Mortgages cheaper than rent, study reveals

While the latest market downturn has provided Australians with some hope of getting into the property market ladder, Domain’s latest report revealed that the 275-bp rate hikes in the past seven months had diminished this prospect for aspiring home buyers.

Upon comparing mortgage repayments to rents across the country, Domain found it is cheaper to pay off a mortgage than rent in 13.8 per cent of suburbs for houses and 21 per cent for units. 

Domain chief of research and economics, Nicola Powell, commented that the RBA’s monetary policy tightening had a heavy hand in the trend of diminishing suburbs where it is more affordable to buy than rent. 

“While it might be thought that rising rents and falling house prices would bump up the number of suburbs it is cheaper to buy than rent, it has been overshadowed by rising interest rates and the subsequent escalating costs of holding a mortgage,” she explained. 

Since May, the central bank has raised the country’s official cash rate from a record low of 0.1 per cent to currently stand at 2.85 per cent in November, which has made servicing a mortgage a bigger hip pocket for home owners. 

On that note, Dr Powell posed an important question: “How far will prices have to fall to offset the deterioration in mortgage affordability?” 

But the report noted that minor adjustments could open up more suburbs for aspiring home buyers. Data showed that allocating an additional $50 per week towards a mortgage will open up a higher number of suburbs for purchasing, adding 7.6 per cent for houses and 11.3 per cent for units. 

The report also noted that not all markets are alike. According to Domain, the greatest opportunities for those who want to purchase their own home can be found in Perth, Darwin, and regional Australia. 

In regional Australia, it costs less to buy than rent in nearly a quarter of suburbs for houses and 44.3 per cent of suburbs for units.

“A noticeable trend in regional Australia shows an area may have lower mortgage costs compared to rents, but in some cases, it can reflect the local transient nature of the population,” Dr Powell commented. 

In Perth and Darwin, houses are 26.2 per cent and 66.7 per cent cheaper to buy than a unit, respectively. These figures dramatically increase within the cities’ unit sectors to 82.1 per cent in the Western Australian capital and 83.3 per cent in the Northern Territory capital. 

Aside from the rate hikes, there are other factors that affect mortgage costs and rental prices. 

“We’re also seeing the more premium a suburb, the greater the mortgage repayment becomes, relative to rent, and rent is higher than weekly mortgage repayments in certain suburbs that have greater levels of competition from short-term residents, students and young professionals,” commented Dr Powell.

According to Domain, choosing to rent is generally more cost-effective on a weekly basis in locations with higher median purchase prices. Given they attract a premium from buyers, it can be challenging for rents to keep pace; thus, they are cheaper to rent than buy. 

Compared to other capitals, data showed there were fewer suburbs in Sydney, Melbourne, and Hobart where it was cheaper to buy than rent.

Additionally, Domain noted that rent is higher than weekly mortgage repayments due to high competition in some areas, which in turn bolsters asking rental prices. For example, the report cited unit markets in the city suburbs of Perth, Canberra and Darwin, Kingston in Brisbane’s west, and the Canberra suburb of Bruce.

[Related: Regional hot spot boom winds down]