Is It Cheaper to Buy Than Rent Post-Covid?

New research from CoreLogic found that servicing a mortgage has become cheaper than paying rent on 36.2% of Australian dwellings, up from the pre-Covid-19 numbers of 33.9% posted in February 2019.

More than a quarter (26.2%) of dwellings are cheaper to purchase in the combined capital cities, while the numbers increased to 60.1% in the combined regional cities.

The analysis was done at the individual property level, using a group of mortgage assumptions and valuation estimates to come up with a ballpark figure for mortgage repayments. The numbers were then compared with rental estimates at the individual property level.

The assumption was that the buyer saved a 20% deposit and bought property at an interest rate of 2.4% on a 25-year loan term.

The combined capital cities had varied levels of mortgage serviceability compared with 2020, with data showing that in certain cities, the number of houses that are cheaper to purchase has decreased.

For example, in Sydney, 4.9% of dwellings are cheaper to purchase in 2021, down from 7.1% in 2020, while in Melbourne, it was 7.3% in 2021, down from 9.6% in 2020.

Sydney property prices have risen by 15.2% since February 2021 (amid low interest rate), which has boosted loan principals.

Rents in Sydney grew by just 2.1% compared to 2020, due to reduced rental demand because of the delated foreign migration.

Properties were cheaper to buy than compared to renting in 2021 thanks to significantly lower interest rate costs on mortgage debt since the start of the pandemic.

Based on the analysis by CoreLogic of data from the Reserve Bank of Australia, the average new mortgage rates for owner-occupiers have declined from 3.21% in February 2020 to 2.40% in May 2021.

CoreLogic: principal could decline because of higher fixed rates

Mortgage costs could increase as lenders start to increase long-term fixed rates along with increased funding costs.

For new owner-occupier borrowers, average long-term fixed rates have improved from recent lows by an average of roughly 12 bps, which would have already undermined serviceability in certain areas.

However, average fixed rates with at least a three-year term are still so far from pre-pandemic levels. Numbers are currently at 2.11%, down from 3.06% in February 2020.

But despite the moderate increase in longer-term fixed rates, renters should still assess their housing costs for longer-term renters, versus the cost of purchasing.

Higher mortgage rates would increase interest rates for buyers. However, for some, mortgage servicing may still be a smarter path than renting in this situation. This is because increased interest rates could weaken the housing market and reduce the principal.

It depends on individual circumstances, and evaluating the cost of various tenure types.

For mortgage brokers, there is business to be had from people who want to shift from renting to owning a home even when rates are increasing. However, they should be aware of the possible tightening in prudential standards.

Monetary policy could remain liberal in the near term, with projected growth in the cash rate fluctuating from late 2022, as forecasted by major banks, to 2024, according to the RBA.

In case average, long-term fixed rates go the full 100 bps, they would return to levels reported in October 2019, when dwelling demand was significantly high.

Taking all of these into account, there could be more proactive risk management and possible tightening in prudential requirements in the housing lending situation. So, you may want to note that there could be increased focus on serviceability assessment.