Last nail in the coffin of property doom and gloom

[evand]

I disagree on a couple of things Michael. They aren't 'hidden' ownership costs, they are quite obvious and upfront and i'm sure most buyers take them into account.

Regarding inflation, it is included in the banks interest rate on the loan. I'd say they know what they're doing there. Renters and buyers are both exposed to the effects on inflation.

And again, you forgot to include the substantial ownership costs in your Mona vale comparison.

Interest rates have to be roughly 2% below what a renter pays to make up this difference.

And people conveniently leave out the impact of inflation when looking at the total cost of ownership too.

But despite the so-called "hidden" costs of ownership, the equation is starting to look good for buyers. If you also allow that inflation is running at 3% and assume rents will rise at this rate, then your total cost of ownership over 5-10 years should be much lower from buying versus renting.

Remember, the loan principle remains fixed when you buy so your interest charge remains pegged to this amount regardless of what inflation does. That "loan" amount remains in today's dollars and not indexed to inflation. Rent on the other hand is not so kind...

I did a quick calc on my own IP in Mona Vale as follows:

Loan amount (100% lend) = $720K including stamp duty etc.
Rent = $650pw TODAY! and indexed at 3% pa.
Mortgage interest rate = 5.11%

So, this year, to buy it costs $36,800 in interest only. To rent it costs $33,800 in rent payments. So, yes, its cheaper to rent than buy by $3K. But if we fast forward only 3 years and index rent to inflation at 3% then the buy cost remains $36,800 but the rent has jumped to $36,900! In only 3 years its better to have bought than stayed on the rental rollercoaster.

If I look at the total cost of ownership over the next 10 years then interest charges are $367,900 and rent is $387,400! i.e. Its $20K cheaper to buy than rent if you plan on holding it for as little as 10 years. If you look at a 20 year loan period then the benefit clearly moves to buying over renting. $970K vs $770K or a total saving of $200K by buying over renting!

I'd argue most would-be buyers aren't just thinking about the year 1 equation when making their rent v buy decision. Its all about getting off the landlord rent hike roundabout. If that's your concern then your thinking long term. Long term, buying way outperforms renting, period.

Cheers,
Michael

 

[Nathan]

evand i dunno about renters buying either ey, they dont normally have savings or mindset to buy a house, they are treading water keeping rent up 2 speed and belive PPOR is 2 risky etc etc....

However i belive there are a lot of 20-30 yr olds living at home sitting on the fence to buy their home with savings etc...

this is what the market is relying on...

also renters may be ready to buy, but lot of renters are long term renters and have their own reasons for this....

 

[essence]

What sydney market are you referring to??? Sydney is a pretty huge place you know.
Virtually none of the areas i look at had ANY rise in 2007.... Most have gone backwards slightly or stayed flat since their 2003 peak.




I want to buy there.
In fact ive put my money where my mouth is - i just bought in Colyton in nov for $226K. Today, you are hard pressed to buy ANYTHING in colyton for under $260K. Dont believe me - have a look out there for yourself!
These areas are actaully performing quite well, and during the last boom they had some of the best CG of all the sydney suburbs. Sure they've gone backwards a little from their peak - but so long as you are buying at or near the bottom and you're in it for the long term, you're on a winner IMO.
Buying in these suburbs also allows me to accelerate my start into the property market, as my holding costs are minimal, and my risk is spread across a number of properties - so if i lose rent for a couple of weeks in one property, im less likely to have a financial heart attack (as opposed to if a $600K IP lost rent for a few weeks).



I havent.
Once the 5.06% interest rate kicks in later this week with CBA, it will cost me ~$55.00 a week to hold onto my colyton property..... look at my rough numbers below if you dont believe me.

Based on numbers like this - why wouldnt people buy instead of rent??

NB: all of the below is worked out without any tax deductions applied. These are raw pre-tax numbers

Everything ive mentioned so far is factual as per my personal experience.

