Rent Or Buy: Which Is Best In Sydney’s Inner West?
Sydney’s property prices have been falling over 2022, at exactly the same time rents have been rising.
Has this tipped the scales in favour of buying in the ‘rent v buy’ equation? We explore.
What the property market is doing right now
After peaking in early 2022, Sydney property prices have been falling. Since January this year, the city-wide median has dropped -10.2% to $1,036,727, according to CoreLogic data.
Here in the inner city and Inner west, we’ve fared slightly better, with realestate.com.au figures showing the median Alexandria apartment price has fallen -2.8% over the 12 months to 30 October 2022, while the median house price has risen 2.6%.
At the same time as this has been happening, rents have been climbing rapidly. SQM Research data reveals that the citywide median rent is now $696 a week. That’s $187, or 36.7% higher than October 2020.
With rents rising at this pace and home prices declining, we thought it was worth running the numbers to look at whether it was cheaper to buy or rent in Sydney’s inner city and inner west.
The difference in numbers
Assuming someone borrows 80% of the value of the home they’re buying, it remains cheaper to rent than buy, taking Sydney-wide averages into account.
For instance, purchasing a home worth the median value ($1,036,727) would require a home loan of $829,382. Borrowing this amount on a 30-year principal and interest home loan with a 4.5% per annum interest rate would require mortgage repayments of around $4,202 a month, or $970 a week. This compares to a citywide median rent of $692 a week.
But these numbers are distorted a little, especially as a higher proportion of properties for rent are units and not houses - which means the median rent could be a little lower than it otherwise would be.
So when only apartments are considered, the numbers even up considerably as the tables below show, based on Alexandria and Erskineville.
Alexandria: one-bedroom apartment - buying v renting
Median sales price: $680,000 (source: Domain)
Median rent: $500 (source: realestate.com.au)
| Interest rates 4% with 10% deposit | Interest rate 4% with 20% deposit | Interest rate 5% with 10% deposit | Interest rate 5% with 20% deposit | |
|---|---|---|---|---|
| Deposit required | $68,000 | $136,000 | $68,000 | $136,000 |
| Amount borrowed | $612,000 | $544,000 | $612,000 | $544,000 |
| Estimated monthly repayments | $2,922 | $2,597 | $3,285 | $2,920 |
| Monthly rent (based on $500/week) | $2,167 | $2,167 | $2,167 | $2,167 |
| Difference per month | -$755 | -$430 | -$1,118 | -$753 |
Alexandria: two-bedroom apartment - buying v renting
Median sales price: $975,000 (source: realestate.com.au)
Median rent: $821 (source: SQM data for postcode 2015).
| Interest rates 4% with 10% deposit | Interest rate 4% with 20% deposit | Interest rate 5% with 10% deposit | Interest rate 5% with 20% deposit | |
|---|---|---|---|---|
| Deposit required | $97,500 | $195,000 | $97,500 | $195,000 |
| Amount borrowed | $877,500 | $780,000 | $877,500 | $780,000 |
| Estimated monthly repayments | $4,189 | $3,724 | $4,711 | $4,187 |
| Monthly rent (based on $821/week) | $3,558 | $3,558 | $3,558 | $3,558 |
| Difference per month | -$631 | -$166 | -$1,153 | -$629 |
Erskineville: two-bedroom apartment - buying v renting
Median sales price: $1,092,500 (source: realestate.com.au)
Median rent: $851 (source: SQM data for postcode 2015).
| Interest rates 4% with 10% deposit | Interest rate 4% with 20% deposit | Interest rate 5% with 10% deposit | Interest rate 5% with 20% deposit | |
|---|---|---|---|---|
| Deposit required | $109,250 | $218,500 | $109,250 | $218,500 |
| Amount borrowed | $983,250 | $874,000 | $983,250 | $874,000 |
| Estimated monthly repayments | $4,694 | $4,173 | $5,278 | $4,692 |
| Monthly rent (based on $353/week) | $3,688 | $3,688 | $3,688 | $3,688 |
| Difference per month | -$1,006 | -$485 | -$1,590 | -$1,004 |
How much would you need to save to make buying cheaper than renting?
The table below shows how much you’d need to have saved to make it the same price to buy or rent each of these properties.
| Property type | Deposit required at 4% interest rates | Deposit required at 5% interest rates |
|---|---|---|
| Alexandria 1-bedroom apartment | $226,000 (33.2%) | $276,500 (40.7%) |
| Alexandria 2-bedroom apartment | $230,000 (23.6%) | $312,000 (32%) |
| Erskineville 2-bedroom apartment | $320,000 (29.3%) | $405,500 (37.1%) |
A more detailed look
Although it is generally still cheaper to buy than rent, these tables illustrate that both the size of your deposit and the interest rate you’re offered have a significant bearing on how much by, or even whether that’s the case at all.
If you’re fortunate enough to be able to cover more than a 20% deposit (which is the amount you generally need to avoid lenders mortgage insurance), and you can afford to pay the cost of transfer duty, the difference can be marginal.
Saving that kind of money isn’t easy, though - especially given that a 20% deposit on an average two-bedroom Erskineville apartment would cost well over $200,000 (and that’s before transfer duty of more than $44,000).
That said, if you’re a first home buyer, you may be able to get into the property market for much less with the help of the NSW First Home Owner Grant and the First Home Buyer Assistance Scheme. The first of these provides a one-off payment of $10,000 towards a new home valued at less than $650,000; the second provides a transfer duty exemption or concession for homes valued less than $800,000.
On top of these, the NSW Government has also introduced a new scheme, First Home Buyer Choice, which lets many first home buyers pay an ongoing annual land tax instead of transfer duty.
The federal government First Home Guarantee Scheme also offers top guarantee up to 15% of eligible first home buyers’ purchase prices, meaning they can buy with as little as 5% deposit without having to pay LMI.
RBA raising interest rates
As of November, we’ve experienced seven consecutive months of the RBA raising the official cash rate. This, in turn, has led to seven straight months of home loan interest rates.
While 2020 and 2021 was a time of historical lows for interest rates (many people were able to fix their home loans for around 2% per annum), it’s now much more expensive to get a home loan. In October, the average variable rate stood at 5.2% and the average interest rate on a fixed rate home loan was 5.04%, according to Finder.
These rates could rise even higher as the RBA continues to aggressively right inflation, so buyers need to factor the potential for rate rises into their budgeting.
Weighing against this, of course, is that, even though prices have been falling this year, the long-term trend is for them to rise. Also, contributing to a mortgage rather than rent means you’ll be paying off an asset and will be building your wealth - something that should benefit you over the long run.
So, even though renting may be cheaper in the short-term, the long-term benefits of getting on the property ladder should still make it an attractive option.
Want more?
Contact our team today to find out more about how we can help you buy and sell in Sydney’s inner city and inner west.
