As rents have gone up and interest rates down, the maths have long been leaning in favour of a mortgage being more affordable than rent in absolute terms – i.e. against the rental that could be achieved for a given house, the cost of paying principal and interest was actually a lesser weekly cost. Its made a pretty compelling argument or home ownership – provided you can find the house and save the deposit in the first place – which haven’t been steps to take for granted.
As interest rates go back up however, it begs the question whether the argument remains quite so compelling – after all, if one side of the equation is changing, then surely there is going to be a diminishing return, or even an incentive to rent instead?
Well, if it was a borderline decision to start with, or you are looking at the top end of the market then yes, you’re probably better off renting than owning a given property. A great example here might be the $1.5M property which you can rent for $1200 per week. While that might seem like uncommon value given a $500,000 home might rent for $600 per week, supply and demand see the number of potential tenants able to pay more than $1000 per week as a fairly thin slice of the wedge so the further up the price climbs, the more tightly rental yields compress and the more evident the affordability ceiling tends to be.
For a more standard home however, there is still plenty in the column to support buying on the cost/benefit scale. For one thing, even as interest rates increase mortgage repayments, there is still some way to go to get back to parity. And then, rentals have been increasing equally rapidly (if not more so), keeping the odds stacked in the buyer’s favour.
A fact worth remembering however, is that when you pay the rent, you pay the landlord and that’s it – there is no bonus that comes back to you, other than the convenience of a home that’s someone else’s responsibility when things go wrong. When it comes to paying a mortgage however, there are two components to it – the interest you pay the bank and the interest in the property that you pay yourself, building equity that reduces your repayments over time, builds wealth and ideally offers more choices down the track.
Of course, if it all goes horribly wrong, sometimes its worth being the tenant that can walk away, but in this environment, that’s the choice you have to make for yourself.
Tom Quaid is the REIQ Zone Chair for Cairns