Interest is a bit on a high side - anyway we are not anywhere near finished with rate cuts.
Insurance - outrageous. I pay half of that combined LL/building with AAMI.
Water in NSW is "USER pays" principle - i.e. tenant pays for it.
$2000 for maintenance? Way too much.
Rent - I would have spent a weekend painting and ask for $300 pw - not to mention depr for capital works.
And is it me - or you ommitted tax benefits?

Otherwise very well done. You have saved yourself $50K simply by making move at the right time. On average salary you would have to work almost 2 years to get $50K net. I would add that for $260 in that area today oyu would get something much worse than you got for $226 in November.

If you would have spent that precious time scratching your privates following Mr evand advice - it would have been pretty expensive scratching.

It is extremely joyful to see that somebody did not actually yield to the mentality prevalent on this forum and used their own brains.

 

[Token Funder]

Based on numbers like this - why wouldnt people buy instead of rent??

No-one should be making a decision that only works under today's interest rate environment. These rates are a direct response to the real threat of a major recession and are, in historical terms, an aberration.

Ancient banker's rule of thumb, if the deal doesn't stack up at 8%, it doesn't stack up.

 

[coastymike]

Where do you get $260K from. A real estate agent or valuer. If from a professional valuer than I would say well done. If not or you just based it on average prices in the area then I would say test the market and see if you do get $260K. That is the problem with property. Unless you sell you could enter anything into the cell. Why not $380K. Ohh because nothing similar sold for that price ? Well what makes $260K any better a guess.

 

[essence]

No-one should be making a decision that only works under today's interest rate environment. These rates are a direct response to the real threat of a major recession and are, in historical terms, an aberration.

Ancient banker's rule of thumb, if the deal doesn't stack up at 8%, it doesn't stack up.

Have you ever heard of fixed rates?

 

[Witzl]

I'm still not convinced its cheaper to buy then rent when all costs are taken into account. I'm not talking about holding an IP, i'm talking about a renter deciding to buy a PPOR.

yeah thats fair - but put your "average joe" hat on, instead of your normal "investor thinking" hat... and you can kind of see how most people will ignore all those other costs just because of the emotive attachment to owning their own piece of australia.

Oh - and i've been looking in many more suburbs than just Colyton.
St Marys, Colyton, Hebersham, Whalan, tregear, Nth St Marys, Mt Druitt, Oakhurst, Plumpton, Hassall Grove, Glendenning, Dean Park, Doonside, Blacktown, Lalor Park, Quakers Hill, Marayong and Kings Park.

All are experiencing the same phenomina, as far as i can tell.

 

[essence]

Where do you get $260K from. A real estate agent or valuer. If from a professional valuer than I would say well done. If not or you just based it on average prices in the area then I would say test the market and see if you do get $260K. That is the problem with property. Unless you sell you could enter anything into the cell. Why not $380K. Ohh because nothing similar sold for that price ? Well what makes $260K any better a guess.

I know this area - and $260K is a bit on a conservative side. What would $226K have bought you back in November - for $260K now you have to settle for much worse. If you will be able to buy anything at all.

 

[evand]

http://www.realestate.com.au/cgi-bi...inbed=&maxbed=&parking=&minlandsize=&p=30&o=p

I know this area - and $260K is a bit on a conservative side. What would $226K have bought you back in November - for $260K now you have to settle for much worse. If you will be able to buy anything at all.

 

[evand]

Yes, but they always re set at the higher current rate. That's where the trouble lies. Not now, a few years down the track. We all know buying property is not for the short sighted.

A lenders rule of thumb is to pressure test your loan application at a conservative 2% above current interest rates for safety.

If most renters were subjected to this test they would be running out of the bank. LOL

Have you ever heard of fixed rates?

 

[essence]

http://www.realestate.com.au/cgi-bi...inbed=&maxbed=&parking=&minlandsize=&p=30&o=p

Oh, please. One of them heritage listed and run down. One has structural problems. Rest already sold and on the net just to lure buyers in. Typical syndrom of listing shortage. You are late.

 

[evand]

Yes, that's true but that's why most people sell in a few years. IP's & PPOR 's.
And we all know what excessive selling of property does. Not even mentioning forced selling.

yeah thats fair - but put your "average joe" hat on, instead of your normal "investor thinking" hat... and you can kind of see how most people will ignore all those other costs just because of the emotive attachment to owning their own piece of australia.

