Five reasons FHBs should avoid buying now

[hobo-jo]

GetUp! may have rejected the home buyers strike proposal, but that doesn't mean that FHBs can't look at the market objectively and decide for themselves that now is not a good time to buy. Of course some of these reasons are subjective, they also don't necessarily apply to FHBs only.

1. Renting is around half the cost of buying

As I recently covered in another post (Rent vs Buy: Cost Comparison) the cost of renting is significantly lower than it is to buy. With mortgage rates at 7% and yields at 4% the cost of renting is almost half that of maintaining the interest on the mortgage interest, let alone rates, building insurance, borrowing costs and maintenance.

Think about the money you could save by renting instead! In a situation where it might cost $500pw to buy, you could expect equivalent rent to be around $250pw. $250pw x 52 weeks in a year = $13,000pa. What could you do with that sort of extra money? That's an overseas holiday every year, a brand new car every 2 years or you could even just squirrel the money away into a term deposit or investments until a time comes that it makes financial sense to buy.

Have you heard the phrase before "rent money is dead money"? Well so is the interest on a mortgage and if the interest exceeds the rent you would pay for an equivalent home then you are paying more "dead money" to buy than you are to rent!

2. Falling prices will continue

The Herald Sun recently reported that, "Melbourne's property bubble is bursting, with $400 a day wiped off the average house price in the past three months."

There is no guarantee that prices will continue to fall that quickly, however even after a 6 percent slump (according to the REIV) in the first quarter of 2011, Melbourne prices and in capital cities all over the country continue to sit at ridiculous levels.

The credit bubble has inflated prices to a point where First Home Buyers are even struggling to afford prices in the new fringe suburbs. That begs the question, who is buying? With volumes having dipped significantly and stock on market up 50% on last years levels the answer is "not many".

Eventually vendors will realise they are going to have to start discounting more heavily to sell, that's when the real declines begin. This is likely to suck in even more sellers who have speculated on house prices increasing, they will leap frog over eachother on the way down just as they did on the way up, putting further pressure on prices and adding even more stock to the already over saturated market.

3. You may quickly outgrow your first home

One idea that I seem to hear repeated often is that you should just 'buy whatever you can afford' when it comes to your first home, just 'get your foot in the door' they say and work your way up the property ladder. What the older generations might be failing to remember is that you may outgrow your first home very quickly.

Imagine the situation where you've bought a 2 bedroom unit as your first home. Two years down the track and the casual relationship with your partner has taken a serious turn and you are looking to start a family (have kids). You may then be in a situation where you have to sell the existing property to fund the larger one. That likely means real estate commission costs (usually around 2% of sales price), stamp duty on the new home, possibly LMI (Lenders Mortgage Insurance) on the new loan if you will be borrowing on a LVR greater than 80% again. Not only that, but as per reason 1, you've possibly been paying a great deal more than renting to buy.

Do the sums. Make sure you consider all possibilities that arise. You may be a lot better off by renting until you can afford a home that will last years no matter what life throws at you.

4. Ownership ain't all it's cracked up to be

What are the benefits of owning? I mean besides bragging to your friends that you're now a proud home owner... can you really justify the extra cost?

The answer may be yes for some. For those that like to get hands on with their home, landscaping the garden, painting and renovations, extending the house & for those that need the security ownership (not relying on the landlord to renew a lease) then buying may be the best option. For me personally (and I'm sure many others) the benefits of ownership just do not outweigh the extra cost that comes with buying.

Personally I love the peace of mind that comes with renting. I know that if something breaks (aircon, heating, stove, plumbing, etc) then it's just a matter of calling the landlord to organise a fix.

Having owned before I know that owning isn't all it's cracked up to be. Council rates, water rates, building insurance, emergency levies, maintenance costs, fixing things when they break... it all adds up!

5. Living at home/renting = Freedom

Taking out a large mortgage is a yoke around the neck of the young. You should enjoy the freedom that renting/living at home provides while you can. Of course it would be prudent to put some of your income away for a rainy day or making a house purchase later in life, but don't give up your youth just so that you can say you own property.

