Episode Details

With interest rates at all-time lows, in some situations, it is now a lot cheaper to be an owner-occupier than a renter. And with the prospect of interest rates not rising anytime soon, it could stay that way for a few years, unless the market changes.

I thought it would be interesting to analyse the potential impact of this phenomenon. Obviously, there are some practical implications for people contemplating renting versus buying. But also, there will no doubt be broader consequences for the property market as a whole.

How much cheaper and for who?

Our analysis is summarised in the table below. Essentially, we compared the current value and rental cost of five property types and locations. The five scenarios were as follows:

1. Luxury, high-end, boutique apartment for $2.2 million;

2. Entry level 2-bedroom apartment that is considered investment-grade for $580,000;

3. Investment-grade, 2-bedroom house in a blue-chip suburb for $1.2 million;

4. A 3-bedroom family home in a desirable suburb for $2.5 million; and

5. A 3-bedroom home in an outer suburb for $660,000.

The interest cost was based on an interest rate of 2.2% p.a., which is the current 3 -year fixed rate for owner-occupier mortgages. It assumes that the owner has borrowed 100% of the purchase price plus stamp duty, which isn’t practical unless they have additional security to offer the bank. But we had to make this assumption to ensure it was a fair comparison, even though consequently it becomes more of an academic comparison than a practical one.

I’m sure you agree that it defies logic that it is less expensive to own your home than rent it. If this continued to be true, renting becomes far less attractive. As such, it is reasonable to assume that market forces will eventually conspire to reverse this i.e. make it more expensive to own. More on this later.

Comparing interest and rental is not the full picture

The above table compared the mortgage interest cost with the rental cost. However, as a homeowner, there might be additional cash flow implications associated with owning your home.

Firstly, there’s the cost of maintenance to consider. This will depend on the type and age of the of property. It’s important to distinguish between maintenance and improvements. It is often very tempting to make improvements to your home, but these tend to be discretionary in nature, and probably should be excluded from this analysis.

Secondly, there are also running costs that are exclusive to owners including owners’ corporation fees if you live in an apartment, council rates, water rates, insurance and so on.

Finally, if your loan repayments are structured as ‘principal and interest’, the dollar value of your monthly loan repayments will be higher than that interest costs included in the table above. This is not a sunk cost however, as it reduces your liability and helps you accumulate equity in your home. So, it should be excluded from a financial comparison, but taken into account from a cash flow affordability perspective.

Including owners’ costs

The table below includes an estimate of the above owning costs including maintenance, owners’ corporation fees, council rates, water rates, insurance and so on.

Tax free capital growth

Of course, one of the benefits of being a homeowner is