Rising Interest Rates Change the Equation, but not the Outcome

For a number of years now, Cairns has offered the opportunity to purchase a home in many suburbs, and have repayments come out at less than the cost to rent an equivalent property.

While low interest rates have obviously played a big factor in that equation (low interest rates = lower repayments vs rent), as rates reverse that trend and start heading north (rapidly), does that mean the idea flips on its head? Is renting now the smarter move?

As tempting as it might be to answer yes (after all, its not YOUR mortgage that’s gone up), rental prices have more than kept pace with interest rate rises, and look likely to continue to do so for the foreseeable future. Tenants are insulated from higher rent costs while they are within their fixed term lease, but each renewal can be expected to come with an increase, with the token $5 or $10 lift of years past a distant memory, and rises of $25, $50 or more per week far more common – particularly if it has been 12 months or more. While it might seem farfetched, in cases where there has been a long term tenant vacate and a property is offered up for the first time in a while, $100 per week over previous leases is also a possibility.

Stepping beyond the dollars, the factor which comes up most often when I speak with prospective buyers moving from a rental property is security. Not so much deadbolts and crimsafe, but the security of having better control over your own home. Though upcoming changes to legislation will affect how tenancies are ended, it remains the case that tenants are only guaranteed an address for the length of their current lease, with renewals (where offered) subject to those increases. For tenants, needing to move a couple of times within 12 months because a landlord has had to move in themselves, or decided to sell, can be an incredible motivator to put down more permanent roots, on your own terms. I have even seen cases where current tenants will make the choice to buy their rented home, rather than take the risk of having to move out.

Now there are still exceptions to the rule, depending on your own circumstances and the property in question. For some, the flexibility of renting can be a bonus, particularly when moving frequently for work. The top end of the market can also offer some relative rental bargains, at least compared to their million plus price tags.

Tom Quaid is the REIQ Zone Chair for Cairns