Travel. See the world! You will find this much more difficult to do once you have a 30 year binding commitment to pay the mortgage on a house. You've got youth, money and an opportunity you may never have again in your life. Don't waste it!

http://www.bullionbaron.com/2011/05/five-reasons-fhbs-should-avoid-buying.html

 

[VYBerlinaV8]

Let's have a look at these in turn:

1. Renting is around half the cost of buying

Not a bad argument. If people were genuinely able to save the difference, it would work out to be a good choice. Consider too that buying removes future rent rises.

2. Falling prices will continue

Unless you can find a property that isn't 'average'. There are planty of properties out there than won't lose value if you buy carefully, and at the right price. Mild renovations can also increase value. There are also places where property isn't falling.

3. You may quickly outgrow your first home

There's no rule to say you have to sell one home to buy another, even though lots of people do. Even if you have to sell, provided you have addressed point (2) above, does it matter?

4. Ownership ain't all it's cracked up to be

This is just an emotive way of expressing the 'pros vs cons' approach. There will always be pros and cons, you just have to work it out for yourself.

5. Living at home/renting = Freedom

See the world! Don't worry about the future! Never mind that if you wait another 5 years that home you want might cost much more than it does now. Never mind that by waiting longer to get a loan, you'll be that much older when you do pay it off, and it's likely to be larger anyway. And of course, if you rent, you don't have to pay rent while you're off traveling (do you??).

Just some thoughts from me. My real opinion is that the market is relatively expensive, and not likely to grow much on average in the short term, but that for many people there are still benefits to be had from owning.

 

[evand]

Why does the property saying "a rising tide raises all boats" only apply to property prices rising? Never prices falling.

Economic factors are national and when property falls, it can (and will) fall everywhere.

2. Falling prices will continue

Unless you can find a property that isn't 'average'. There are planty of properties out there than won't lose value if you buy carefully, and at the right price. Mild renovations can also increase value. There are also places where property isn't falling.

 

[Propertunity]

Why does the property saying "a rising tide raises all boats" only apply to property prices rising? Never prices falling.

Well, probably because the saying is about a "rising tide".

If you want a saying about a falling tide, then how about this one:
"Only when the tide goes out do you discover who's been swimming naked." -- Warren Buffett

Economic factors are national and when property falls, it can (and will) fall everywhere.

That is just plain untrue. When property in general falls, there can always be found, some places where it is rising. National economic factors do not have the same impact everywhere.

 

[silverx]

i am certainly no expert in this and by far i wouldnt be classified as most experienced investors but here is my take on it

1. Renting is around half the cost of buying

that's very true, initially.... but in the long term, having paid your principal loans over the year, your "rent" (interest) actually decrease, whereas if you rent, the rent will only increase over the years

2. Falling prices will continue

it looks like it, this is something that's weighing my mind. you are probably right, it's better to hold off purchase until the market is at the bottom. but noone knows what's coming tomorrow. I think if you can afford one, and you found a great bargain at the moment, no harm getting in. Someone else would

3. You may quickly outgrow your first home

another great point, i outgrew my first home and now it's rented out to someone else. i also outgrew my second place and it's also rented out to someone else and now i am starting to outgrow my third place however i think that really comes down to personality. Some people can stay at the same place forever, stay at the same job forever (i dont think i can ) funnily enough i actually move from 3 bedder to 4 bedder and now with 1 kid i actually end up with 2 bedder it's weird i know but it's closer to work so i can go home and spend more time with her now and i think that's all we need at the moment (havent planned for second one yet!)

4. Ownership ain't all it's cracked up to be

absolutely, i am with you mate, i hate gardening, i hate councils (such a leech), i hate chores but having rented before there are also some trade off, i know my place is never secured, it can be sold next month, i have to get permission to hang my wedding photos, i cant even paint my room to the color that i want. but i guess you cant win them all, there are always things that you have to trade/sacrifice

5. Living at home/renting = Freedom

another great point, i am pretty stretch (try to do what i do on 1 income and a baby and tell me if it's tough or not!). sometimes i do wish i dont have to do all these and instead enjoying my drinks at carribean cruise, partying hard on the weekend. there are moments of course in my life that i wish i have done differently. but i am thinking if i am putting my hard yard now, forcing myself to save by paying the mortgage as quick as possible i hope i can enjoy the benefits when i retire. even if i fail, the housing market collapse tomorrow and i lose absolutely everything, i have given it a try,
knowing that by starting early i have a chance to redeem myself instead of leaving it too late

 

[evand]

My point is why doesn't a falling tide affect all boats? But you knew that.

