Inflation figures show rents rising in Sydney | Pete Wargent

Not a bad day for predictions as it turned out, with rental growth in Sydney ‘accelerating’ to 3.2 percent, but easing back in some other cities according to last weeks‘s inflation figures.

Nationally rental growth increased by 0.7 percent over the quarter to be 2.5 percent higher over the past year.

The national downtrend in rental growth was cemented with declines in Brisbane (to +2.1 percent) and especially Perth (from +2.9 percent to +2.1 percent).

Rental price growth remains soft in Adelaide (+2.0 percent) and Melbourne (+1.9 percent).

In Sydney rental growth rebounded to be up by +3.2 percent over the past year, but in reality that was probably as much due to previous readings being too low as any actual acceleration.

The zoomed in 5 year chart below shows how rental growth has softened significantly in Perth and to a lesser extent in the other large capital cities.

In the smaller capital cities, rental growth is now falling sharply in Darwin, became even weaker than it already was in Hobart (declining to +1.0 percent), and has collapsed in Canberra (-1.6 percent) to be negative and with little sign of reprieve.

Dead money or dead weight mortgages?

These trends of softening rents (at least, outside of Sydney) have given rise to a number of media articles suggesting that it may in some cases be better to rent where you live than to buy property.

This can indeed work as a personal finance strategy if you invest heavily in other assets while renting.

However, it is important to recognise that nominal rents have increased relentlessly in Australia across the full 42 years of the data series, so as a general rule homeowners have fared much better than renters.

In reality, for most people it is better to be a homeowner than a renter, since at the end of the mortgage term an unencumbered home is owned, and thus the homeowner benefits from imputed rent once the loan debt is paid down.

The alternative is to pay rent for as long as you live, which the below data set from 1972 to 2014 suggests is likely to result in escalating rental payments over the long term.



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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