Rent vs Buy: An Australian "Cost Comparison"

Discussion in 'Property Market Economics' started by hobo-jo, 17th Nov, 2010.

  1. lizzie

    lizzie when i grow up ...

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    i've been in the game 20 years and would agree that in the last 10 years the growth took a different form, but there was still growth in the first 10 - just of a different nature - and same with the 10 years before that and the 10 years before that.

    great to hear, MB, that you have had sucess in your choosen investment path - but we are talking above "average" australian's here, of which you obviously are not one of them. to the average, common, majority of australians their home (and super) will be their only assest by the time they retire.

    do not put those on ss up as being typical of average australians - we are probably in the top financial 5% of the country. but we do find that like people hang with like, so it is easy to forget that the other 95% have very poor investing skills.
     
  2. Propertunity

    Propertunity Real Estate Buyers Agent

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    ^ ^ ^ what she said :)
     
  3. Luv2Travel

    Luv2Travel Member

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    I said the figures were just an example and bit optimistic for today's markets, however there are plenty of people buying neutral/positive properties today according to this forum. My point was just that I believe if you want to live in a fancy suburb with yields of 2% then renting is perhaps the better option if you invest the difference, however I believe that as the yield increases, then so too does the argument supporting buying a home over renting. Just my opinion and experience.

    As for your interest, I have a loan currently locked in at 5.19% until 2014, which would have my outgoings as being realistic.
     
  4. Corey Batt

    Corey Batt Finance Broker

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    For those interested, the calculator I mentioned from NY Times:

    http://www.nytimes.com/interactive/business/buy-rent-calculator.html

    LOTS of value inputs to give a good picture. And a graph!

    Factors in:
    Inflation, taxes, rent increases, house price increases, mortgage rates, Strata, buy/sell costs, mortgage length, reno costs, annual maintenance, CG exclusion, additional monthly utilities and more.

    Now we can just argue about the values.

    /thread :)
     
  5. jaycee

    jaycee Member

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    and a few hangers on as well...
     
  6. hobo-jo

    hobo-jo Not a bear just a realist

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    The figure is probably not that optimistic for some regional areas, but it's around DOUBLE the (average) metro yield. I live in a nice suburb (coastal, not far out from city) and yield is around 4% (unit), so it's fairly close to the example in the original post in that it would cost around double the rent cost to buy it.

    I agree with your premise that if yields are high in an area then purchase could be considered a reasonable option, but reality for most living in capital city suburbia is that the numbers just don't add up.

    Well done with the rate! I locked in at around 6% for 5 years back in May 2009 but then decided to sell the property, most missed that boat.
     
  7. willair

    willair xx

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    That's a long time,I think the last ten years is very different from the 90's-80's,money was very tight to get your hands on during the 80's
    i think when i started in 1983 the NAB was the only one that would lend me anything at about 18%,the 90's in Brisbane some area's went back over 50%,i know this for a fact 2 we bought in 1996-1998 were over 50 % from the purchase price in 1990-1991,but from 1999 onwards it been
    over 13% growth year in year out,because over the past 9 years anyone could get their hands on fast bucks,and feed by the Australian media reno shows,property guru's,IMHO no matter what anyone tells you and as property is such a slow moving machine when it's on the slide,that most don't see it happening,or as a RE long time mate told me last he has not sold anything in the past 7 weeks,listing are comming in the door each day,myself i don't care less for what we paided it does not matter,but imho the next 5 years will be unlike the last 5..
     
  8. Luv2Travel

    Luv2Travel Member

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    Or just before a capital city boom as I did with Melbourne (my first one in 2000 before that boom and the upgrade a couple of years ago before this recent growth). I know I'm in a better position having bought, for the sake of costing me initially, long term my costs are definately going to be lower as they already are. And at some point I will be debt free and never have to pay repayments or the non deductible expense of rent.

    However, I'm buying for one so buying below median house price so affordable to me. I must admit if I had a family and needed a house in this area, there's no way I could afford a $1M+ property, however wouldn't be prepared to move back to the outer suburbs, so would have to consider turning current PPOR into an IP and renting a PPOR.
     
  9. Graemsay

    Graemsay Doom and Gloomer

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    I just want to add a couple of thoughts to this thread.

    Hobo-Jo's original comparison is between renting and an interest only mortgage. It strikes me as being wrong if it's cheaper to rent the asset off a landlord than it is to rent the capital off the bank.

    As with some of the other posters, I'm not convinced that property will consistently rise at 7 or 8%, particularly if inflation and wage growth remains relatively low. During the Seventies and Eighties inflation was running at a much higher rate, which would support faster rates of growth.

    Lastly, outside of a Japanese style depression in the housing market, buying makes sense over the long term. My calculations using a set of pretty bearish assumptions suggest a fifteen year timeframe to be "safe" of coming out ahead.

    The question, of course, is what to do in the shorter term.
     
