Room for Debate: Is it really cheaper to buy than rent in some suburbs?

Buyers' agent Catherine Cashmore:

RP Data’s Rent vs Buy report flew into my email box this week, and already bold claims are being made across the internet and in print media that it’s currently cheaper to buy in 388 suburbs for those servicing a principal plus interest home loan using a variable rate.

Hurray! I hear you all cry – with the joyous voices marginally overpowered by the stampede of renters’ feet as they rush into their local real estate agency, chequebook in hand.

RP Data claims to be “Australia’s leading property data and analytics company”, and for the most part, I enjoy their market insights, updates, and media releases – all of which provide a valuable service for those of us not privy to direct data collecting software.

However, once in a while, I dearly wish RP Data would spend a little time thinking about the headlines it is creating before jumping in with the bold claims made on this report.

Median values – while a good barometer of the price point the predominant buyer demographic in any one suburb is purchasing – should always be used with caution when assessing if an area is “affordable”. The median price is only the middle number of all properties sold within a single period and therefore not helpful when it comes to assessing individual property prices.

RP Data stratifies its median prices between units and houses – and when producing detailed reports, usually breaks this data down listing other relevant information such as the number of bedrooms and so forth.

However, for the purpose of this report, the median values are simply divided between the two major property types – unit and house – therefore median “unit” value could mean a one-bedroom apartment or semi-detached three-bedroom townhouse. There is no distinction.

In its last report, RP Data pinpointed 238 suburbs or towns where “the mortgage repayment is lower than the median rent, based on a principal and interest loan on a variable mortgage rate”. Obviously the list expands two-fold when assessing interest-only loans, and there are hefty disclaimers explaining how the research is pinned together. In the latest report, due to lower rates and flattening prices, more suburbs fall into the bracket they use for assessment.

The resulting calculations are derived from the “median” unit price (or house price depending on suburb) and median “weekly advertised rental price”, with the “buyer” purchasing on a 90% loan-to-value ratio at an initial 5.9% variable 30-year loan. (Other examples are calculated on terms of interest only; however the above example is most applicable to the classic first-home buyer profile).

The results, however, assume a great deal – to take median values and use them as a barometer of affordability against a median rental price has significant flaws. For example, in Victoria’s list, you will find the popular suburb of Abbotsford – located a hop and a skip from Melbourne’s CBD.

Abbotsford is a favoured area for home buyers looking north of the city, so it may surprise readers that the median value is listed as $360,868. There is currently only a small handful of properties listed for sale online in Abbotsford that you could comfortably purchase for the RP Data median value (or less) of $360,868. One of the listings is a small one-bedroom flat (roughly 40 square metres) situated on a main road.

There is nothing wrong with the unit – it would suit a first-home buyer – however probably not on a 90% LVR variable home loan (the formula used by RP Data.) Due to its internal size the lender of choice would probably require a larger deposit – however, we’ll put this to one side and assume otherwise.

The median rent in Abbotsford according to RP Data’s Rent vs Buy report is $475 per week – yet in reality, this is the price you’d expect to pay for a small house in “original condition” – not a one-bedroom apartment!

If you’re a renter currently paying $475 per week for a one-bedroom flat, of course it’s cheaper to buy! Yet for the one-bedder that I used as an example, the rent would be roughly $270 per week – cheaper to buy? Not on your Nelly is it cheaper to buy – in fact it’s far cheaper to rent in Abbotsford than it is to buy.

Let’s take another example –Docklands – Melbourne’s favourite underperforming high-rise metropolis. The median value is listed as $493,185 – the price will buy a standard two-bedroom apartment most likely servicing high owner’s corporation fees due to the high-density construction.

Furthermore, borrowing for high-rise accommodation would likely present problems for a first-home buyer who may encounter lending restrictions for this type of accommodation – especially if borrowing on a 90% LVR. However, once again for the sake of the analysis on this report, we’ll put this to one side.

The median weekly rent is listed as $963 per week – if any renter is paying over $900 per week for a two-bedroom apartment in Docklands I’d suggest they seek help. For roughly $900 per week, it’s possible to rent a fully furnished three-bedroom penthouse with views of the city and beyond! Is it cheaper to rent than buy? No! It’s not!

It may be advantageous for some in the industry to spread the rumours spruiked in the report and encourage buyers to make the move and go see a mortgage broker. Hopefully even those who don’t follow the market closely will be a tad more educated when assessing the analysis.

Rental prices in Australia have risen over 49% over the past five years, and the number of renters is up from 27.2% to 28.7%. Along with this outright ownership is down from 32.6% to 31% and of those figures, 34.5% of 30- to 39-year-olds now live in rented accommodation and clearly struggle to save a deposit while servicing rising rental costs.

Families with children in particular are suffering, recording a decrease in their ownership rates from 79.5% to 77.2%. If it were cheaper to buy than rent, these figures from the ABS census data would be – at best – questionable.

Although Australia may still possess a good proportion of owner-occupiers to renters – enabling some in the industry to close their eyes to distress calls coming from the increasing numbers locked out altogether – both state and federal governments would be foolhardy to ignore the downward trend in ownership and the reducing pool of first-home buyers. Meanwhile, any myth that it’s cheaper to buy rather than rent in some of our most desirable inner-city locations needs to be taken with a degree of mistrust until data can be analysed at a deeper level.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.