Five reasons FHBs should avoid buying now

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.

This is true, especially in established suburbs. As an example, it would cost $850K to buy the place we rent now on the harbour. At 80% deposit that's at least $4000/mth mortgage, $2000/qtr strata. etc.
We rent for $2200/mth. That's $2000/mth in saving, to absorb any future rent rises.
The important thing is to invest the difference, and not just spend it.


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??).

No, exactly the opposite. See the world, while investing the different in rent saving in the future.
Freedom to move easily as well. Moving PPOR's can be quite a hastle.
 
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.
You are discounting the opportunity costs of the 10% deposit, you can't do that in a financial calculation and expect to be taken seriously. If someone had $40k as a 10% deposit, then you need to add the benefit to the other side (e.g. the income they would receive from the interest), at 6% and with 30% tax rate that's an extra $30 towards their rent each week if they don't buy. Doesn't sound like much, but it more than doubles your '$20 out of pocket' figure. if you honestly think that the deposit shouldn't be included in a cost benefit analysis then why not jack up the deposit to a 50% LVR and claim buying is cheaper than renting??

That's also without taking into account stamp duty (may not apply for a FHB, but would if I was to buy again) which can be a signficant cost and LMI given they are usually borrowing over 80%.

Also I think we can safetly say that most houses in desireable suburbs to buy would not be yielding anywhere near 8%. So you are taking the outlier and trying to project it onto a larger sample...
 
You are discounting the opportunity costs of the 10% deposit, you can't do that in a financial calculation and expect to be taken seriously.

i don't consider "opportunity cost" a feasible calculation.

i mean, if you didn't see opportunity where you're parking your money, why would you invest there?

"opportunity cost" is double dipping IMPO.
 
Also I think we can safetly say that most houses in desireable suburbs to buy would not be yielding anywhere near 8%. So you are taking the outlier and trying to project it onto a larger sample...

... as are you.

however, to bring back to a point that is asked time and time again ... why should a fhb think they should be entitled to buy a house in a desirable suburb as their first purchase?

whatever - there is no right or wrong answer.

yes, property can be bought for cheaper than renting. yes, renting can also be cheaper than buying.

yes, if you rent you miss out on capital gains and sweat equity gains. yes, if you rent then you miss out on any downturn.

yes, renting allows more flexibility. yes, owning allows more stability.

yes, rents go up (and rarely down). yes, interest goes up, and often back down.

yes, renting can allow you some financial freedom now. yes, owing can allow you financial freedom in the future.

neither option is the be all and end all solution for everyone. 80% of people in australia prefer the owing options. this means it is right for 80% and not right for the other 20%.

but it is neither right nor wrong. i am trying to point out that it is possible to buy for near to, or less than, the cost of renting. to counter your claims that it "is" cheaper to rent, i am showing that it is sometimes a better financial decision to buy.

p.s. mentioning lost opportunity cost ... the 10% deposit that i used? made 100% return in 6 months. better rates than ing could give me.
 
i don't consider "opportunity cost" a feasible calculation.

i mean, if you didn't see opportunity where you're parking your money, why would you invest there?

"opportunity cost" is double dipping IMPO.
I'm not sure how you conclude it's double dipping? If they put the $40k in as a 10% deposit then it's working to reduce the interest payments they would have otherwise had. If they don't buy then they still have the $40k cash and the interest income from this should be factored into the rental equation. We're not talking about investment, we're talking about someone buying their family home.

... as are you.
If I was using the outliers on the opposite side I would grab some 2-3% yielding properties many of which can be found in Melbourne to use in examples. Rather I just use market averages.

however, to bring back to a point that is asked time and time again ... why should a fhb think they should be entitled to buy a house in a desirable suburb as their first purchase?
As I suggested in the article I think given market conditions FHBs should just skip their "foot on the ladder" purchase and rather rent, save the difference and buy when they can reasonably afford a property that will last them longer term. What's wrong with that? Why shouldn't a FHB be entitled to buy a house in a desirable suburb if they have put the hard yards into saving for it?
 
As I suggested in the article I think given market conditions FHBs should just skip their "foot on the ladder" purchase and rather rent, save the difference and buy when they can reasonably afford a property that will last them longer term. What's wrong with that? Why shouldn't a FHB be entitled to buy a house in a desirable suburb if they have put the hard yards into saving for it?

Absolutely fair point, however this only holds true in a falling or stagnant market, often the upswing is hard to identify/catch (look at all the physical Silver investors looking to pounce this morning on falling prices after the margin raising, only to find that it had probably been priced into the market and it instead rose in the order of 7 or so percent).

