hysteria

[alexlee]

People in European countries where renting is more common than in Australia don't pine for housing when they have families. They have more security in the properties they are renting.

I have family who rent in Copenhagen and in Paris, and they have been renting the same properties for as long as I've been alive - there is no tension that the rent will become so high that they have to move and no thought at all that the property may be sold and they be turfed out.

So do people rent for longer because longer term rental contracts exist, or do longer term rental contracts exist because people want to rent for longer? Conversely, do people in Australia prefer to buy rather than rent because of shorter term rental contracts, or do shorter term contracts exist to accomodate the fact that people prefer to buy?

I'm more talking specifically about australia. It doesn't make sense to think that the wants / needs of a teenager would be the same as a person in their 20s, and a person in their 30s.

 

[aussierogue]

But it does show that what is behind these wants and needs isnt necessarily logical. Its a collective consciousness that is making the Aussie NEED for property look a tad over the top.

 

[Amadio]

So do people rent for longer because longer term rental contracts exist, or do longer term rental contracts exist because people want to rent for longer? Conversely, do people in Australia prefer to buy rather than rent because of shorter term rental contracts, or do shorter term contracts exist to accomodate the fact that people prefer to buy?

I'm more talking specifically about australia. It doesn't make sense to think that the wants / needs of a teenager would be the same as a person in their 20s, and a person in their 30s.

:

I'm inclined to think the former in both cases but I'm not sure. It's a different mindset here to any other place I've ever lived in. It's almost an obsession to own a house here in Australia as Aussierogue has pointed out. And yet if it was easier to settle into a rental place, (once you are settle age like young families - point taken about wants/needs), and make a long term home of it, I think many people would be quite happy with that.

Imo the obsession with home ownership has a lot to do with an strong desire to stay in one place and become part of a community. Renters just can't do that when their properties are constantly changing hands.

 

[dan c]

It's a zero sum game if you only own your home. If you need to move because of your job, you must pay the NEW price and borrow as much for the new house as you owed on your old one. (You will have a higher LVR than when you bought the first, but that matters nought!)

I still live in a house I paid $10,000 for but if I wanted to move into something "nicer" I would need to borrow a qtr mil. Tell me how I'm better off?

Because the house you paid $10,000 for is now worth a lot more. Say it's worth $90,000. There's $80,000 you didn't have to save or borrow.

 

[alexlee]

I'm inclined to think the former in both cases but I'm not sure. It's a different mindset here to any other place I've ever lived in. It's almost an obsession to own a house here in Australia as Aussierogue has pointed out. And yet if it was easier to settle into a rental place, (once you are settle age like young families - point taken about wants/needs), and make a long term home of it, I think many people would be quite happy with that.

Europe does have a different mindset, but the mindset in Australia is not unique. Certainly it's common in Hong Kong and China. My observation is that there seems to be less emphasis on home ownership where there is a stronger state / government safety net. Western European countries tend to have higher pensions and much stronger unions. People view their home as part of their retirement plan. If you expect your pension to continue until you die and you think it's going to be high, then you don't need your own home as part of your retirement planning.

Imo the obsession with home ownership has a lot to do with an strong desire to stay in one place and become part of a community. Renters just can't do that when their properties are constantly changing hands.

Is that really the case, though? The transaction costs makes 'trading' property uneconomic, in most cases. I would have thought people buy and hold with IPs as well. Perversely, it's rising prices that makes people want to buy because they want in, and that, of course, drives prices up further.

 

[Sunfish]

Because the house you paid $10,000 for is now worth a lot more. Say it's worth $90,000. There's $80,000 you didn't have to save or borrow.

You don't think I have been aware of that for 50 years? LOL

It is money that has been "consumed" providing me with a roof over my head. It is NOT money available for me to spend. If I draw it down I am spending someone else's money, hence I pay interest on it.

There is widespread misunderstanding of inflation caused cap gains here.

 

[WinstonWolfe]

There is widespread misunderstanding of inflation caused cap gains here.

SF, whether you are better off is relative......relative to not having bought a house all those years ago, I reckon you are better off.

 

[Sunfish]

SF, whether you are better off is relative......relative to not having bought a house all those years ago, I reckon you are better off.

I am better off for having bought a house, maybe. (But if I knew then what I know now I may have done better with other assets.) I would be no worse off if there had been no inflation though. If I wanted to move I would still have to add a significant sum to the proceeds of the sale, especially if I wanted a sea change.

 

[Africandaisy]

If I were starting our instead of buying a ppor I would not buy one 500k investment property. I would by 2 x 350k investment properties (700k in exposure) giving the same yield.

(Above assuming your dream house is 500k)

let compunding and inflation do some majic and in 5 years you are there!

I am basically in this situation right now and cant make up my mind what to do.

I recently sold my PPOR in Pt Cook and decided to rent for a year to try out living in Kensington. I am paying off two IPs worth about $240K each (Werribee and Bendigo). I can afford to borrow enough for another $500K worth of property. I could buy a $500K PPOR in Kensington and live in it. Or I could buy two more cashflow positive $250K IPs and continue to rent.

