When should you stop renting and consider buying

When should you stop renting and consider buying

WHAT if I told you housing in Australia was getting cheaper?

For some people, it’s true. The average rent in Australia rose by just 0.6 per cent over the last year, according to official inflation data. That’s less than consumer price inflation, and less than wage growth.

If you are a renter in Darwin, or especially in Perth, your rent is getting cheaper even without having to adjust for inflation.

Does this mean the house price crash so many people have been predicting is on our doorstep? Not so fast. Rents help predict house prices, but they are not the only factor.

As we see in the following graph, the link from rents to house prices is not simple. Sometimes, as we have seen recently, house prices grow faster even as rental price growth is slowing.

House prices swing much more wildly than rents. They’re not just about getting a roof over your head. They gyrate and slump in response to global markets because they depend on borrowed money and expectations of price rises.

House price growth turned negative during the GFC (2008), even though rents kept rising. Actual demand for places to live was pretty strong then, but banks weren’t lending and investors worried prices would stop growing, so prices weren’t high.

DOES SUPPLY AND DEMAND MATTER?

So should we worry about rents? The RBA likes to remind us how low rents are whenever it meets about interest rates, and if they’re paying close attention, we should too.

The RBA Governor recently made a big speech in which he said supply and demand for the underlying homes is what matters most for house prices. After all, interest rates are the same in Sydney and Perth, but house prices are heading in opposite directions in the two cities.

Low interest rates are an accelerator on house prices when supply can’t meet demand, but by themselves, they don’t always make prices rise.

Rents are a great barometer of that fundamental supply and demand, because they don’t depend on expectations about capital gains.

In Perth and Darwin, demand is dwindling as the mining boom dollars dry up. Meanwhile, housing supply is increasing in a lot of parts of Australia, especially Melbourne and Brisbane.

That really leaves Sydney as the odd one out. It is almost the only place where demand is high and supply is not surging. (although oddly, Hobart is seeing fast growth too now.)

Sure enough, if you take Sydney out of the equation, the average rent in Australia’s capital cities is falling.

Some people would take that as a bad omen for house prices in most of Australia. And as Sydney’s house prices continue to glide towards Manhattan / Central Tokyo / West London levels the distance between the harbour city and the rest of Australia becomes increasingly obvious.

Is Sydney — with its high finance jobs, high profile among international investors, and relatively low housing supply — immune from house price gravity?

Only time will tell, but evidence from New York City suggests even top cities can be brought down in a major housing slump.

This graph shows that the most expensive houses (“High Tier”) actually fell the least, while the cheapest houses (“Low Tier”) fell the most. (The graph is indexed so that all the prices are taken as equal in 2000 and it shows only the changes since then, not the absolute level of prices).

That could mean if a housing price crash comes to Sydney, it falls hardest on those in the outer suburbs of Sydney, far from any harbour views. If a crash comes, those people might regret not having moved somewhere rents were cheap a lot sooner.

Jason Murphy is an economist. He publishes the blog Thomas The Thinkengine. Follow Jason on Twitter @Jasemurphy