Reserve Bank : Probably cheaper to rent

It’s the age old question that’s bound to attract heated debate from those with vested interests. Is it cheaper to rent or buy?

The bulk of comparisons have, to date, been flawed – deliberately – to swing the outcome in the way the author so chooses. A cursory glance normally detects gaping omissions.

Today, Australia’s independent central bank has released a research discussion paper titled “Is Housing Overvalued?”

The paper is written by Ryan Fox from the bank’s Financial Stability Department and Peter Tulip from the bank’s Economic Research Department. Full housing disclosure was given – Tulip brought a house during the preparation of the paper, while Fox continues to rent.

The comprehensive analysis examines the costs associated with home ownership such as council rates, repair/maintenance and expenditure, but excludes expenses paid by investors such as property agent fees and land tax. Significant one off fees are incurred when one buys and sells their home – stamp duty, conveyancing costs etc. The report estimates these can add as much as 7.25 per cent to the cost of ownership and it determines the median length of tenure is 10 years. These costs are amortised over the 10 year period.

The interest rate used in the calculations is the fixed 10-year mortgage rate and it assumes the opportunity cost of the owner’s equity is close to the mortgage rate.

It also discusses more subjective factors such as risk of capital loss, flexibility of moving, security of tenure, freedom to renovate etc and indicates “although these considerations are important at an individual level, at an aggregate level they seem to cancel out.”

While the paper indicates there is no signs of a bubble in Australia, it does come to the conclusion that it will probably be cheaper to rent than own. The uncertainly surrounds the future growth of Australia’s house prices. If real prices continue to grow by 2.4 per cent a year, the average rate of increase since 1955, then renting will be approximately the same price than buying. However, if real prices appreciate slower than the 2.4 per cent historical average, then renting will be cheaper than buying.

The report doesn’t provide much analysis on the future direction of house prices, but it does report on predictions from some forecasters that growth will moderate. The paper notes real price appreciation in the past ten years since 2004 is 1.7 per cent.

Above is real house prices in Australia (and the USA) dating back 134 years from 1880. You can see a upward trend since 1955 before house prices rapidly accelerated into bubble territory around the turn of the century.

Nobel prize winning economist, Robert Shiller is responsible for the U.S.A. real house price dataset. He found, historically, house prices do not increase much more than inflation, i.e real house price growth is close to zero. In 1880, Shiller’s index was 100. Just prior to the United States sub-prime bubble, the index was barely over 100 and after the bubble burst, the market made a trajectory back to mean. The concept is simple – if house prices rise more than inflation, each generation will find it harder and harder to purchase a home until a point where everyone is priced out of the market. While it is evident the current generation has been priced out by something the reserve bank refuses to call a bubble, historic growth of 2.4 per cent is not long term. Your parents paid roughly the same for housing than your grandparents and great grandparents.

If 120 years of history is not conclusive enough, Dutch economist, Piet Eichholtz created a Herengracht Real Location Value Index for homes on Amsterdam’s Herengracht Canal dating back 350 years. It also has the same outcomes. Prices do not rise much faster than inflation (if at all) and while the Herengracht Canal has seen many bubbles in the past 350 years, they have all corrected back to norm.

Expecting long term sustainable real growth of even 1.7 per cent might be a bit optimistic. Subjective factors such as risk aversion to capital loss (and being able to sleep at night) could be undervalued.

» Is Housing Overvalued? – Ryan Fox and Peter Tulip; Reserve Bank of Australia, 14th July 2014.
» The RBA says you’re probably better off renting – The Sydney Morning Herald, 14th June 2014.
» Reserve Bank paper states 2.9 per cent is the magic number for deciding whether to buy or rent – News Limited, 14th July 2014.
» Dutch history pointing to real estate fall – The ABC, 28th January 2008.


  1. Having moved from Italy 3 years ago, I’ve seen the price of real estate slide around the 30% mark there in the last few years – and that was in a country that had very conservative lending standards.

    These idiots that are leveraged to the hilt don’t stand a chance.

  2. Erm, no shit Sherlock – I worked that out years ago! I love it when so-called ‘experts’ have that ‘light-bulb’ moment and publish a paper. The rest of you, please form an orderly queue…

  3. Na, she’ll be right man. Australia is different.

    Whoever did this report cant be very smart because house prices double every 7 years.

    Rent money is dead money.

    That report is nonsense.

  4. I want greedy investors to suffer and fucki## pay for the crap hole the have turned the greatest country on earth into. Germany is doing far better off than us housing wise. Why the hell is that? Becuase they are not friggen morons thats why! They realize that whilst your not wasting 80% of your god damn wages on a bloody roof over your head, lo and behold you can actually spend that cash on something more useful like um lets seegovernmentNot working so much. Spending time to develop advanced talents and skills, um, your kids, inventions, start up businesses . Jezz the things you can do when your not getting friggen raped by a scum sucking parasite society.

    I for one am looking forward to the inevitable correction and I will be merciless when I demand to pay 250k for a 600k house and I dont give a crap if u lot thinks thats insane I will find the parasites who have indebted themselves greedily up to the eyeballs and I will bend them over thier dining room tables and watch them sign those hand over papers.

    my grandfather did not fight hard for this country only for it to be taken over by rent seeking trash and for his grandson to be working his guts out earning $108k a n d still not able to afford a house of his own with a tight budget! Ive been to these investor meetings. I know what they are all about. It’s all about building rentals and living off the backs of others and doing as little work as possible whilst you get ur hider paid for by some poor unfortunate fool who can’t afford to buy because he missed to boom.