Similarly, why do economic factors mean properties rise altogether but never fall. I think its more to do with the people making the judgements rather than the reality of the situation.

Ive seen a few cycles and ive seen properties rise across the nation and ive seen property fall across the nation. Maybe early on in the down cycle (like now) you might see a few wood ducks buying over priced property.

But thats an entirely different thing to property rising in a falling market.

Well, probably because the saying is about a "rising tide".

If you want a saying about a falling tide, then how about this one:
"Only when the tide goes out do you discover who's been swimming naked." -- Warren Buffett

That is just plain untrue. When property in general falls, there can always be found, some places where it is rising. National economic factors do not have the same impact everywhere.

 

[lizzie]

1. not necessarily - i bought within the last six months two ip's, in inner mid ring of major city where the rent covers at but $20/wk of my costs. but at the same time i have also had a 10% rise in value that belongs to me, me, me (evil chuckle). rent rise next year will be close to throwing into completely neutral territory. it would be just as cheap for my tenant to have bought.

2. as prop covered - some fall, some rise, some stagnent. it all depends on the underriding factors. since mine have gone up 10% in the last 6 months, i'm not really worried if they drop by 5% ... and even if they drop by 10%, i'm back to square one but the rent is covering my costs i'm not fazed as i have no intention to sell.

3. maybe, maybe not - it's not like you have 3 kids arrive in the space of 12 months (usually). more likely you outgrown the property slowly - in which time you have the opportunity to renovate/extend wait for the market to pick up (which it tends to do every few years) or rent the property out and rent somewhere yourself until the market picks up.

4. pros and cons - i personally wouldn't like to be at the mercy of a landlord again (having been there done that and had a lovely one too), and i prefer buying something i can add value to - and then the added value is mine, all mine (evil laughter again).

5. covered by silverx ... and most of us don't have the luxury of staying at home until we are 40. it's fine to rent - if - you are also investing for your future. renting just so that you can spend everything left over on doodads just puts one even further behind the 8-ball.

 

[greedy2000]

it looks like it, this is something that's weighing my mind. you are probably right, it's better to hold off purchase until the market is at the bottom. but noone knows what's coming tomorrow. I think if you can afford one, and you found a great bargain at the moment, no harm getting in. Someone else would

I dislike these type of statements, its the old "the best time to buy, is now" argument used by real estate agents and those cashing out of Ponzi schemes.

 

[devo76]

When the market is at or near the bottom.
Prices are cheaper
Rental returns are better
This leads to people jumping on board and creating the upswing


When an upswing leads to the peak of the market.
houses cost more
rental returns are less.
this leads to buyers retreating.

During all stages of the above there are still those that buy in a sellers market and sell in a buyers market.
all things being equal it is very black and white as to when you should buy or not buy.
but things are rarely black and white and everyone has individual reasons as to why they do what they do. add to this individual properties performing differently.

there is nothing new here at all. not sure why we have to overthink it.

 

[Aaron Sice]

Let's have a look at these in turn:

1. Renting is around half the cost of buying

Not a bad argument. If people were genuinely able to save the difference, it would work out to be a good choice. Consider too that buying removes future rent rises.

i think you've missed somethign there.

if you're renting, 4 or 5 successive rate rises aren't going to leave you starving to pay the mortgage, it'll just mean another $40/50 per month extra in rent over a coming 12m period.

food for thought - pardon the pun.

 

[silverx]

I dislike these type of statements, its the old "the best time to buy, is now" argument used by real estate agents and those cashing out of Ponzi schemes.

yeah i think it does sound like that a bit sorry but i think what i am trying to say, if you can get a place for 400 p/w, you can afford it, why not getting it now?

 

[devo76]

My point is why doesn't a falling tide affect all boats? But you knew that.

