20 Zealand Rd, Mont Albert is in the market with a $3m-$3.3m guide as the suburb top Melbourne for the longest wait for rent to pass the mortgement.
Melbourne’s most desirable suburbs have become so expensive homeowners can be worse off paying off a mortgage than renting for decades.
And it helps explain why rental supply can be weak in some of the most desirable places to live, and why negative gearing can hurt first-time buyers.
A new PropTrack model that compares income and mortgage payments shows the gap between the two is even wider in some of the city’s more prestigious housing markets.
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Under the modelling, it would take more than four decades for rents to exceed mortgage payments on the east side of Mont Albert.
It assumes an 80 percent loan-to-value ratio on a 30-year loan at an interest rate of 5.75 percent, and rents calculated using a decade of rental growth history.
Other affluent areas including Toorak, Canterbury, Hawthorn, Albert Park and Malvern East are also entering the decade mark, highlighting the huge gap between purchase prices and affordable rents in Melbourne’s prestigious housing markets.
99 Grange Rd, Toorak is listed for $5.8m-$6.3m as one of Melbourne’s most prestigious areas where mortgages can outpace rents for decades.
PropTrack economist Anne Flaherty said Melbourne’s blue-chip suburbs had very high rents that were often difficult to keep up with.
PropTrack economist Anne Flaherty said the figures showed a growing disconnect between property values and rental returns in Melbourne’s most expensive areas.
“The reality is that it varies a lot from city to city,” Ms. Flaherty said.
“In the lower blue-chip areas of Melbourne we tend to see the lowest prices and the highest property values. Although rents in those areas are high, they are often out of line with purchase prices.”
The economist said the relationship between rents and house prices tends to look very different in cheap markets.
“In less expensive areas, the rent compared to the value of the building is usually higher,” he said.
15 Prentice St, Elsternwick is the market with a $2.275m-$2.5m guide as the bayside suburb ranks among Melbourne’s longest mortgage-versus-rent crossover markets.
17 Allenby Rd, Canterbury is listed at a guide price of $2.8m-$3m in one of Melbourne’s most prestigious housing markets where rents can take decades to outpace payments.
“That means the gap between housing costs and rents can close very quickly.”
In contrast, several urban apartment markets are already making strong rental returns, with the suburbs of Docklands, Southbank, Carlton, Collingwood and Pran seeing rents outpace mortgage payments under the same assumptions.
In the cheap interior space the crossover is also very fast.
In Brunswick East the gap closes in about one month, while in St Kilda it takes about seven months for the rent to go through.
Ms Flaherty said the findings also highlighted the important role played by investors in providing rental housing across the city.
“If a few investors buy properties in a certain area and there are still people who want to rent there, that can strengthen the availability of rental properties and may increase rents,” he said.
PIPA chairman Cate Bakos warned investors facing years of losses without tax relief could look beyond property or switch to higher yielding areas.
PIPA chairwoman Cate Bakos said long periods of negative cash flows would deter many investors if the tax rate was lowered.
“I think that any investor who is looking at losses year after year without tax relief will go back to another asset class that does not sustain losses and does not command maintenance or large taxes such as land tax,” said Ms. Bakos.
He said most investors entered the property market with a long-term view but still expected losses to be manageable.
“Ten to 15 years are widely accepted by investors as part of the property investment journey,” he said.
“When income periods exceed 20 years it completely changes investor preferences.”
Ms Bakos said any move to lower negative rates in the two areas could drive investors to areas where rental yields are strong.
“If tax incentives are reduced, investors will focus on assets that break even quickly or go into good gear quickly,” he said.
“That would put more pressure on areas below the entry level where rental yields are high.”
He said that while some buyers may benefit from reduced competition for investors, the wider impact on the supply of rental properties could be significant.
“If investors leave the market or redirect their money to different areas, it reduces the number of places available for renters,” said Ms. Bakos.
“That could ultimately put more pressure on the rental market.”
Mortgage broker Damian Medici said most investors are still chasing long-term capital growth, but poor liquidity could hamper borrowing capacity.
Director of Margin Finance, Damian Medici, said most investors are still primarily motivated by capital growth rather than short-term rental income.
“I honestly believe that most investors are driven by capital growth,” said Mr Medici.
“For many Australians, property remains a long-term vehicle for wealth creation.”
However, he said poor regulation could have a major impact on lending to investors.
Mr Medici simulated a situation involving a working couple earning $100,000 each buying a $750,000 investment property.
With negative gearing included in the loan test, their borrowing capacity remains at around $1.55m.
Without the tax deduction for the loss, their borrowing capacity dropped to around $1.35m, making it difficult for them to pay off their investment loans and their existing mortgages.
He said the majority of rental housing across Australia was provided by private investors.
“Rental houses are invisible from the air,” said Mr. Medici.
“It is provided by the landlords.”
“If an investment property is not attractive, fewer people will enter that space, and that affects employers across the market.”
| A suburb | Average selling price | Years |
| Mont Albert | $2,425,000 | 41.8 years |
| Toorak | $5,008,888 | 35.1 years |
| Elsternwick | $2,000,000 | 32.4 years |
| Canterbury | $3,753,750 | 32.3 years |
| Albert Park | $2,430,000 | 31.8 years |
Source: PropTrack
Note: Based on modeling assuming an 80 per cent LVR loan over 30 years at an interest rate of 5.75 per cent with rent compounded using 10 years of historical growth.
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