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You've heard the term rentvesting before. It's not new. But what is new is, is how much of an increase it's been on for Aussies over the last 12 months. Why is rentvesting all of a sudden becoming so much more popular? In this episode, I'm going to give you a 30 second summary of what rentvesting is, just in case you haven't heard of it.
Alongside unpacking the shift in data behind the move for rentvesting and how you can potentially take advantage of this to grow your property portfolio in 2025. I'm Arjun Paliwal. Let's get into it. So rentvesting is essentially renting where you want to live, but using your money instead of buying a home to invest in property borderless. And as I'd mentioned earlier, it's definitely on the rise.
So let's break down some of the reasons of why rentvesting is on the rise to begin with. The first part is actually the price gap in house prices. There are those that want to rentvest and there are also those that get forced into it because of the lack of options they feel they have or the options they want to take. Now, there are always going to be options for home buyers to go to a further ring out or a different city or a different type of property, houses versus unit. But for some people, the desire is not there.
They don't want to do that. And that's OK. So they turn to rentvesting. And it's something in particular that's been occurring ever since the last five years in certain cities. Let me go through some numbers on what's been happening from house price to income ratios across various cities.
If we take a look at this data here, pre-COVID, March 2020, Sydney, the dwelling median house price to income ratio was 16. 6. So that's overall between houses and units. Units were at 14. 5 times income and houses at 19.
- Definitely one of the highest across the country. Now, when it comes to this market, if you take a look at taking from March 2020 to Feb 2025, almost the five years since COVID, which, by the way, how crazy is time flying? That mark there for houses in particular went up 18. 6 percent, which essentially means that it's worsened for house price to income ratios.
At the same time, during 2020, repayments were also far lower with interest rates lower than today, which means not only is the price to income ratio worse, but so is the repayments to income ratio as well. But then you take a look at the opposite and you go to places like Melbourne, where the house price to income ratio for houses was 16 times. But then for houses today, five years later, it's actually 15 times. That's an improvement. It wasn't all cities that worsened.
Cities like Melbourne have actually improved with the income to house price ratio from five years later is better for home buyers. Now, let's look at the renting side and we'll take two different scenarios over here for renting. If we look at Brisbane, rent to income ratio is 0. 09 times from houses in Brisbane back in 2020. Now it's 0.
12, which means it's increased by 25. 6 percent. Although it's definitely a different measure to houses, being the house prices have many more zeros on it, it's still an interesting measure to see. And it is worsening because of the rental boom that's occurring in some of these cities. The main thing to note is across our national prices, price to income ratios have increased by 25 percent, while rental affordability ratios have also worsened by 20.
8 percent. So both have gone backwards. Now, the price is going more backwards than the renting. And then the price is also having not only the higher deposit that you need to have because of the higher prices alongside the higher rents, higher savings rates you need to have because of the higher repayments. It's created that crunch forcibly for some to become rent investors.
So that's one side of the equation, why it's happening more because people don't have as much of a choice as they once did. Doesn't mean that the choice is over, but it just means it's a choice that actively people are now making because of the difficulties that come on that side. If we move over to the other side of rentvesting, which is rentvesting by choice, let's break down some of the trends that are occurring. Firstly, across Australia, we're noticing the trend of data driven investing pick up a lot more, where people are looking to make the best decisions possible for investing. And because of wanting to make this decision the best you can, the thing that you can do that makes a huge difference, open up more markets for you to have choice in.
So that could be someone living in Sydney, but looking to invest across Brisbane, Perth, Adelaide or many regional centres across Australia, depending on their budget or where they see the data shows for growth investing. Whereas in the past, if you go back many decades, parents of ours or parents of parents of ours weren't very common for them to go and invest across the country. They thought it was their house, maybe some other houses across their backyard or maybe extended parts of the city, the drive, the look, the feel, the touch. So with that now shifting in the country, being at everyone's fingertips, people are now using data to get ahead and professionals like us here at InvestorKit to be able to start looking at investing across the nation. This is allowing people to be a part of the long term growth journey of real estate, but at the same time, not be limited to what their budget or what their home location has, which is definitely picking up the growth of rentvesting.
The next thing is there's more education out there than ever. People used to have this thought of just the home to live in. Now, with the education picking up on rentvesting, people are realising that you could rent a property far nicer than what they could live in with mortgage payments for the same amount. For example, if you go to premium areas, the rental yields across Australia are far lower than more affordable areas. And the yield is essentially rent times 52 divided by the purchase price, which means if it's lower, it's a lower proportion of the total price of the property.
That now also means that the rent is likely to be cheaper than the mortgage repayments for that property. Even if interest rates come down by a large amount, this calculation could still be in favour of the renter for a couple of other reasons. When you're rentvesting, you're placing a bond typically of four weeks on a property, whereas when you're buying a house or buying an expensive unit in a premium area, you're placing a deposit, which could range from 5, 10, 15 or even 20 percent on the property. Don't forget stamp duty and other costs as well. This requires lots of capital, whereas someone who is renting could have a new lease agreement bond, which, by the way, is returned if you're smart and looking after the place.
And then from there, you're able to use that bond and move to other places. So you're never actually losing the capital, all whilst your interest bill could still be more than the rent bill that you're paying. And even if interest rates did come down and it maybe was similar, then you can now look at the actual money you go down and have into a place. Don't forget the selling agent fees, buyer's agent fees, lawyers, pest and building and all the maintenance you're responsible to whilst owning a place. So people are just trying to make those choices now where they get fluidity, flexibility, and they also get to be across different locations that they never imagined that they would live in, all thanks to rentvesting.
So it's clear that rentvesting now is starting to have greater education and greater choice. Other reasons why rentvesting is growing is also because of the math. Now, the math I gave you just before was from an education around where you could live in and how it treats your pockets. But the math I'm going to share with you now is more regarding borrowing capacity. When you're looking to rent, the rent you pay is the rent calculated in your servicing calculations for finance.
Whereas the mortgage you obtain has an assessment buffer rate, whether it be one, two or three percent, then assuming interest rates are higher than today. Or if you own the property and you're looking to refinance, majority of the banks apply something called a debt loading rate. For example, if your repayments are $1,000 a week on your loan, they may place a 20 percent loading rate, which means that the repayment is now $1,200 a week in the eyes of the bank. So if you're thinking of all of that, even as you're trying to grow your wealth, you may be hurt by the calculations of the bank, even if the cost might be similar in your pocket. So this is the math that people are realizing that's impacting them and they want to use that to grow a portfolio.
The last part, which isn't just education, it's lifestyle. I mentioned how you could have a bigger property or a premium property, but now you could have experience of living in suburbs all across the city or suburbs and locations all across the nation. So lifestyle, education, the actual math in your pocket, the math also from the bank, and then also the fact that the median price to income ratios or the median rent to income ratios worsening is leading to some people reflecting on their choices of what they want to do because they don't want to make the sacrifices of living in a certain area so they could buy it. Instead, they'd live in another area and make sacrifices in other ways. The same debt sacrifice or the same repayment sacrifice might exist, but it might be in the form of multiple investments data driven across the country.
