Whether to rent or buy has long been an issue of contention amongst younger generations. Despite recent research underlining that Australians are likely to pay almost the same cost to buy a home compared to renting for the next 30 years, the number of first home buyers is at a historical low in Australia. John Edwards from onthehouse.com.au looks at the reasons why.
Basically the reason is the affordability differentiation.
Currently, in Sydney and Melbourne, looking at affordability, the overall cost of renting is less than paying off a mortgage, according to the latest data (below). In Sydney, buyers can expect to pay 39% more per month on loan repayments on a median-valued house than it would cost to rent, while in Melbourne it is 51% higher.
| Houses | ||||||
| Area | Median Value | Income | Monthly Loan Repayment | Monthly Rental Payment | Difference between loan and rental payments | Affordability premium |
| ACT | $529,500 | $128,754 | $2,472.51 | $2,204.45 | $268.05 | 12.16% |
| Adelaide | $407,500 | $90,266 | $1,902.83 | $1,583.44 | $319.38 | 20.17% |
| Brisbane | $456,500 | $97,454 | $2,131.63 | $1,909.06 | $222.57 | 11.66% |
| Darwin | $576,500 | $109,701 | $2,691.97 | $2,579.55 | $112.43 | 4.36% |
| Hobart | $375,500 | $90,200 | $1,753.40 | $1,573.56 | $179.84 | 11.43% |
| Melbourne | $610,000 | $99,796 | $2,848.40 | $1,889.84 | $958.56 | 50.72% |
| Perth | $524,500 | $109,637 | $2,449.16 | $2,071.75 | $377.41 | 18.22% |
| Sydney | $771,000 | $106,330 | $3,600.20 | $2,582.86 | $1,017.34 | 39.39% |
| Units | ||||||
| Area | Median Value | Income | Monthly Loan Repayment | Monthly Rental Payment | Difference between loan and rental payments | Affordability premium |
| ACT | $408,500 | $128,754 | $1,907.50 | $1,839.42 | $68.07 | 3.70% |
| Adelaide | $305,000 | $90,266 | $1,424.20 | $1,305.61 | $118.60 | 9.08% |
| Brisbane | $355,000 | $97,454 | $1,657.68 | $1,637.50 | $20.18 | 1.23% |
| Darwin | $431,000 | $109,701 | $2,012.56 | $2,113.64 | -$101.08 | -4.78% |
| Hobart | $257,500 | $90,200 | $1,202.40 | $1,212.31 | -$9.91 | -0.82% |
| Melbourne | $449,500 | $99,796 | $2,098.95 | $1,680.90 | $418.04 | 24.87% |
| Perth | $454,500 | $109,637 | $2,122.29 | $1,932.95 | $189.35 | 9.80% |
| Sydney | $537,000 | $106,330 | $2,507.53 | $2,252.52 | $255.01 | 11.32% |
Source: Onthehouse.com.au / Residex
This strength in the rental market is creating opportunities for astute landlords – with investors currently taking advantage of low interest rates, particularly older generations who are now investing in property through their self-managed super funds. People are now structuring their super fund investments in such a way that allows a form of negative gearing in residential property, allowing monthly super fund contributions from their salary to cover any rental income shortfall.
As a result, younger buyers and those looking to buy a first home are finding it increasingly difficult to afford to purchase property, especially in Sydney and Melbourne, and are therefore having to rent.
For landlords and investors, this essentially means a bigger pool of renters – giving an added incentive to purchase residential property.
For the longer term this is a good scenario for investors – there are rising rents and there is little chance that housing prices won’t continue to grow, so the overall rate of return and the risk from housing will be better than other asset sectors. Investors will have increasing constant cash-flow to reduce debt, and an asset which will increase in value. In short, the investor is going to see reducing risks from housing investments.
But for Australians looking to buy their first home, it’s disastrous. The high cost of buying property will force first-time buyers to move out of the capital cities and into regional towns – and in doing this, these major regional areas will see growth. Good growth in larger regional towns in the longer term is probably more likely to surpass growth in capital cities.
But the point to keep in mind here, is that the differentiation in affordability is a trend that is expected to continue for the long term because it will take time for wages to catch-up to house price growth.
With rising rents, the government will be forced to take action to reduce it, otherwise we face the risk of rent becoming unaffordable also.
All this happens because there is not an adequate supply of what the public uses and wants. For example, the market is providing a large amount of units but a significant portion of the population don’t want units.
The bottom line is that Governments will need to take steps to support the decentralisation of the population. Recent stats for Sydney for example showed that 40% of new jobs were created in the CBD. More needs to be done to incentivise businesses to set up operations in regional towns, to help create jobs and cause people to move and take pressure off capital city housing.
While it is more affordable to rent than buy, people shouldn’t be put off buying property because of this. We need to keep in mind that long-term savings from paying off a mortgage and capital gains on your own property can outweigh the short-term benefits of affordability.
Also, because there is a strong market of renters out there, now could be a good time for those looking to get onto the property investment ladder to get their foot on the first rung.
The increasing activity of investors has been a feature of the market for a number of years and can be traced back to the start of significant affordability issues for home owners. It’s also expected that investors will be ramping up their presence in the market.
Overall, the general indicators suggest that Australia is moving to a situation where a large number of families are going to be renters unless something occurs that diminishes housing costs. Renting in capital cities and buying in outer city regions looks as though it will be the natural outcome for young working families in these areas.
John Edwards is Consulting Analyst for Onthehouse, Australia’s most comprehensive real estate portal, and Founder of Residex, a leading Australian research organisation providing quality information on the real estate market to government, financial institutions, valuers, real estate agents, accountants, solicitors and the general public.
