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Renting may be better than buying, says Reserve BankJonathan Shapiro

The Reserve Bank of Australia has toldproperty buyers they will be better offrenting rather than buying their homeunless house prices keep growing asfast as they have over the past twogenerations.

House prices are not overvalued, thecentral bank said, but it warnedprospective buyers that house priceswould need to grow in line with histori-cal averages to recoup the costs of homeownership such as mortgage rates,stamp duty and council rates.

"If house price growth were to beslower than the historical average, assome forecasters predict, then theaverage home buyer would befinancially better off renting," say

RBA researchers Ryan Fox, and PeterTulip in a provocatively titled researchpaper Is Housing Overvalued.

The RBA analysed costs involved inowning a house compared withrenting, such as council rates, interestrates and the purchase price.

It estimated average rent yields of4.2 per cent since 1955 were equal to theannual cost of owning a house.

The researchers calculated theannual rate at which theinflation-adjusted price of a houseshould rise for an owner to be no betteroff than a renter at just below 2.5 per

cent This was in line with the annualexpectation of house price rises of2.4 per cent after adjusting for inflation,since 1955.

"If this rate of appreciation isexpected to continue then ourestimates suggest that houses are fairlyvalued," the paper said.

The RBA's conclusion is that houseprices would have to continue to rise atthe same expected rate as they hadsince 1955 - 2.4 per cent after adjustingfor inflation - for owners to be as well offfinancially as renters.

'To put this another way, the expec-

tations of future capital gains impliedby current house prices are in line withhistorical norms," they write.

The research, the central bankexplained, allayed concerns about ahousing bubble because investors wereassuming house price growth would

maintain the pace of the last 60 years.The paper, however, contained a

veiled warning to home owners totemper their expectations of capi-tal gains.Continued p8

•Wanted: a rental for $780,000 a year pB

From page 1Renting better thenbuying: Reserve Bank

University of New South Wales Pro-fessor Nigel Stapledon said the paperwas a caution to investors to "think interms of what is plausible in terms ofhouse price growth in the future".

Professor Stapledon, who waswidely cited in the research, said thepaper was "tentatively forward look-ing" which was unusual for Australia'scentral bank.

"The bottom line is an expression ofcaution going forward. To really justifyjumping into the housing market youreally want to be assuming you are get-ting similar house price gains," he said.

"The underlying message is therehas been a lot of capital gains but becareful because they are far less certainin the future."

The paper follows warnings fromthe central bank governor Glenn Ste-vens this month that "people shouldnot assume that prices always rise"when deciding to buy property. "Theydon't sometimes they fall," he said.

The RBA has largely dismissed sug-gestions of a housing bubble even ashouse prices in Sydney rose 15.4 percent last financial year.

The International Monetary Fund

said in June Australia had the thirdmost expensive housing market in theworld and called on local regulators toavoid "benign neglect".

In the paper, the RBA referenced theThe Economist and The Organisationof Economic Co-operation and Devel-opment arguments that Australianproperty is "overvalued" by 24 per centand 21 per cent

Remarkably, the research said itcould take as long as 30 years for own-ers to be better off if the rate of houseprice growth did not better the 10-yearaverage "real" expected rate of 1.7 per

cent. Owners would be no better offafter eight years if the "real" expectedgrowth rate was 2.4 per cent

"But be cautious about buying forshort-term gain and if you aren't confi-dent about that rate of appreciationbeing achieved and if you're not, thenrenting maybe a better option," saidProfessor Stapledon regarding the find-ings of the paper.

HSBC chief economist PaulBloxham, a former Reserve Bank econ-omist, said the paper was part of thecentral bank's "ongoing researchagenda to look at whether Australia hasa housing bubble" and suggested houseprices were fairly valued.

"What the RBA is trying to do isassess whether prices can be supportedby the fundamentals - such as rents andinterest rates - whether the level of

house prices is in line with what youwould expect given where rates andrents are," he said.

"Expectations of capital gains is oneof the variables they include n theirframeworks. There have been periodsin the past where expectations are themain drivers of house price growth... but not at the moment"

"On their model, the growth we areseeinginhousepricesis very much sup-ported by the fundamental factorsrather than irrational exuberance."

Professor Stapledon, who has doneextensive studies on Australian prop-erty prices said that house price gainsover the last two decades was largelyexplained by falling mortgage rates.

"From the mid-90s the big story hasbeen falling rates but that's not going tobe a factor in the next 20 years," he said.

"So you need something happeningon the rental side for prices to keepmoving up," he said.

Predicting future house pricegrowth is difficult, the RBA said but itpointed out that forecasters wereexpecting the rate to slow.

"That said, many observers havesuggested that future house pricegrowth is likely to be somewhat lessthan this historic average," the papersaid. "In that case, at current prices,rents, interest rates and so on, the aver-age household is probably financiallybetter off renting than buying."

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Brief: RBA_MENT

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To rent or not to rentProperty overvaluation as aper cent of fundamental value

Future real capital appreciationrates{%)

Break-even appreciation rateby tenure - April 2014 (%)

- With 10-year rollingappreciation rate

84 89 94 99 04 09 14

Property is fairly valued if ownersexpect prices to grow at 2.4% but overvalued if that rate is 1.79%

84 89 94 99 04 09 14

Owners expectations of house pricegrowth tracks the break-even ratebetween owning and renting

Tenure-years

5 10 15 20 25 30

Renters may be better off even overlonger periods

Ref: 284398144

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Australian Financial ReviewTuesday 15/7/2014Page: 1Section: General NewsRegion: Australia Circulation: 62,455Type: NationalSize: 449.00 sq.cms.Frequency: MTWTFS

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