Buying in an outer suburb - The real cost!

[FrankGrimes]

Hi all,

Trust we are all well.

This thread has been inspired by in particular this thread

http://www.somersoft.com/forums/showthread.php?t=35347

Often the idea comes up of “buy where you can afford” “buy the cheapest $%^$ you can”. This is obviously important, but sometimes I feel these affordable areas are not as affordable as one might think. There are many hidden costs such as travel, cars, petrol, tolls and so on (I’ll add time.. the most important of all at some stage) So I’ve come up with an example scenario (which needs tweaking, but it’s a starting point.....)

After reading this thread, I started pondering the thought of “Turramurra vs Baulkham Hills”. (Turramurra just sprung to mind because it’s an area a like, no other reason). Both are comparable "Family Safe" suburbs.

For people interstate, Turramurra is on the middle of Sydney’s north shore with a good train link into the city. Baulkham Hills is about 35 km’s with no train line.

I have used myself as an example. I work in St Leonards, near North Sydney. However these figures would be similar for someone working in the CBD / surrounds. If I lived in Turramurra I wouldn’t require a car. Baulkham Hills you wouldn’t have a choice. So you would be sacrificing one car to live in a closer area.

House Cost – Turramurra = 700k
House Cost – Baulkham Hills – 500k

It’s assumed that both have the same capital growth rates (4.5%) and both have the same loans, interest only @ 7.5%. Travel costs are based off the toll websites and cityrail.nsw.gov.au

I’m interested in discussing the merits of buying in a closer suburb, albeit at a greater cost VS buying in an outer suburb with limited transport available. This is over the long term.

Please feel free to edit the spreadsheet and / or make improvements!

 

[FrankGrimes]

You would save 112 hours in travel time in the first year alone.........

 

[alexlee]

Time, of course, is a huge difference. However, you also have to consider the type of property. For my budget, I can either get a McMansion around Pennant Hills or a townhouse in Maroubra. Pennant Hills will involve a lot more travel, but I have the benefit of a big house (not financial, just space for family, pet, etc.)

For most people, it's not a choice of 'Do I buy for $500k or $700k'. There are three main things: location, size/type and budget. People tend to max their budget out for the PPOR. They also have a size/type of property in mind. Location really comes third. Or so I've found with my own thinking. I first determine the max amount I'm comfortable with buying for my PPOR, then I decide on the type of property I want. Then I look for the suburb that allows me to achieve 1 and 2.

I also suggest making the most out of your travel time, if that's what you must do. I spend 45 minutes each way on the train every day. I download hundreds (no kidding) of pages of stuff from newspapers, magazines, etc from the net every day. I usually get through may be 70-80 pages to and from the office. Multiply that by the 200-odd days we go to work. Don't spend the trip sleeping or staring into space.
Alex

 

[HiredGoon]

Transport is very much factored into my living equations. Some of the factors for my current house were car-free bike commute and high quality soil for a veggie garden.

I moved to the city because it only cost $40 a week more to rent but saved 2x$25 bus tickets (which are going up faster than rent) and 1 hour each day on a bus (though I did use that as reading time)

I now live in the burbs and ride a bike in to work, it takes me 15-20 mins each way and I only have to be on the road with cars for 200m of that.

 

[FrankGrimes]

Alex,

Good points as always. The examples are of comparable properties, both simple 3 bedroom brick veneer.

I understand what you mean but I'm interested in the long term costs of traveling such a distance vs spending more upfront to get the same house in a better location.

If I had to choose tomorrow which one to live in, the first year costs are slightly more at Turramurra, but over time it comes out ahead. There's 1000s of variables so it was difficult to come up with a "sample"

 

[alexlee]

I'm also mindful of the psychological problem of having too much of one's assets in the PPOR.

That is, I believe the PPOR pulls you in emotionally. You will pay too much for your PPOR, and most likely do a lot of renos and put money into it that you can't recoup.

Theoretically I can sell everything and get a nice PPOR without a mortgage. In fact friends have asked me why I don't do that (this was after I remarked that the North Shore was out of my price range). I want to maximise my gross assets, and I believe staking too much on my PPOR undermines that.

I'd rather consistently buy below my capacity for the PPOR, but as my means increase move every 10 years or something.
Alex

 

[BayView]

Nice work Alex; good to see that left brain in action.

Similar thing for me; I have friends who are clammering to get into Black Rock, Brighton and the like, but as we know; the PPoR is a fair liability on the hip pocket (unless you own it outright).

Me; I like the understated PPoR in a nice suburb, without the 'postcode' price tag and keep on grabbin' those I.P's.

 

[alexlee]

Nice work Alex; good to see that left brain in action.