As a result, timing an entry or re-entry into the property market is a difficult game and one that I would have little faith in the average FHB navigating successfully.
 
As a result, timing an entry or re-entry into the property market is a difficult game and one that I would have little faith in the average FHB navigating successfully.
In Silver you are talking days/hours to time a correction, in my opinion the opportunity to buy property for cheaper price (than today) will last years. I would not expect a FHB to be able to time the bottom exactly.
 
In Silver you are talking days/hours to time a correction, in my opinion the opportunity to buy property for cheaper price (than today) will last years. I would not expect a FHB to be able to time the bottom exactly.

Fair enough, my opinion is things will move a lot quicker, e.g. a swift introduction of a $20k FHB grant (don't rule something like this out in property mad Oz!) and suddenly you have 30-40 bidding parties at an auction screaming, "now is the time to re-enter, hope you don't have the same idea". It is often swift and unforgiving.

I know many that were in a position to buy a couple of years ago renting in Bondi and couldn't imagine living anywhere else (even though their rent in Bondi would have virtually been enough to buy a similar, slightly smaller unit in Maroubra) so they rented and saved their arses off, post GFC they couldn't imagine that property was going anywhere anytime soon. What happened next? They are still renting in Bondi (moaning about successive rent rises), they can't afford a property in Maroubra anymore and they complain to me about how 'lucky' I am to be on the proverbial ladder...
 
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I'm not sure how you conclude it's double dipping? If they put the $40k in as a 10% deposit then it's working to reduce the interest payments they would have otherwise had. If they don't buy then they still have the $40k cash and the interest income from this should be factored into the rental equation. We're not talking about investment, we're talking about someone buying their family home.

i guess my point is where does it stop? i mean, you're trading investment opportunity for whatever reason you choose to buy a house.

what's the opportunity cost of putting your money in a term deposit and not in housing?

and then back again?

and back again?

you would never invest in anything because where does the buck stop by analysing lost opportunity?
 
wow thats a great rental return on a $600K + property.

you'd be charging at least $925 - $1,000 per week!

looking on Realstate.com the average rent for a 3-4 bedroom house was $400 -$500 in adamstown and the surrounding area, so you did well.

Do have a whole stack of international students living in your place?

Where did you pull the $600k + figure from? I think the '6 in front' reference was in relation to the interest rate...I could be wrong but I'm probably not...
 
Where did you pull the $600k + figure from? I think the '6 in front' reference was in relation to the interest rate...I could be wrong but I'm probably not...

yep my mistake, nothing to see here, move along...... :)

i guess my point is where does it stop? i mean, you're trading investment opportunity for whatever reason you choose to buy a house.

what's the opportunity cost of putting your money in a term deposit and not in housing?

and then back again?

and back again?

you would never invest in anything because where does the buck stop by analysing lost opportunity?

I think you're missing the point on the common economic term "opportunity cost".

Its just a point of reference to determine whether or not you are better off by taking a certain course of action.

in this case its either buying a house and funding that over the next 5 - 10 years. Or not buying a house and saving the difference (and assuming an investment return somewhere else, most commonly in a term deposit).

"opportunity cost" is just a yard stick to measure your returns by.

If you a buy a house today for $500K and 5 years later its still worth $500K. you might say hey well at least it didn't go down in value. But when you factor back in the additional cost of home ownership vs renting over the same period (mortgage, insurance, rates etc). you'll see that you have actually lost out. and thats the opportunity cost.
 
Fair enough, my opinion is things will move a lot quicker, e.g. a swift introduction of a $20k FHB grant (don't rule something like this out in property mad Oz!) and suddenly you have 30-40 bidding parties at an auction screaming, "now is the time to re-enter, hope you don't have the same idea". It is often swift and unforgiving.
Possible, but the government appears to be much more conservative now, looking to get us back into surplus rather than deficit spending and the slowing economy and housing markets are already looking to put pressure on the coffers, I can't see them pulling another FHBB out of their hats. I certainly wouldn't be buying in the hope that they do so. Also while the FHBB pushed the market up short term it was not a sustainable situation and pulled forward demand, one of the reasons the market is struggling again now.

i guess my point is where does it stop? i mean, you're trading investment opportunity for whatever reason you choose to buy a house.
I wouldn't really call money in a term deposit an investment. It's not necessarily an investment opportunity lost, in the case of a term deposit though there is definitely a loss on the interest you would have otherwise received.

