Mortgage serviceability cheaper than renting on over a third of Australian properties

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CoreLogic analysis suggests servicing a mortgage is now cheaper than paying rent on 36.2% of Australian properties, which is higher than the pre-COVID proportion of 33.9% reported in February last year.

HomeloanThe analysis was undertaken at the individual property level, using a set of mortgage assumptions and valuation estimates, to approximate mortgage repayments.

These were then compared with rental estimates at the individual property level.

Using these estimates of mortgage and rent, the data reveals striking differences in housing costs across different parts of Australia.

The proportions of properties cheaper to rent or buy by region are outlined in Figure 1.

The data is also broken down by SA4 sub-regions in figure 2.

The highest proportion of properties where mortgage serviceability is cheaper than rent is across Regional NT (96.4%) followed by Darwin (86.5%).

Corelogic Fig1

Aside from Darwin, regional Australia generally has a larger proportion of suburbs where it’s cheaper to service a mortgage than pay rent.

Property values and rents across the combined regional areas of Australia suggest 60.1% of properties are currently cheaper to service a mortgage than rent, while across the capital cities, this is only true of around one-quarter of properties.

The increase in areas where it is cheaper to service a mortgage than to pay rent across Australia when compared with preCOVID analysis, is a reflection of much lower interest costs on mortgage debt since the onset of COVID-19.

Average new mortgage rates for owner-occupiers have fallen from 3.21% in February 2020, to 2.40% as of May 2021, according to RBA data.

This is one of the factors that may have boosted sales activity coming out of COVID-19 restrictions in 2020; if it makes more financial sense to pay for a mortgage than rent, renting households may have been triggered to look for something to buy as interest rates have fallen.

However, reduced interest costs have not led to cheaper mortgage serviceability relative to rents in every instance.

This is especially the case in Sydney, where property values have increased markedly against low-interest rates, pushing up loan principals (the amount borrowed) and outpacing growth in rents.

Since February 2020, Sydney dwelling values have increased 15.2%.

Sydney rents only increased 2.1% city-wide in the same period.

Mortgage3

The relatively subdued rental growth may be largely due to a loss of rental demand from stalled overseas migration, where Sydney and Melbourne have traditionally been the most popular destination for international arrivals in the country.

The combination of lower rent growth and very strong dwelling value growth has meant that even fewer properties across Sydney are cheaper to pay down a mortgage than rent, at just 4.9%.

This is down from 7.1% when the analysis was done with the same assumptions in February 2020.

This kind of analysis historically has also shown that just because an area sees cheaper mortgage costs than rents, does not mean people would necessarily want to buy there.

Regional Northern Territory and Outback Western Australia are prime examples.

Rental costs tend to be higher in these regions, because accommodation that suits a more transitory lifestyle would likely be in higher demand – for example, in proximity to FIFO mine sites. Mortgage4

This dynamic is echoed to a small extent across larger, east coast cities.

The regions where rent payments are more likely to outstrip mortgage repayments generally reflect lower socioeconomic areas within a city, where the property is not as expensive, but there is demand pressure on rental markets.

This could be because of affordability constraints on barriers to entry around homeownership (such as a deposit hurdle, professional services, or stamp duty payments).

However, the low-interest-rate environment is still conducive to better serviceability in many parts of the country.

The analysis is a good reminder for renters to weigh up housing costs and savings, to see if it is time for a change in tenure.

Corelogic Figure2

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About

Eliza is head Of Residential Research Australia for Corelogic and a respected property market commentator. Eliza holds a first class honours degree in economics from the University of Sydney


'Mortgage serviceability cheaper than renting on over a third of Australian properties' have 1 comment

    Avatar for Eliza Owen

    July 16, 2021 bridget

    This data (both tables) is very informative when reflected upon in hind sight, and applied if seeking long performing investment grade property assets. It seems those ‘least affordable to buy’ suburbs could be the best for investment properties. I wonder what past similar data looks like say at 5 year intervals.
    Thanks. BB

    Reply


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