  5. I realize my last comment is too hard core for this site. Sorry about that. Im just pissed.

  6. Genius, we understand your frustration.

    It is probably the banks to blame – they are the ones striving for super profits year in and year out, the only way this is achievable is with credit growth from predatory lending. While they are the ones creating debt slaves, I still believe there is two parties to each transaction. You also have the mortgagor that willingly wants to become the debt slave and go into poverty.

    Investors will just be the collateral damage who borrowed too much from banks.

  7. Pete,

    The banks are just part of the gang. Government, which is elected for the benefit of the public, including the RBA, shall bear more blame than the banks, the RE agents, the public media, the many swarms of parasites, and so on.

    When government sucks the blood of the economy through various policies, constantly increasing levies, and refuses to correct the bigger and bigger mistakes, the whole country is sick.

    The banks cannot develop various stimulus packages to the housing market. The banks cannot keep real interest rate negative (2.5% cash rate – 2.9% inflation rate). Banks can get a bailout fund of 380 billion only from the government.

    My point is that Australia is systematically sick rather than the greedy banks.

  8. @ Genius

    Don’t stress. And I wont be offering 250k either, it will be less. Australian’s, chinese and canadian’s have all lost the concept of investing.

    A house actually looses value over time as it ages. The land will increase in value, yes this is true.

    This last few years has been nothing but a sucker rally. Crazy investment philosophies, coupled with Australia’s post war belief that things only get better. And loose monetary policies. Negetive gearing is an awesome example of loose policy: Giving a tax break to speculators who push up the price of assets. It really is a sick joke: Get mums and dads who can’t pay their power bill to believe they can “save” money by owning a loss making asset.

    A wise man once told me, the easiest, fastest and most predictable way to get rich is to sell the “possibility” of getting rich. And that is exactly what all these property groups are doing: A struggling human, with out the knowledge to research on their own, are lambs to the slaughter for these groups. It’s so sick and accepted in society that I see one of the big banks now advertising that they can bid at auction for you! Just sick, sick, sick.

    I have mates who are living week to week, but will not accept that their ‘investment’ properties are bleeding them dry.

    The finance sector in Australia is booming, record profits every bloody time. Yet, even the government admit that tax receipts are collapsing. The real economy is stuffed.

    Living in SA, I can’t help but laugh every time I grab the mail: Commercial properties north of the city at crazy prices, of course they are empty, with no hope of getting anyone in there. And this before Holden and the ASC close. I always wanted to go to see detroit, but in 2 more years I can simply drive the 15 minutes up the road to see it right here in Australia: Crime is out of control, police act as tax collectors, utility companies are given the right to carry out legalised theft, while government charges are rising at 10% or so year in, year out.

    And the white shirts wonder why there is no confidence in the economy.

    Depending how it goes when SHTF, I may well roll up my stuff and hop onto a boat and find a nicer place. A place where the government is scared of the people and respect them.

    Here’s a thought: Yesterday crispy creme opened in Adelaide…..There was a massive line up…for crappy processed food….Yet, other than a headline in the paper now and then, no one reacts to the government…..Do you think the government are scared of us? Do you think the government respect us?…..Do you think the government will keep stealing your prosperity? Of course they will. They got Aussies where they wanted them…..Enslaved by debt to jobs they hate, working overtime to keep their jobs that just provide enough to keep them going back the next morning. What a laugh.

    Don’t be on the wrong side of the debt equation when this all stops.

  9. Pete,

    Thanks for sharing the moral hazard article.

    I am afraid to say that my view about the system is more dire compared to critical articles.

    Chinese banks have less than 30% loans in the RE sector while our banks around 70% before last year and 95% new loans since last year. I am sure that China will survive its property bubble burst. But I seriously doubt the situation in Australia.

    US could recover from the burst of property bubble because it still has diversified and highly competitive industries, and the greenbacks priviliged to tax the whole world, etc.

    Japan has suffered three lost decades since the burst of its property bubble. Despite its highly competitive electronics and car industries, the country is still going down and down.

    What does Australia have then, except greedy banks ripping people off especially from housing loans and credit cards, greedy government taxing people and businesses to death, greedy miners milking the Chinese cows to death, greedy media lying for incomes, greedy tourism industry charging both domestic and international travellers painfully to prevent them from planning another visit?

    Australia has fallen off the back of the sheep. The agricultural industry is dying with higher and higher fuel, water, electricity, and other costs. The manufacturing industry is already dead. The retailers are shrinking. The wholesalers seem clawing in last profits when they are still monopolies. The government now kills education industry through a new budget.

    What is left for Australia to recover from the immenent crisis? I cannot see any!

    Sorry to say the depressing words. But this is the truth that I can understand…

  10. Something I’ve known for quite some time.

    There is no 2 chances of me ever owning a home – bugger all and buckleys – ie: never, not going to happen.

    Buy as many properties as you want, the more the better – just don’t complain to me when you have to go bankrupt and have nothing to show for the house that you owned but a loan for nothing that you have to pay back for the next decade.

    We really are different here – when will we realise that this not a good thing?

  11. @ Genius I totally understand where you are coming from. More people need to speak out. We need to organize a protest.. Get the message out there that our Generation needs to be the ones who are here to make the changes! remove Negative Gearing and remove Foreign Investment !

  12. Throughout your life you will pay off a mortgage, its up to you if you pay your own or for someone else.

    I wonder if the author realises that once you pay off a mortgage you live rent free ?

  13. @Ben – Sorry Mate, I think the report is a little beyond you and maybe that’s why you didn’t/couldn’t read it. Maybe you should watch a repeat of The Block instead – take your mind off it.

    There is no such thing as living free – you still have council rates, emergency services levy, water, insurance, transaction charges (stamp duty/conveying etc), maintenance etc.

    Then there is opportunity costs – what you can do with the money rather than having it locked in a house returning less than inflation. (or worse)

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