Rent vs Buy: An Australian "Cost Comparison"

Yields are too low at present but are set to take off with income increases and high inflation on the back of the mining boom phase II. Prices might take a breather for a year or two before that rental yield hits the tipping point. I've posted my tipping point hypothesis before. I reckon a two percent differential between prevailing interest rates and rental yields sees tennants become buyers. Today yields are 4.5% and interest rates 7.5% so the gap is too large for now but will close in time.
Common to get yields in my area now over 5% and IR's are 6-6.5%. No tipping point happening yet mate but if we get another cut or two and vals stay put then your hypothesis will be seriously tested. It will be interesting to see whether the new grant announced in NSW will bring FHB's back with the 2% differential broken already. There are already cases where some lower val homes around my neck of the woods would have yield on par with IR's. Interesting times.
 
A recent Northcote (3070) example of rent v buy

Just had a refinance for a property recently and the val came in at $475k. It is rented at $415pw. The rent is a fair market rate.

The difference between renting and owning per annum is $6241, with renting being cheaper, but its not a pot of gold and this assumes a P&I loan. A I/O loan makes the difference only $1501. So whilst i understand the "benefit" of renting instead of owning and reinvesting the surplus funds, and I did it myself for many years, I think the benefit is overstated.

I did it when I owned a 2br apartment but then rented it out and rented a 1 bedder myself. So if you are downgrading/downsizing, the benefits are far more lucrative. In the example above, renting a comparable one bedroom apartment, would extend the benefit to $10,661 compared to a P&I loan & $5,921 for a i/o loan

I admit, there is a small issue of having $119,340 as 20% deposit plus costs (stamp duty & legals)

But when it comes times to nesting or even living together with your partner with a view to the long term, I would challenge, that for most people, even a $6241 benefit is not going to outweigh the certainty of being in your own property (as discussed throughout this thread).

And what are you going to do with these excess funds? Shares? Gold? Term deposit? Super?
 
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Just had a refinance for a property recently and the val came in at $475k. It is rented at $415pw. The rent is a fair market rate. The difference between renting and owning per annum is $6241, with renting being cheaper, but its not a pot of gold and this assumes a P&I loan.
How are you calculating this buzz? I get $6920 based on 6% mortgage rate/100% loan/interest only.

If you'd rented instead of buying from when I started this thread you would have also been a lot better off due to price drops we've seen.

e.g. Melbourne has dropped around 11% over this time frame, on a $475k property that's an additional $52,250 saved + the benefit of this reduced mortgage over time would probably double that saving.
And what are you going to do with these excess funds? Shares? Gold? Term deposit? Super?
Well I know where I have mine ;), but a term deposit is fine as well.

I ran some scenarios through Excel recently (it does take into account further prices falls):

http://www.bullionbaron.com/2012/02/increase-your-property-purchasing-power.html

Obviously outcomes will differ depending on how things play out (unlikely to be exactly as projected in the post), but I think in most areas renting still makes more sense.
 
The type of people who frequent this site are not a good cross-section of the community to run a survey about what they would do with their expendable income if they are renters, because most people here would be average or above income earners for a start, and are active-minded investors, and would therefore invest some of it. We are not the average people here on SS from this perspective.

So, what needs to be done is survey the average punters who walk into the r/e office every month to pay their rent; and ask them what they do with their expendable income after their rent is paid.

The answer would be probably that they spend it all, other than their employer contributed super.

So, in a practical world; for the majority of folk it is better to be a homeowner in order to accumulate any sort of wealth.

In a financial sense; it is better to be a renter and invest in property and/or other vehicles.

Personally, we live in a very nice house worth over $1mill. Not a big deal really at my age if you do a few sensible things.

We have leveraged against it (and previous PPoR's over the years) to invest in property and business.

No big deal; lots of folk do this; it's not a sophisticated way to acquire wealth really, but it can work.

But I know in my financial head that we should really be renting this joint out, and renting a similar place. We would save several more thousands per year off our holding costs of the house through the tax deductions no doubt.

But the feeling of being able to walk out on the deck and see the view etc, and be able to say; "this is mine" is hard to put into words.
 
How are you calculating this buzz? I get $6920 based on 6% mortgage rate/100% loan/interest only.

If you'd rented instead of buying from when I started this thread you would have also been a lot better off due to price drops we've seen.

e.g. Melbourne has dropped around 11% over this time frame, on a $475k property that's an additional $52,250 saved + the benefit of this reduced mortgage over time would probably double that saving.

Well I know where I have mine ;), but a term deposit is fine as well.

I ran some scenarios through Excel recently (it does take into account further prices falls):

http://www.bullionbaron.com/2012/02/increase-your-property-purchasing-power.html

Obviously outcomes will differ depending on how things play out (unlikely to be exactly as projected in the post), but I think in most areas renting still makes more sense.
80% P&I loan, 5.79% interest (given there are various banks offering 3 year rates at this amount), including $2300 in outgoings (ie water/council rates and owners corp fees).
 