Similar thing for me; I have friends who are clammering to get into Black Rock, Brighton and the like, but as we know; the PPoR is a fair liability on the hip pocket (unless you own it outright).

Me; I like the understated PPoR in a nice suburb, without the 'postcode' price tag and keep on grabbin' those I.P's.

A PPOR owned outright is a big opportunity cost, in my opinion. Think about all the IPs and shares one needs to NOT buy to get a nice PPOR without any debt. Personally, I plan to buy my PPOR as well, but I realise that it's not the best investment I can make and I'll be keeping my IPs as well.
Alex

 

[Mr. Fabulous]

Transport is very much factored into my living equations. Some of the factors for my current house were car-free bike commute and high quality soil for a veggie garden.

I moved to the city because it only cost $40 a week more to rent but saved 2x$25 bus tickets (which are going up faster than rent) and 1 hour each day on a bus (though I did use that as reading time)

I now live in the burbs and ride a bike in to work, it takes me 15-20 mins each way and I only have to be on the road with cars for 200m of that.

I think exactly the same way as you do HG. When I was still in Melbourne, I lived in St Kilda and worked with people who (usually) lived much further out. They would say to me 'How can you afford to live in St Kilda, it's so expensive.' and I would sit down with them and show them how after costs it was actually cheaper for me to live there than it was for them to live 3 or 4 times further out (in km's).

I now live in a suburb 5 k's from the city and walk to and from work each day, I shudder at the thought of living any further out. It's strange - people say that rent is expensive here now, but around my area it's bloody cheap (but admittedly hard to find anything)! I dunno, maybe that's my St Kilda experience talking, but I saw a brand new (under 3 years old) place advertised for share accomodation recently in the same suburb but closer in for $150 a week. Spun me out - that's what you would have been paying for a room like that in St Kilda 7 years ago.

Mark

 

[Dean1337]

Nice spread sheet FrankGrimes, its really easy to read and understand. It must have taken alot of time to put together.

Just wondering if the results would be much different if you factored a fix deposit size rather than an 90% LVR. I'd imagine that the majority of people would use a fixed deposit rather than a 90% LVR.

Just one thing to note, the 'Net Worth Year 10' don't seem to take into account that you would have paid a proportion of your loan. I would believe that would have a substantial difference in result.

 

[BV]

House Cost – Turramurra = 700k
House Cost – Baulkham Hills – 500k

It’s assumed that both have the same capital growth rates (4.5%) and both have the same loans, interest only @ 7.5%. Travel costs are based off the toll websites and cityrail.nsw.gov.au

I’m interested in discussing the merits of buying in a closer suburb, albeit at a greater cost VS buying in an outer suburb with limited transport available. This is over the long term.

FrankG,

First of all not everyone works in the city, there are jobs all over the city.

I previously worked at North Ryde, Now I work at Milperra
but with all the decentralisation that is taking place my next job could be anywhere.

2ndly, you are not comparing apples with apples.

The purchase price of your 2 properties is different
so in the case of the Turramarra house you will need a huge deposit
or you won't be having the same size loan as per the Baulkham Hills house.

For your example to work you will need a $300K deposit for the Turramarra
house or $100K deposit for the Baulkham Hills house.
Now which is easier to save $100K or $300K??

Additionally, if the couple had those $300K and decided to buy a house and chose to buy in Baulkham Hills then their loan would be $200K and their interest repayment would be $300/week instead of $600/week.

To make your comparisons fair you will need to put down equal deposits
for both properties and not to have equal size loans as you are suggesting.

Cheers

 

[adam31]

Way too many variables to consider. Especially in regards to travel. Good idea though

 

[FrankGrimes]

FrankG,

First of all not everyone works in the city, there are jobs all over the city.

I previously worked at North Ryde, Now I work at Milperra
but with all the decentralisation that is taking place my next job could be anywhere.

2ndly, you are not comparing apples with apples.

The purchase price of your 2 properties is different
so in the case of the Turramarra house you will need a huge deposit
or you won't be having the same size loan as per the Baulkham Hills house.

For your example to work you will need a $300K deposit for the Turramarra
house or $100K deposit for the Baulkham Hills house.
Now which is easier to save $100K or $300K??

Additionally, if the couple had those $300K and decided to buy a house and chose to buy in Baulkham Hills then their loan would be $200K and their interest repayment would be $300/week instead of $600/week.

To make your comparisons fair you will need to put down equal deposits
for both properties and not to have equal size loans as you are suggesting.

Cheers

Yes all good points - I will revamp spreadsheet next week. The one thing I can't change is that no everyone works in the city. But alot do.

The other thing I need to add is CPI to the train, tolls and petrol.