The headline in The Australian Financial Review
raised eyebrows: "It's cheaper to buy than rent
," screamed Australia’s leading financial rag. Reporting on a study by Mortgage Choice, Debra Cleveland reported "it’s cheaper to buy a home than rent in almost every Australian capital city … despite fewer government incentives".
But the paper seemed more content to recycle a press release rather than actually consider whether the result of the so-called study made any sense at all. So Crikey
applied the Get Fact test.
It should be noted Mortgage Choice, which commissioned the study, is a mortgage broker -- it makes money solely from people buying houses. The more people houses people buy, the more money Mortgage Choice makes. It therefore has a pretty clear vested interest in convincing people to buy houses. A study which suggests buying is cheaper than renting fits nicely with that.
We looked at Mortgage Choice’s media release
and it didn't take long to realise that the entire premise of the claim was erroneous.
On face value, the data produced by Mortgage Choice appears to support the claim that it is more expensive to rent than it is to purchase a home. For example, the report found that in Brisbane the weekly median rental amount is $390 (according to APM’s December Rental Report), while weekly loan repayments were a mere $375. Similarly, in Sydney the report claimed the median rental costs of $500 per week were allegedly far higher than average loan repayments of a meagre $422.
The problem with the survey isn't on the rental side -- the median rental amounts appear reasonably accurate. However, it’s the weekly loan repayment statistic which are substantially understated -- for several reasons.
First, the survey isn’t comparing like with like. Mortgage Choice calculated the weekly loan repayment data based on the ABS’ calculation of the average first homebuyer loan
. That is completely wrong as it ignores numerous factors, most importantly, that most purchasers don’t take out a loan for the entire purchase price. For example, many purchasers may use a 20% deposit -- but that deposit amount represent an opportunity cost as that money could be in a term deposit or the share market earning a return. The Mortgage Choice figure therefore significantly understates the real cost of purchasing a home.
The other problem with Mortgage Choices data is that it considers only first home buyer average loans
, rather than data for all properties. By contrast, the median rental statistic it uses include rental received for all properties
(and would therefore include more expensive residences as well as cheaper ones). What that means is the survey took a global metric for one part of the calculation and a very narrow metric for another.
Instead of using weekly loan repayments for first home buyers, the correct calculation would be to use the level of weekly interest payments based on a 100% interest only loan to purchase the median property (for each state). That way, it can be properly compared with the median rental amounts.
Let's take Sydney: the median property price according to RP Data
is $580,246. However, when you buy a house, there are other significant costs to consider, like stamp duty, mortgage fees, mortgage insurance and solicitors' fees. As a result, the median price should be adjusted to include those payments. Doing that (remember, we are comparing the costs of renting versus buying so we need to include all expected costs), the median price real purchase cost in Sydney is around $610,000. Using the 5.9% variable rate chosen by Mortgage Choice, the imputed weekly cost of purchasing the median Sydney property is actually $691 -- almost 40% more than the rental cost.
But that’s far from the end of it.
Property owners also have several other costs that renters don’t need to pay -- most significantly, depreciation of the structure of the home. Dwellings tend to depreciate at around 3% annually. While land doesn’t depreciate, the cost of structural depreciation would add around $5000 to the annual cost of owning a home. Then there’s ongoing maintenance costs (replacing the airconditioner or dishwasher) which would conservatively average around $2000 a year, not to mention council rates, water and insurance of around $2000 annually (and far more for apartments within body corporates).
Taking a conservative approach of $7500 annually for those other costs, that would amount to around $150 per week. That means, the average cost to own a (median) home in Sydney would be $835 per week -- or 68% more than renting. In real terms, renting will save the median Sydney-sider almost $20,000 per year (after tax).
As the table indicates, the figures are most damning in Melbourne, where owning a home is more than double the cost of renting one, Adelaide is 76% more expensive while Perth is 52% dearer.