Similarly, why do economic factors mean properties rise altogether but never fall. I think its more to do with the people making the judgements rather than the reality of the situation.

Ive seen a few cycles and ive seen properties rise across the nation and ive seen property fall across the nation. Maybe early on in the down cycle (like now) you might see a few wood ducks buying over priced property.

But thats an entirely different thing to property rising in a falling market.

Who actually says prices never fall. I here this thrown around alot but its normally from the bears not the bulls( im not calling you either).
Its crap and nearly everyone would agree.Property die hards included that property "can" go down.
I think this is twisted from the fact that the majority of property investors safely assume that over the LONG TERM prices will rise. This is somewhat of a safe assumption.
I think its from this that the whole "property never goes down" line is drawn from.
Short term. Yes it can absolutely go down.
medium term Yes it still can happen
Long term Maybe but it becomes very unlikely to the point its hardly worth factoring in to your risk analysis.

Cheers

 

[silverx]

i think you've missed somethign there.

if you're renting, 4 or 5 successive rate rises aren't going to leave you starving to pay the mortgage, it'll just mean another $40/50 per month extra in rent over a coming 12m period.

food for thought - pardon the pun.

good point.. come to think about it... rate rise 4-5 times might actually do me

 

[buzzlightyear]

On balance these are relatively sound arguments with a few caveats.

Renting v Owning
Renting is cheaper than owning and paying a mortgage undoubtedly in established suburbs across in Melbourne. I suspect that is replicated across most capital cities. Now as for double, that is bit of literary license. If I look at one property of mine located in Windsor/Prahran in Melbourne. A quintessential period home in inner city suburbs. This is the biggest price/rent differential across my portfolio. It is 1.4 ie the monthly mortgage is 40% more expensive than renting (inclusive of outgoings). Of course, it assumes you have a 20% deposit. No small feat admittedly depending on the purchase price.

The issue becomes, at least on a purely financial basis, will someone who is renting and believe they are better off, save or invest the surplus funds. My gut feel and based on my obsevations of friends and family is probably not. Owning a home/mortgage, where most people pay P&I, are forced savings that they would otherwise not do which is often missed. It is also a point that is made by the additional savings people are making in today's economy.

Falling prices
If you believe prices will fall, then it stands to reason you don't buy. If the argument when prices are rising, is that some buyers just want to get into the market then I can understand the rationale for not buying. Interest rate expectations would also have an impact too.

However, I wonder whether those waiting for falls will ever actually pull the trigger and make a purchase at some time. If the magnitude of our falls are part of the normal cyclical patterns, will they be sufficient enough to provide incentive for those to purchase at some point in time in the future? If they are a pre-cursor to a US style fall, then you may find a generation of people who will never want to buy as a result. Maybe a stretch, but I suspect there are people who were put off shares as a result of the GFC.

The last points are more the opinion and preference of the writer and may have resonance for some people, especially the young. The advice given about travelling etc has often been offered here for those considering a purchase at a young age.

Culturally and as we pass the partying and our formative working years, nesting and having a family is also very much linked to living in your own space and with that comes a price, that many people in this country continue to choose. I do not see any social phenomenon for this to change.

 

[hobo-jo]

If people were genuinely able to save the difference, it would work out to be a good choice. Consider too that buying removes future rent rises.

That’s true, but if a renter was to save the difference between renting and buying there would be quite a few years of rent rises built in. Consider the situation where a house is priced at $300k, $250pw to rent it (4.3% yield). Interest on $300k at 7% would be $400. That’s 10 years worth of rental increases at 5% without taking into account any savings in earlier years and interest/return on the funds if invested elsewhere.

Otherwise largely agree with your post, as I said it’s all subjective to the person buying.

you are probably right, it's better to hold off purchase until the market is at the bottom. but noone knows what's coming tomorrow. I think if you can afford one, and you found a great bargain at the moment, no harm getting in.

I think the bottom will be long and drawn out. I certainly don’t think there is any need to rush back into property once we think the bottom is in.

I agree if you find a bargain then no harm in buying it assuming you can easily afford the repayments. What hope do you put in a FHB snapping up a bargain though? I know looking back on my first house I would do things differently, we overpaid, but luckily for us the market was very forgiving of our mistake (that won’t be the case for everyone).