I'm a gen X daughter of migrants, so I feel quite uncomfortable with the idea of renting indefinitely. My fear is that even if my IPs do well over the next 5 years, I'll be completely priced out of the Kensington market by then (as a buyer and possibly even as a renter).

I'd be grateful for any insights from investors who have chosen to rent long term rather than buy a PPOR.

 

[aussierogue]

Mmmm

I think that your situation is slightly different because you already have two investment properties.

Well done - these will work for you forever if you decide to keep them. I read somewhere that property gurus (the age newspaper i think) expect bendigo to boom soon.

So with that already in the background i reckon you are better off going for the kill and buying as good as you can get in Kensington. Buy something that you can renovate down the track - once your other properties double in value you can access equit or sell down.

 

[alexlee]

My fear is that even if my IPs do well over the next 5 years, I'll be completely priced out of the Kensington market by then (as a buyer and possibly even as a renter).

Not making any specific comments about those areas because I know nothing about them. As a general principle, though, assuming everything goes up at the same rate, if you own MORE $ value in property than what your 'dream home' is worth now, you'll be ahead over time.

That is, if your 'dream home' is 500k, and you own $1m in property, then assuming everything goes up at 6% or 7% or 10% or whatever, over time the $ gains in your property portfolio will outpace the $ appreciation of your dream home, making it 'cheaper' (to you).

 

[Ausprop]

Not making any specific comments about those areas because I know nothing about them. As a general principle, though, assuming everything goes up at the same rate, if you own MORE $ value in property than what your 'dream home' is worth now, you'll be ahead over time.

That is, if your 'dream home' is 500k, and you own $1m in property, then assuming everything goes up at 6% or 7% or 10% or whatever, over time the $ gains in your property portfolio will outpace the $ appreciation of your dream home, making it 'cheaper' (to you).

but to provide balance...your negative cashflow is greater, your risk is greater (tnenats, building damage, white ants, if/when property goes down in value, litigation), the IPs are taxable gains as opposed to your PPOR. there is also the paperwork headache

 

[alexlee]

but to provide balance...your negative cashflow is greater, your risk is greater (tnenats, building damage, white ants, if/when property goes down in value, litigation), the IPs are taxable gains as opposed to your PPOR. there is also the paperwork headache

Depends on the initial yield, the initial -ve cashflow might be greater. However, rents increase over time, and you don't get any rent on the PPOR, nothing is deductible and you can't claim depreciation. Yes, the risk is higher but can be mitigated by insurance. IP gains are taxable, but in my opinion the higher gains (because of bigger portfolio) justifies this. e.g. with 1m IPs v 500k PPOR, your appreciation on the IPs is double the PPOR, more than compensating for the CG payable (if you sell). Obviously, the bigger your portfolio is, the greater the advantage from a pure appreciation perspective.

Also, there is more flexbility in terms of selling one or more IPs whereas with a PPOR, it's harder emotionally to sell it.

Personally, I don't find paperwork to be a big issue, but that's because I'm used to it.

 

[Africandaisy]

Quote:

So with that already in the background i reckon you are better off going for the kill and buying as good as you can get in Kensington. Buy something that you can renovate down the track - once your other properties double in value you can access equit or sell down


Thanks Aussierogue. I appreciate your advice.

Ive been looking at newish 2 bed apartments in Kensington but perhaps I'll investigate some 1970s flats with renovation potential. One problem with those though is that the outside is usually very ugly and I imagine it would be hard to get the other owners to agree to spend money tarting up the exterior.

 

[Africandaisy]

As a general principle, though, assuming everything goes up at the same rate, if you own MORE $ value in property than what your 'dream home' is worth now, you'll be ahead over time.

Thanks Alexee. Your point makes a lot of sense. However, I'm not absolutely confident that my cashflow positive/neutral investment properties (outer suburbs and regional areas) would get the same rate of capital gain as Kensington (inner suburb of Melbourne).

 

[alexlee]

Thanks Alexee. Your point makes a lot of sense. However, I'm not absolutely confident that my cashflow positive/neutral investment properties (outer suburbs and regional areas) would get the same rate of capital gain as Kensington (inner suburb of Melbourne).

Personally, I assume growth rates are the same. The other thing you have to consider is relative portfolio size. My assumption is that outer suburbs have higher yields, which means you can support a bigger portfolio. e.g. say the inner 500k property goes up by 10% a year. If you have 1m in outer suburb property (supportable because of the higher yields) that goes up 7% a year......

All up to how you think the different areas will perform, of course.

 

[Ausprop]

Thanks Alexee. Your point makes a lot of sense. However, I'm not absolutely confident that my cashflow positive/neutral investment properties (outer suburbs and regional areas) would get the same rate of capital gain as Kensington (inner suburb of Melbourne).

in your forecasts you shouldn't be confident of any CG, which is why your neutral/cf+ properties are worth their weight in gold. Melb could well retrace some of these gains as the resources boom gains traction and IRs go thru the roof to contain it, in which case your outer properties will be the star performers