to buy than rent, down from 45.2 per cent in February 2022.
This means that even if you can save a home deposit while the cost of living is soaring, you may be looking at even higher ongoing costs once you take on the mortgage.
The suburbs where it’s cheaper to repay a mortgage than rent are largely very cheap markets, most with a median value of $500,000 or less. Around 60 per cent of these markets are regional, and of the capital city suburbs, more than half are located in Perth.
Does this mean it’s better to stay in the rental market as opposed to owning your home? Not necessarily. Home ownership has value prospects other than just how it compares to the weekly rent you pay now.
These include capital growth over time, greater housing security – and perhaps most importantly – being rent-free by the time you hit retirement. Being in the private rental market in retirement might not be an issue if you have other streams of income to help cover your cost of living, but older renters in Australia today generally have the highest rates of cost of living stress among their peers.
Another consideration is that while mortgage costs are currently high because of the rate-hiking cycle, the underlying cash rate can go both up and down. Some economists expect that the cash rate could move back down as soon as the second half of this year. That will eventually flow through to people with mortgage debt, reducing the difference between typical rent and mortgage costs.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. Investors should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
Eliza Owen is the head of research at CoreLogic.
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