If the deposit money shouldn't be included in the calculations on the rental side then what deposit amount is fair to use on the mortgage side in an example? 10%, 20%, 50%? Each will vary a rent vs buy scenario by a huge amount...


[edit: well explained greedy2000]
 
yep my mistake, nothing to see here, move along...... :)



I think you're missing the point on the common economic term "opportunity cost".

Its just a point of reference to determine whether or not you are better off by taking a certain course of action.

in this case its either buying a house and funding that over the next 5 - 10 years. Or not buying a house and saving the difference (and assuming an investment return somewhere else, most commonly in a term deposit).

"opportunity cost" is just a yard stick to measure your returns by.

If you a buy a house today for $500K and 5 years later its still worth $500K. you might say hey well at least it didn't go down in value. But when you factor back in the additional cost of home ownership vs renting over the same period (mortgage, insurance, rates etc). you'll see that you have actually lost out. and thats the opportunity cost.

nah i understand the term and what it means, i just think that it's something you can only look at in hindsight, not while you're assessing where to park your money.

it depends on the investor though. i mean, if you're wanting to put money in a term deposit, do you look at the potential lost opportunity in housing?

or do you go back afterwards upon releaseof your funds and lament the fact that house prices went up 20% while your cash was locked away?

on the other hand, if you stuck all your money into Mandurah 2x1 "apartments" in Dec 2007, you can only lament the capital loss versus a term deposit fixed percentage guarantee once you have liquidated.

my point is, that opportunity cost can never be assessed before doing anything, because you can only act with one bucket of money into one thing at one time, given the information available to you at said time.

if you have a few buckets into different things, then that's great, but then do you assess everything against "opportunity cost"? if they're doing well, chances are you don't give a rat's bum.

hindsight is 20/20 and i don't believe that opportunity cost can be measured before you invest.
 
Possible, but the government appears to be much more conservative now, looking to get us back into surplus rather than deficit spending and the slowing economy and housing markets are already looking to put pressure on the coffers, I can't see them pulling another FHBB out of their hats. I certainly wouldn't be buying in the hope that they do so. Also while the FHBB pushed the market up short term it was not a sustainable situation and pulled forward demand, one of the reasons the market is struggling again now.

I know, I am certainly not banking on it, it was merely a suggestion of how quickly it can all change as it has in the very recent past. Not many called it last time either...

My guess- rents will rise fairly rapidly and consistently over the next couple of years, in fact this is already happening in all of my areas, this will increase yields for investors and also provide further justification for FHB's to move from renting to owning.

Rental increases will change the entire equation and I am confident that rents will not stagnate in the short term, at least where I am investing.
 
From the figures I've seen rents are rising strongly in some Sydney areas. I wouldn't count on this occurring across the board in the medium term if we see this house price corrrection continue. The Australian economy is already weak, would not be surprised to see recession within the next few years, higher unemployment, etc.

Could be wrong, but I wouldn't be counting your chickens before they hatch.

Investors on here said they would raise their rents with interest rates, these have risen by 40% over the last 2 years, but apart from Sydney they have seen little growth in other capitals (according to RPData).
 
I tend to agree its not a good time for FHB to buy, yet I have been saying that for the last 5 years, in 2007 my parents pested me to buy a place or risk missing out forever a place for 280K here in Townsville was one of the very few houses under 300K at that time, so fast forward four years I didn't miss out if the same place came up for sale now I think my chances are good that I would get the same place at a cheaper price more homes under the 300k mark are popping up every week spin it however you want but house prices are on a slow decline here I think I will wait.
 
1.) false approx 35% more expensive not 100% more (atleast in the areas i own property. Western sydney, South west sydney)

2.) your opinion

3.) your opinion

4.) your opinion

5.) your opinion


More info on number 1.)

Figures used from one of my rentals.

Market value 380k
Rent 435 pw

LVR used 100% lend, stamp duty not paid because FHB, 7k used to cover purchasing costs.
$1200 council rates, $650 water rates, $600 insurance, $500 repairs, Interest rate 7.2%

380k * 0.072%
+ 1200 + 650 + 600 + 500

total P.A $30,310 or $582pw

which is $147 per week more to buy then rent.
 
1.) false approx 35% more expensive not 100% more (atleast in the areas i own property. Western sydney, South west sydney)

Yeah, if you want to live in the Western suburbs:eek:. My calculation for around the harbour are rent $2200/mth, buy ~$5000/mth(mortgage 80%lend+strata). or 127% more to own.
 
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