To buy or not to buy It’s the age old question – should you rent or buy?
According to one Reserve Bank official, the answer is actually pretty simple – you should definitely buy, and now’s as good a time as any.
Reserve Bank senior research manager Peter Tulip Recently made a strong argument in favour of buying over renting at the Australian Conference of Economists in Brisbane.
House prices in Australian capital cities have risen by an average of almost 10 percent in the last year, but Dr Tulip says prospective buyers should not be scared off by constant reports of a ‘property bubble’ – because owning a home still costs 30 percent less than renting. He and co-researcher Ryan Fox compared the cost of renting a property with the annual cost of buying that same property (calculated using the purchase price, the transaction cost, the expected mortgage rate and running and depreciation costs offset by expected capital gains). “You can either pay 2.7 percent of the value of the property to buy, or you can pay 3.9 percent of the value to rent,” Dr Tulip said.
The undervaluation is 30 percent. It’s unusually wide, the widest in at least 30 years. I can take you back further but the data quality deteriorates the further we go back.
“Under our assumptions, owning a home is now more attractive, relative to renting, than it has been at any time in the past 30 years.” Dr Tulip had not prepared separate reports for each capital city, but it’s reasonable to believe buying over renting might be a particularly wise choice in Brisbane, where renters are paying prices equivalent to their Melbourne counterparts in house prices between the two cities.
According to a recent Domain rental report, it cost $400 a week to rent a home in Brisbane in the June quarter – that’s about $10 a week more than you’d pay in the Victorian capital. The same report stated that the average rental price of a Brisbane apartment grew by 1.4 percent in the June quarter to $370 a week, on par with what you’d pay to rent an apartment in Melbourne.
These figures are quite incredible when you consider that Brisbane property can be bought for an average $100,000 less than Melbourne property.
Unlike Melbourne, Sydney and Perth, rental yields in Brisbane have consistently remained above five percent. That’s great news for investors, but not so much for renters.
Certainly, a dollar spent on property will go further in Brisbane than it will in Sydney, where it’s virtually impossible to buy a new house for less than a million dollars. A one bedroom, one bathroom, one car space apartment in Seidler’s Cove in Sydney was recently listed at $1.225 million; by comparison, a four bedroom, two bathroom, two car space home in Carindale was recently made open to offers from $995,000.
Dr Tulip attributed the particularly dramatic difference between the costs of renting and buying in 2015 to this years interest rates cuts. “Just one year ago when we last published results, we found that houses were fairly valued – that is, the cost of buying was about the same as the cost of renting,” Dr Tulip told the conference.
“What has changed since then is that real long-term interest rates have fallen substantially. That fall made housing more attractive relative to renting, despite the increase in prices.