  10. Ms Jade

    Ms Jade Down the Rabbit Hole

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    Absolutely agree. I am surprised investors would be buying within 10km of the Melbourne CBD based on current yields, for example. As rates go up it will be even harder to justify, which will lead to the inevitable (finally!) catch-up of yields.
     
  11. Ms Jade

    Ms Jade Down the Rabbit Hole

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    Even if growth is less than the last 10 I don't think it changes the answer - just the degree. I find it hard to believe that anyone would argue it's a better financial decision to buy a PPOR than rent & buy IPs instead. It just comes down to your servicability. If you pay less rent than you'd pay on a mortgage= you can borrow more, the debt is deductible= you can borrow more. This allows you to control a bigger asset base. Whether the properties rise an average of 5% p.a. instead of 10% for the next 10 years you still come out ahead. You have maximised your returns in the circumstances. No reason not to do it because you'd have made more money in the prior decade.
    Of course, all this is predicated on the belief that property values will increase over the next 10 years and also that you're happy to use leverage to control more assets.
     
  12. tom32

    tom32 Member

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    But its as simple as if you have excesses of capital you buy a PPOR, if you are using the banks capital you buy IP's.

    100% LVR on IP's and 0% LVR on your PPOR seems to be the "ideal" situation.

    I'm not saying this is a good investment strategy in the short term in terms of house price rises / falls, only that from the tax angle it is where you want to employ your own capital v borrowed funds.

    In summary using the banks money you want the tax deductable IP, using your own funds you want the asset that is treated outside of the tax system, i.e. it saves you rent which you would otherwise pay after tax.

    So this is why some will argue it is a better financial decision to buy a PPOR and live in it.

    If you deploy capital into IP's you are then not getting the tax advantage of negative gearing anyway.

    To me it is this easy; deploy your own capital into a PPOR not IP's. Use the equity in that PPOR to buy IP's if you believe capital growth beyond inflation will be seen over the next 5 years.
     
  13. Ms Jade

    Ms Jade Down the Rabbit Hole

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    Agreed.

    Yes, those who own their PPOR outright. But how many people start off like this?

    If you are starting out with $120k or whatever you will get further faster using this as deposits on IPs rather than getting into a mortgage IMO.
     
  14. tom32

    tom32 Member

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    Yes, sorry I was only bringing it back to the rent v buy argument to say in certain situations you would be best off owning your PPOR rather than renting. It would seem in most situations however, i.e. high leverage you are better off renting it and investing the difference.
     
  15. bene313

    bene313 Member

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    A plan could be to accumulate IPs while renting, then debt recylce when the PPOR comes along.
     
  16. rugrat

    rugrat Member

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    It really does depend on too many variables as to what is better for each individual. For myself, rent = mortgage. That is why we did buy, if I am paying that much money I may as well get an asset out of it. But then, canberra rents are crazy.
     
  17. wylie

    wylie Member

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    This is how my brain works too, no matter how much I tell myself that paying rent whilst investing works too.... it is just not something I would ever do.

    I know that when I was around 18 and bought my first IP with my Dad, I never wanted to pay someone rent and help pay their mortgage, and I never have.

    There is no way I would have saved as much as I did through the forced savings of having always had an IP and/or PPOR.

    I know others do it differently, and I acknowledge that, but for me.... I just never wanted to pay rent. I like to think if I was starting over, I would buy IPs first, but I just don't think I could pay rent even knowing what I know.
     
  18. bene313

    bene313 Member

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    Also depends on where you want to live. If you want to live in an area where yields are 6% it might be better to buy. But if you want to live where yields are 2% renting is a good option (then buy IP in the area yielding 6%).
     
  19. Indifference

    Indifference Member

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    If your circumstances were more akin to something like mine, I guarantee you would reconsider. Acknowledging that they obviously are not, I agree with your train of thought...

    Renting and buying property are not mutually exclusive... You almost acknowledge a financial benefit from renting (given the right circumstances) and I would like to reiterate, that for some of us, buying a PPOR does not make financial sense. This may puzzle many regular 9-5ers, but many of us tend to move regularly (Ie. Corporate nomads etc...) and the churn in the home-front is the first big disincentive, but the real kicker can be employer provided housing or heavily subsidized housing.

    Some people essentially get to 'live for free' as it is part of the remuneration package, and some pay a meagre contribution. I doubt many would choose to forego such benefits and buy a PPOR, considering these types of benefits are often forsaken if you choose to live in your own home. Particularly when the benefit can be >50k per annum.

    For some, a PPOR makes financial sense, but for others, it is really financially dumb, and most people reside somewhere in the middle of this spectrum. It all depends on individual circumstances.
     
  20. Melanie Monico

    Melanie Monico Member

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    Renting & Buying

    You could continue renting yourself whilst renting out another property you own; this could free up more money if your rent is less than a mortgage repayment, thus you will be able to continue saving.
    This may be a better option if property investment is a priority; however even for first home buyers taking up such opportunities might be more feasibly successful in the long term.
    It’s useful to understand the advantages of both renting and buying: http://bit.ly/yyLaU2