More dwellings cheaper to buy than rent post-COVID

CoreLogic’s weekly Property Pulse has revealed that servicing a mortgage has become cheaper than paying rent on 36.2 per cent of Australian properties, higher than the pre-COVID-19 proportion of 33.9 per cent reported in February 2020.

The analysis found that just over a quarter (26.2 per cent) of properties are cheaper to buy in the combined capital cities, while this figure jumps to 60.1 per cent in the combined regional cities.

CoreLogic undertook analysis at the individual property level to compile the report, using a set of mortgage assumptions and valuation estimates to approximate mortgage repayments. These were then compared with rental estimates at the individual property level.

CoreLogic assumed the buyer had a 20 per cent deposit saved and purchased property on an interest of 2.4 per cent (based on the average new lending rate for owner-occupiers reported by the RBA at May 2021 on a 25-year term).

Mortgage serviceability levels have varied across the combined capital cities compared with 2020, with CoreLogic figures revealing that in some cities, the proportion of dwellings that are cheaper to buy has reduced.

For example, in Hobart, 50.2 per cent of properties are cheaper to buy in 2021, down from 59.2 per cent in 2020, while this proportion has also decreased in Melbourne (down from 9.6 per cent in 2020 to 7.3 per cent in 2021) and Sydney (down from 7.1 per cent in 2020 to only 4.9 per cent in 2021).

Property values have increased by 15.2 per cent in Sydney since February 2020 (against low interest rates), which has pushed up loan principals (the amount borrowed).

Sydney rents increased by only 2.1 per cent during the same period (amid loss of rental demand due to stalled overseas migration).

On the other hand, in Darwin, the proportion of dwellings that are cheaper to buy has spiked from 77.6 per cent in 2020 to 86.5 per cent in 2021, while this figure has surged from 44.3 per cent in 2020 to 59.6 per cent in 2021 in Perth, from 48.8 per cent in 2020 to 55.3 per cent in 2021 in Brisbane, and from 40.6 per cent in 2020 to 47.6 per cent in 2021 in Adelaide.

The report attributed the overall increase in the proportion of properties that are cheaper to buy than rent when compared with pre-COVID levels to much lower interest rate costs on mortgage debt since the onset of COVID-19.

Average new mortgage rates for owner-occupiers have fallen from 3.21 per cent in February 2020 to 2.40 per cent as of May 2021, CoreLogic’s analysis of Reserve Bank of Australia (RBA) data revealed.

“This is one of the factors that may have boosted sales activity coming out of COVID-19 restrictions in 2020,” the report said.

“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.”

According to CoreLogic’s head of research Australia, Eliza Owen, this kind of analysis has shown that people would not necessarily want to buy property simply because mortgage costs are cheaper than rent.

This is particularly the case in areas like regional Northern Territory and outback Western Australia where rental costs tend to be higher because this type of accommodation is more suited to a transitory lifestyle – for example, in proximity to fly-in fly-out mine sites.

“This dynamic is echoed to a small extent across larger, east coast cities,” Ms Owen said.

“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. This could be because of affordability constraints on barriers to entry around home ownership (such as a deposit hurdle, professional services or stamp duty payments).”

Higher fixed rates could bring down principal: CoreLogic

While mortgage serviceability is currently cheaper than rent, mortgage costs could rise as lenders begin to raise long-term fixed rates amid higher funding costs.

Ms Owen told Mortgage Business that average longer-term fixed rates for new owner-occupier borrowers have come off recent lows by around 12 bps on average, which would have already weakened serviceability in some areas.

However, she noted that average fixed rates with a three-year term or longer are still “a long way off” pre-COVID levels (currently at 2.11 per cent compared with 3.06 per cent at February 2020, according to the RBA).

“This means despite the subtle rise observed across longer-term fixed rates, it’s still a good time for renters to weigh up their housing costs for longer-term renting, as opposed to the cost of buying,” Ms Owen said.

“An increase in mortgage rates would have the impact of increasing interest costs for buyers, but for some, servicing a mortgage may still be a better option than renting in this scenario, because higher interest rates would likely cool housing market demand and bring down the principal.”

She cautioned that it is dependent on individual circumstances, and weighing up the costs of different tenure types.

Ms Owen said that for mortgage brokers, there are opportunities from clients seeking to transition from renting to home ownership even when rates are rising but flagged potential tightening in prudential standards.

“Monetary policy is likely to be expansive for some time, with forecast increases in the cash rate varying from late 2022, according to major banks, to 2024, as suggested by the RBA,” she said.

“If average, long-term fixed rates increased a full 100 bps, this would put them back at levels seen in October 2019, when housing demand was quite high.

“Having said that, the housing lending environment will likely see more proactive risk management, and potentially tightening in prudential standards. So, there could be greater emphasis on serviceability assessment to keep in mind.”

[Related: COVID-19 to amplify house price surge: KPMG]

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.