01 November 2019
Chance of a Lifetime
So in Victoria, the proportionate difference between owning your own home and renting over the past few years is a mere 6 per cent of income. However, this does not account for the recent material drop in house prices of around 5 to 15 per cent and huge drop in interest rates to the lowest point on record, at the same time that rents are rising. $400,000 inner Melbourne apartment, assuming a buyer has access to a 10 per cent cash deposit, This incredible shift in circumstance has resulted in it becoming more affordable to own than to rent for the first time, at least in my lifetime. To illustrate, take the example of a typically from a combination of savings, family assistance and government incentives like the firsthome buyers initiative. It has now become cheaper to service that mortgage than it would be to rent that property.
Price: $416,370 (including stamp duty)
Loan: 90 per cent (LVR) $374,733
Interest rate: annual interest at
3 per cent (some lenders are offering lower rates) $11,242
Weekly interest repayment: $216
Rent: annual rent for a $400,000 apartment $19,760
Weekly rent: $380
In this high-level scenario, the home owner is astoundingly $164 per week or $8528 per year better off than their renting counterpart. Not only that, the owner is a player in the property market and capitalising on price increases and capital gains over a long period of time. Instead of paying off someone else’s mortgage with rent money that they will never see again, they can be investing in their future which, looking at historical data, would see their home price rise around 6 to 7 per cent per annum as an average over a long period. CoreLogic recently reported that over the past 25 years median house values in the Australian market have increased by 412 per cent. I have been saying for more than four years now that we are coming to a very scary point in the market that will result in a material undersupply, which will in turn only place more pressure on rental stock and create a genuine rental crisis that will see rents rise quickly and competition get even more fierce.
We are starting to see the likes of CBA, the RBA and many incredibly well regarded economists coming out and sharing my long-standing view that, as a result of the construction downturn bottoming out by mid2020, by end of 2020 we will be in a potentially severe undersupply. On this assumption, if interest rates drop further and rental prices continue to rise off the back of a state of undersupply, the affordability gap between renting and owning is only going to widen in favour of owning. The fact that it is cheaper to own than rent alone does not mean that I believe the market is in a great position to grow (although I think it will for many other reasons), but it is essential that when assessing fearmongering conversations that both sides of the equation are equally viewed and assessed. The key take-away from this that we are currently in the midst of an unprecedented stage of a cycle where the fundamentals have created a unique opportunity for people wanting to get into the market and invest in their future.