Why it is cheaper to buy in southeast Queensland than to rent

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It is cheaper to buy a house in southeast Queensland than it is to rent, according to RiskWise Property Research.

In most areas principal and interest are lower than the annual rent and nowhere in the region are interest-only loan repayments for owner-occupiers higher than the annual rent.

RiskWise CEO Doron Peleg said ultra-low interest rates had created a unique environment where buying a house in many areas was simply cheaper than paying rent on one, as principal and interest repayments are lower than the rental payments.

He said in general, rent money was dead money, and that renters with secure jobs were better off buying a house than continue paying someone else's mortgage.

Pete Wargent, co-founder of Buyers Buyers, a national marketplace now offering affordable buyer's agency services to all Australians, said that there had been a notable shift in the buy versus rent equation in 2020.

"We clearly seeing more interest from first home buyers this year, keen to buy at a time when there's less competition from investors, and taking advantage of the some of the incentives on offer from federal and state governments" Mr Wargent said.

"Record low mortgage rates have clearly also been a key factor" Mr Wargent added.

"In most areas, except for three, the full mortgage repayments, i.e. principal and interest repayments, are lower than the than the rental costs. Also, interest-only loan repayments for owner-occupiers and investors in all southeast Queensland are below the annual rent. This means, it's cheaper to buy than rent, assuming you have 20 per cent deposit, so it makes no sense not to take advantage of the current ultra-low interest rates and continue to rent," Mr Peleg said.           

"For principal and interest loans, both owner-occupier and investor loan repayment amounts are lower than the annual rent in all Southeast QLD, except for three SA4 areas being Brisbane Inner City, Brisbane South and Brisbane West.

"Areas such as the Sunshine Coast and Gold Coast have enjoyed exceptional capital growth over the past 10 years with further positive projections in the medium to long term, especially as more and more people work remotely and can enjoy a sea or tree-change without having to seek accommodation close to employment hubs, but rather move for lifestyle benefits," he said.

"If you buy a house you can start building equity, particularly when you take a long-term strategic view and are in an appropriate position to negotiate well and buy a 'Grade A' property that will serve your family to many years to come.

"Our research also shows that nationally the interest only repayments for both owner-occupiers and investors is lower than the annual rental cost in most of the 88 areas at the statistical area level 4 (i.e. SA4s). Therefore, funding costs are lower than rental payments across all states and territories.

"And, except for Sydney and Melbourne, in all other states and territories, even the principal and interest repayments are lower than the annual rent, if you have 20 per cent deposit.

"No interest rate rises are expected in the foreseeable fortune and the intense competition between the banks is only going to further intensify, meaning buyers are in a very strong position to continue enjoying ultra-low interest rates."

Mr Peleg said the biggest savings were in the capital cities where rental returns were the highest.

"A sustained period of ultra-low interest rates seems almost certain in the near future and is likely to have a positive impact on the market during 2021. In fact, RBA research has found that for every 1 percentage point reduction to the cash rate, property values may increase 8 per cent over the following two years."

Ultra-low interest rates have led some lenders to offer introductory home loan variable rates of 1.99 per cent, a move which follows the launch of the first fixed rate of less than 2 per cent.

Over the medium and the long term, he said solid price growth was highly likely for houses, particularly due to a systematic undersupply in the inner and middle rings, and the lifestyle changes and the increased popularity of South-East QLD that will further increase internal migration into the area.

"What this all means is now is the time to buy if you are a first home buyer or an owner-occupier as this current slowdown in the property market is only temporary, with houses in popular areas likely to experience solid capital growth in the medium to long term. However, it must be stressed that units carry a higher risk and at this point of time so this strategy should only be considered for houses. There are some areas in South East QLD, such as inner Brisbane that carry an elevated level of risk for units. Also, units are less popular dwelling alternative amongst owner occupiers, in comparison to houses.

"Once the COVID-19 issue is resolved, most likely in 2021, the traditional connection between low interest rates and increase in dwelling prices is likely to take place."

Mr Wargent of Buyers Buyers said investors with a long-term view could also benefit despite interest repayments for investment properties being slightly higher.

"If the rent covers their monthly interest repayments, they are in a good situation. There is a relationship between low interest rates, low out of pocket expenses and stronger demand and this is attractive to investors," Mr Wargent said.

NOTE: Our calculations of the rental cost is based on the median house price in each area, multiplied by the rental return (i.e. yield), in %. The calculation of the mortgage repayments is based on 80% LVR (i.e. 20% deposit) of the median price in each area. The interest rates are based on the actual variable interest rates for owner occupiers and investors, as published by the EBA, and as follows:

Homebuyers: 2.92% for all loans

Investors: interest only: 3.17% and principal and interest: 2.96%

 
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