 

[Witzl]

Interest is a bit on a high side - anyway we are not anywhere near finished with rate cuts.
Insurance - outrageous. I pay half of that combined LL/building with AAMI.
Water in NSW is "USER pays" principle - i.e. tenant pays for it.
$2000 for maintenance? Way too much.
Rent - I would have spent a weekend painting and ask for $300 pw - not to mention depr for capital works.
And is it me - or you ommitted tax benefits?

It's just my rough costs, which i have done on the high side of things for safety margin. Thanks for the tips on insurance... i'll look to get a better deal asap.

Tennants were already living there when i bought, and they are good tennants so i've kept them. Pushing for $300/wk rent would be a little hard at the moment... but i will look at painting/refreshing in 6mths time for more rent.

Otherwise very well done. You have saved yourself $50K simply by making move at the right time. On average salary you would have to work almost 2 years to get $50K net. I would add that for $260 in that area today oyu would get something much worse than you got for $226 in November.

If you would have spent that precious time scratching your privates following Mr evand advice - it would have been pretty expensive scratching.

It is extremely joyful to see that somebody did not actually yield to the mentality prevalent on this forum and used their own brains.

Thanks for the kind words. Im pretty happy we pounced when we did.
As soon as i heard the boosted FHOG come out - i was all over it looking for a deal to buy.

Where do you get $260K from. A real estate agent or valuer. If from a professional valuer than I would say well done. If not or you just based it on average prices in the area then I would say test the market and see if you do get $260K. That is the problem with property. Unless you sell you could enter anything into the cell. Why not $380K. Ohh because nothing similar sold for that price ? Well what makes $260K any better a guess.

I get that figure from my DD and legwork looking for another similar deal to buy again now. I cant find one. Essence is right - $260K buys me a crappier property than the one i bought, and people are buying them.
Sometimes, after looking at a suburb/area for a long time, you just get a feel for things. Call it experience, call it crystal balling.... call it whatever.... but ive got to know what houses are worth in these areas after looking at so many and immersing myself in it almost every day.

 

[essence]

Yes, but they always re set at the higher current rate. That's where the trouble lies. Not now, a few years down the track. We all know buying property is not for the short sighted.

A lenders rule of thumb is to pressure test your loan application at a conservative 2% above current interest rates for safety.

If most renters were subjected to this test they would be running out of the bank. LOL

Don't we still have 3.25% to raze off official cash rate?

 

[Witzl]

http://www.realestate.com.au/cgi-bi...inbed=&maxbed=&parking=&minlandsize=&p=30&o=p

hahahahahahah!!!
One of the sold ones is mine.

Also - 10 Cooinda St is sold. Offer was taken on saturday (we tried to go and see it).

Too late - TOO RIGHT!

 

[evand]

Not too late if i'm not looking to buy. I wouldn't buy in that area anyway. Horses for courses tho.

Remember guys, this is an artificially created short lived price spike in dodgy lower priced suburbs. Like i have said previously, does not make sense for long/medium term property investing. This is not the beginning of another boom. It is a government/RBA/ATO created suckers rally.

 

[boomtown]

Looks good Witzl.

 

[evand]

Mate, if the cash rate gets that low i'm moving to Zimbabwe. Can you imagine the state of our economy, property prices etc.

Don't we still have 3.25% to raze off official cash rate?

 

[essence]

Mate, if the cash rate gets that low i'm moving to Zimbabwe. Can you imagine the state of our economy, property prices etc.

Yes, I can. In each and every recession it was property which pulled country out of the ditch. It is not going to be any different this time. There is simply no other way. Same scenario every time - property booms, it revives residential construction, residential construction pulls the rest of the economy. Be sure you pack up for Zimbabwe before October.

 

[coastymike]

That's fair Witzl. Just hate it when the "spruikers" throw those figures in and they have no real basis. Or they base it on something meaningless. I do agree that you get a general feel when analysing a particular market segment.