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- Despite a modest increase in the proportion of homes where mortgage servicing is less expensive than renting, nearly two thirds are cheaper to rent
- A mortgage is now cheaper than paying rent in 36.2 per cent of Australian homes, up from 33.9 per cent in February last year, according to CoreLogic
- It is more likely to be cheaper to service a mortgage than rent in regional areas, whereas the opposite is true in capital cities
- CoreLogic’s Eliza Owen says the increase in the number of areas where it is cheaper to pay a mortgage is a reflection of lower interest costs
Despite a slight increase in the number of properties where servicing a mortgage is cheaper than renting, nearly two-thirds of properties in Australia are cheaper to rent.
Maintaining a mortgage is now cheaper than paying rent in 36.2 per cent of Australian homes, up from 33.9 per cent in February last year before the COVID pandemic and introduction of record low interest rates.
The analysis from CoreLogic was conducted at the individual property level -utilising a set of mortgage assumptions and valuation estimations – and then compared with rental estimates.
The relative cost of buying versus renting varies across different parts of Australia. However there are more areas where it is cheaper to service a mortgage than rent in regional Australia.
Across the combined regional areas of Australia, property values and rents suggest 60.1 per cent of properties are currently cheaper to service a mortgage than rent.
However across the capital cities this is true of only around one quarter of properties.
CoreLogic head of research Australia Eliza Owen said the increase in areas where it is cheaper to pay a mortgage than rent was a reflection of lower interest costs on mortgage debt.
“Average new mortgage rates for owner occupiers have fallen from 3.21% in February 2020, to 2.40% as of May 2021, according to RBA data,” Ms Owen said.
“This is one of the factors that may have boosted sales activity coming out of COVID-19 restrictions in 2020.
“If it makes more financial sense to pay for a mortgage than rent, renting households may have been triggered to look for something to buy as interest rates have fallen.”
Reduced interest rates, on the other hand, have not always resulted in lower mortgage serviceability compared with rentals, according to Ms Owen.
“This is especially the case in Sydney, where property values have increased markedly against low interest rates, pushing up loan principals (the amount borrowed) and outpacing growth in rents,” she said.
The value of a home in Sydney has grown by 15.2 per cent since February 2020. In the same time period, Sydney rentals only climbed by 2.1 per cent.
“The relatively subdued rental growth may be largely due to a loss of rental demand from stalled overseas migration, where Sydney and Melbourne have traditionally been the most popular destination for international arrivals in the country,” Ms Owen said.
“The combination of lower rent growth and very strong dwelling value growth has meant that even fewer properties across Sydney are cheaper to pay down a mortgage than rent, at just 4.9%. This is down from 7.1% when the analysis was done with the same assumptions in February 2020.”
This type of study has revealed, according to Ms Owen, that just because a location has lower mortgage prices than rentals, it does not always indicate that consumers will want to buy there.
She said rental costs tended to be higher in regions such as regional Northern Territory and Western Australia because accommodation that suited a more transitory lifestyle would likely be in higher demand –for example, in proximity to fly in, fly out (FIFO_ mine sites.
To a lesser extent, this dynamic can be found in major east coast cities, according to Ms Owen.
“The regions where rent payments are more likely to outstrip mortgage repayments generally reflect lower socio-economic areas within a city, where property is not as expensive, but there is demand pressure on rental markets,” she said
“This could be because of affordability constraints on barriers to entry around home ownership.”
