Summary: Courtney Barnett's song Depreston has resonated with prospective first home buyers disillusioned with elevated property prices in Australian cities. However, these people haven't missed out, they've actually gotten lucky in avoiding the tail end of an unsustainable land price bubble. They should wait it out, rent close to work, avoid debt, minimise car ownership and save up. Enjoy the coffee shops and be happy you dodged a bullet. And, if socially-minded, help make long-term renting more secure and satisfying in Australia.
Details:
1. Renting is much cheaper than buying in all Australian cities. The more desirable the location the cheaper renting is than buying
Using sites like Realestate.com.au - Invest you can see that median rents for houses are at least $600/month cheaper than median buying costs (comparing monthly rent to monthly mortgage repayments). And this doesn't include all the other upfront and ongoing costs of owning compared to renting (deposit, stamp duty and other buying costs, insurance, maintenance, council rates, strata fees, etc).
And as Sydney and Melbourne's property boom continued into 2017, the median prices of the 284 properties that were sold continued to escalate sharply, while median rents where anchored by limited wage growth across the ~5,000 households that rent in the suburb. This increased the monthly cash flow gap between renting and a mortgage to $1,140/month.
As of October 2018, median rents are $1,288/month cheaper than median mortgage costs, and that's before all the other upfront and ongoing costs of owning compared to renting.
Of course, the area-wide, median price comparisons used by real estate websites aren't very precise as the type of properties bought vs rented are different. It's more accurate to do these direct comparisons for each individual property you would consider buying or renting. See below for an example.
2. A direct comparison of buying vs renting costs on an individual property in Preston
I've chosen 13 Mary St, Preston which sold for $700,000 on 11 April 2015 and is listed for rent at $420/week in June 2015 (without any major improvements in value thus a fair comparison). It was relisted again in January 2017 for $440/week.
Even if we ignore the 20% deposit ($140,000), stamp duty ($38,540) and other ownership costs (insurance, council rates, maintenance), the monthly mortgage repayments are $3,000.
This compares to monthly rental costs of: $420/week * 52 weeks ($21,840) / 12 = $1,820.
This is a gross rental yield of $21,840 / $700,000 = 3.12%
Or conversely a Price-to-Rent ratio of: $700,000 / $21,840 = 32. In other words, it would take 32 years of annual rent payments to equal the cost of buying.
Clearly, renting in Preston is much more affordable and sensible than buying at these property prices and Price-to-Rent ratios. If you're just looking for shelter not a speculative investment, then as a financial decision this is a no brainer.
3. Rental yields (or their inverse - Price-to-Rent ratios) are an easy way of comparing the costs of renting to owning
As a rule of thumb the gross (before expenses) rental yield for an area or property is the simplest way to compare the costs of buying to renting. This figure is also what all real estate websites publish and so is easily accessed. In Preston the gross rental yield was around 3% in 2015 when these comparisons were first made. It dropped to 2.5% as of July 2017. And was also 2.5% as of October 2018.
This compares with a gross rental yield of 4.8% in Cragieburn (4.2% in July 2017, 3.7% in Oct 2018):
"Craigieburn represents the distance you would have to go out of Melbourne to find a property which had the same affordability today as existed [in Preston] 20 years ago," Mr Edwards said.And a gross rental yield of 2.1% in Kew (1.8% in July 2017, 1.8% in October 2018):
Courtney Barnett's 'Depreston' song strikes a chord with first-home buyers
But a first home in the suburb of Kew doesn't come cheap with a median house price of $1.69 million... Property Council of Australia's Victorian division executive director Jennifer Cunich said Kew offered good schools and transport, making it a desirable place to live. "You've got the cafes, restaurants. It's just very well serviced," she said.These relative figures show that the more desirable the location (access to well-paying jobs, transport infrastructure, services, safety, schools, etc) the lower the gross rental yield. Due to decades of socially-regressive public policies (tax, planning, infrastructure, car-centric approach to transport), land prices have been inflated and forced owning costs to become much higher than they should be. The more desirable the location, the greater the effect these perverse policies have had.
