September 10, 2015

Is Buying a House Cheaper than Renting?

It is now much cheaper to own a property rather than rent a property.

A year ago it was financially a lineball decision whether owning or renting was cheaper. This year, it is quite different.

At a recent conference in Brisbane, Peter Tulip, a Reserve Bank Senior Research Manager and Ryan Fox, a researcher presented a paper which showed that the costs of owning your own home has fallen substantially in the last year. Dr Tulip made it clear that the paper came from him and his co-author and not the bank.

The reason for this change is that long term bond rates have fallen over the last year. This means that the market now expects the current low mortgage rates to persist for 10 years or more.

The market can be wrong, but have you noticed that five year fixed rates are now available for about the same price as three year fixed rates? This is new. The seven and 10 year fixed rates are still more expensive but that may also change at some stage.

So, despite rising property prices in the capital cities, especially Sydney, property has become cheaper to own. It sounds crazy but the cost of money (the mortgage interest rate) is a big part of the cost of housing.

The conference paper summarised the difference in a single number: renting a house currently costs 3.9% a year, owning a house costs 2.7% a year. This number is calculated from the purchase price, stamp duty and other transaction costs, the expected mortgage interest rate and how much it costs to run and renovate the property minus the expected capital gain.

“I have never liked the adage ‘rent money is dead money’ because in many cases it makes a lot of sense to rent rather than buy but I would agree that ‘rent money right now is expensive money’,” Dr Tulip concluded.

Source: The Chronicle

CHRISTOPH SCHNELLE ([email protected]) is the principal of In Your Interest Financial Planning Pty Ltd and Auth Rep 308223 of FYG Planners Pty Ltd AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances.

Article by RE/MAX Success

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