1. not necessarily - i bought within the last six months two ip's, in inner mid ring of major city where the rent covers at but $20/wk of my costs. but at the same time i have also had a 10% rise in value that belongs to me, me, me (evil chuckle).

What size was your deposit? Have you laid out the figures for these already on SS? If not care to disclose property type, price range and suburb so I can check things out?

No doubt there will be some situations where rent will be closer to purchase costs than those I’ve outlined, but on the whole a 4% yield would be around average for most (house) buyers today.

since mine have gone up 10% in the last 6 months, i'm not really worried if they drop by 5% ... and even if they drop by 10%, i'm back to square one but the rent is covering my costs i'm not fazed as i have no intention to sell.

Actually if they rise by 10% and then fall by 10% you are below square one. $400k x 1.1 = $440k x .9 = $396k

it's fine to rent - if - you are also investing for your future. renting just so that you can spend everything left over on doodads just puts one even further behind the 8-ball.

I’m a believe in balance. I invest a lot of my income, but also use some for the good things in life! SE Asia in 2009, Japan in 2010 and just booked in Europe for later this year (thankyou Air Malaysia and your $1250pp return flights!).

Of course, it assumes you have a 20% deposit. No small feat admittedly depending on the purchase price.

This should be included in any financial calculations, e.g. 20% of a $400k purchase is $80k which would bring in interest of around $3360pa if you were renting (30% tax rate, 6% interest on acc). What percentage of FHBs would have a 20% deposit? During early 2009 when Fujitsu were performing stats over 50% of FHBs were buying with a 90% LVR or higher.

 

[lizzie]

What size was your deposit? Have you laid out the figures for these already on SS? If not care to disclose property type, price range and suburb so I can check things out?

10% deposit plus costs ... adamstown ... rent return 8% ... int only with a 6 in front. as for full figures, have been stung in a personal manner by putting precise info up on ss before so prefer not to.

 

[hobo-jo]

Is that $20pw outgoings inclusive of the 10% deposit and costs?

If not then don't you agree that it's pretty deceptive using those figures to try and make things look better than they are?

 

[VYBerlinaV8]

Why does the property saying "a rising tide raises all boats" only apply to property prices rising? Never prices falling.

Economic factors are national and when property falls, it can (and will) fall everywhere.

Who knows - it's not an idea I subscribe to rigorously. I can give examples of properties that haven't risen in a rising market. That said, during times where prices have risen, most property tends to follow upwards. During downswings I've noticed much less consistency downwards.

Trends are just that: trends. They aren't automatically or equally applied to all market components.

When you're only buying an individual property, economic conditions and stage of the cycle are important, but that aren't the only factors - there are lots of other things to take into account.

 

[buzzlightyear]

This should be included in any financial calculations, e.g. 20% of a $400k purchase is $80k which would bring in interest of around $3360pa if you were renting (30% tax rate, 6% interest on acc). What percentage of FHBs would have a 20% deposit? During early 2009 when Fujitsu were performing stats over 50% of FHBs were buying with a 90% LVR or higher.

Fair enough. In my above example, at 10% deposit you would be at 1.73. But then again, I wouldn't imagine FHB's would want or even qualify for a loan over $850k nor even rent this premises to be honest.

We agree

But this has been like this for sometime so not really new. It actually prompted me in 2003 to rent out my 2br apartment in Sth Melbourne and rent around the corner. I did this (rented that is) until 2008 with this partially in mind.

 

[lizzie]

Is that $20pw outgoings inclusive of the 10% deposit and costs?

If not then don't you agree that it's pretty deceptive using those figures to try and make things look better than they are?

the 8% return is on the actual mortgage (purchase price less 10%) and ongoing costs such as rates, strata etc ... but i don't think it deceptive at all as a fhb would need to pay a 10% (minimum) deposit and costs - so after purchase, with minimum required financial input, they would be better of buying than renting.

in fact - as the fhb wouldn't have to pay management and accountants fees, they would be financially in front.

if i add back in the deposit - the return is around 7.2% ... still a goodly bit more than the interest rate on the mortgage.