The new face of housing affordability: Buying first house too expensive for Victorian MP Tim Smith
On the other hand, rent reflects only what all residents (not a few current speculators) are actually willing and able to pay out of their disposable income. There are no cheats like negative gearing tax subsidies and capital gains tax discounts. And the money has to be earned not borrowed meaning boom and bust speculation isn't possible, unlike with land prices.
4. At what gross rental yield level are owning costs equivalent to renting costs? (putting speculation on future land price growth aside)
According to Trulia the advice is that above a Price-to-Rent ratio of 20 (below a gross rental yield of 5%), it makes more sense to rent. The more above 20 a Price-to-Rent ratio is, the crazier it is to buy - you'd be taking an increasing gamble on future property price growth. If you run the comparison maths on rent vs buy calculators you'll find that a Price-to-Rent ratio of 20 is not too conservative, and that buying becomes increasingly risky and dependent on favourable conditions holding for decades the more the Price-to-Rent ratio exceeds 20.
Looking at Price-to-Rent ratios for Cragieburn, Preston, Kew or any Australian city suburb at current property prices indicates how easy a call this is to make. If you're not a property speculator and can't afford the risk of large losses or being trapped with negative equity and debt, you'd be very unwise to buy property at these prices and yields.
Regardless of your view on future house price growth, the very low yields (high Price-to-Rent ratios) in the most desirable locations certainly indicate that Australian renters gain the most the more desirable the area. As in the Preston example above, a renter can achieve the same location benefits for $420/week that an owner has to pay $700,000 for (plus interest, stamp duty and other transaction costs, insurance, maintenance, council rates, etc.).
5. In desirable locations across Australia, renting is much cheaper and rents are stable and much less risky
Gross rental yields across all Australian cities are provided in the table below. These are well below most cities overseas and below their Australian historical averages. This shows how risky, speculative and unbalanced Australia's current property markets are.
It's also clear that rents haven't grown massively in most cities and are currently growing very slowly or even going backwards. Rent and property price growth are currently very disconnected and this is a clear sign that speculation is a big factor in current property prices.
Interestingly, due to Australia's cultural norm of home ownership, a key influencer on rental prices is the cheapest equivalent entry into home ownership. In Sydney, rents are much higher than elsewhere in part due to the fact that you can't affordably enter into home ownership on the fringe of the city. Meanwhile, Melbourne has plenty of affordable homes on offer on the western and northern fringes and this tends to constrain rental prices.
The Economist chart below shows how current Price-to-Rent ratios compare to long-term averages. Right now, Australian locations with the lowest yields (like most of Melbourne) are a particularly good place to rent and bad place to buy. There are affordable places to rent in Preston and other more desirable suburbs. Conversely, the cost of buying is at an unsustainable level and would be a big mistake for first time home owners.
The Economist: Global house prices
Further Info:
The Age
Courtney Barnett's 'Depreston' song strikes a chord with first-home buyers
The new face of housing affordability: Buying first house too expensive for Victorian MP Tim Smith
SMH
Renting property? Don't hold your breath for a long lease
Macrobusiness
Australian bubble makes vox pop debut on Ellen
Business Spectator
Property investment is sucking the life out of the economy
Stupidity is the biggest problem in the housing debate
The New Daily
Why you can afford to buy a property this year
Business Insider Australia
Here's what you should be paying in rent across Australia
Get Rich Slowly
Renting vs. Buying: The Realities of Home-Ownership
Trulia
Rent vs Buy Report
Rent vs Buy calculator
Blog posts tagged - Rent vs Buy Index
Where Buying a Home Beats Renting
Investopedia
Price-to-Rent ratio
Mr Money Mustache
> Rent vs. Buy: If You Have to Ask, You Should Probably Rent
Websites:
Macrobusiness
Prosper
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