80% P&I loan, 5.79% interest (given there are various banks offering 3 year rates at this amount), including $2300 in outgoings (ie water/council rates and owners corp fees).
If you calculate on an 80% loan, then you need to take into account 20% deposit savings interest for the renter.

$95k @ 5.51% = $5234 - applicable tax rate.
 
80% P&I loan, 5.79% interest (given there are various banks offering 3 year rates at this amount), including $2300 in outgoings (ie water/council rates and owners corp fees).
Add insurance + factor in maintenance liability + account for interest on 20% cash deposit (as hobo-jo pointed out)..... Then the picture looks a little different.

Additionally, it is often the case whereby one can "afford" to rent a particular property but not "afford" to buy said property.... many people do this for certain phases of their life to gain access to school zones, proximity to work etc... that they would otherwise not be able to access until later in life, when this accessibility is longer relevant.

There are many good reasons to rent, even for people that can "afford" to do otherwise but choose not to due to work, family, financial or social considerations.
 
Thought I'd do an update of these figures...

http://www.bullionbaron.com/2015/05/rent-vs-buy-adelaide-cost-comparison.html

Rent vs Buy - The Figures

Property: $500k House

Rent (2010): $25,000pa / 52 = $480pw
Rent (2015): $26,520pa / 52 = $510pw

(Residex shows yields have slightly improved for Adelaide over the past 5 years)

Buy (2010):
$500k + $24,000 (stamp duty and transfer fee#) x 7.25% = $37,990
1% of property value for maintenance and insurance = $5000
Council and water rates = $2000
Total = $44,990 / 52 = $865pw (interest only)

Buy (2012):
$500k + $25,000 (stamp duty and transfer fee#) x 4.15% (3 years fixed) = $21,787
1% of property value for maintenance and insurance = $5000
Council and water rates = $2200
Total = $28,987 / 52 = $557pw (interest only)

# Adelaide based figures, this would differ between states

As I pointed out last time, this still doesn't account for all costs of ownership (or for that matter renting), but you can see that there has been a squeeze in the gap between the two. In 2010 the cost difference was $385 per week, in 2015 that has narrowed to $47 per week, mainly as a result of falling interest rates and a small increase in rents. The above example shows a 6.25% jump in rents, in my personal situation I have seen a 13% rise in 5 years (which reflects the local market, different areas in Adelaide may have seen higher or lower). Over the last 5 years I have also seen my income rise which would make servicing the gap easier.

In Adelaide a $500,000 house would actually buy you something quite nice, a modern 3 bedroom house around 10km from the city, maybe even closer or a small house in the city if that is a preference. If you are prepared to look at modest homes you can buy something more dated, 15-20km out from the city, for around $300,000. Assuming a 10% (+ costs) deposit (leaving a $270,000 loan) and 3 year fixed interest rate of 4.15%, the principal and interest repayments would be around $300 per week. Rent for the same house might set you back $320-340 per week. Suddenly a home in Adelaide is looking quite obtainable, maybe even for a household on a single income.
http://www.bullionbaron.com/2015/05/rent-vs-buy-adelaide-cost-comparison.html

Figures starting to stackup to buy in Adelaide.
 
Thought I'd do an update of these figures...

Figures starting to stackup to buy in Adelaide.
If you had just kept the house you sold you would probably have it paid off by now.

Now you'll have to pay stamp duty again, plus the other buying (and selling) fees. Plus the cost and hassle of moving, removalists etc.

Seems like a lot of time and effort wasted for little (if any) gain. What was the point?
 
If you had just kept the house you sold you would probably have it paid off by now.

Now you'll have to pay stamp duty again, plus the other buying (and selling) fees. Plus the cost and hassle of moving, removalists etc.

Seems like a lot of time and effort wasted for little (if any) gain. What was the point?
No headache looking after a large block for 5 years.
I will buy something different this time around (no interest in buying what I had/where I was).
Tens of thousands saved/made even after stamp duty.
Living in a better, lifestyle oriented area while renting.
Who uses a removalist? That's what friends and family are for :)
 
Figures starting to stackup to buy in Adelaide.
Considering you have had your finger on the pulse of property so closely for a while, and with all the info available to you here on SS about what's going on; how come you didn't buy in Sydney when the latest frenzy started?

I'm bleeding that I couldn't buy up there - but we have not been in a position to buy for a number of years.
 
Add a little CG to the mix and you would be ahead. I think this is probably a conversation being had by many renters presently, I've had a long term tenant wanting to buy one of our places recently, unfortunately I think it may lead to soft rents in many places for the next year at least
 
If someone had rented in Syd these 5 years, they probably left a million bucks on the table. Just saying.

Anyway really not much need to justify your choices. If you bought 5 years ago and made $1-10m, good. If you didn't, well let's just say as long as you're happy with what you've achieved with your money that's all that matters. No need to really tell landlords that they made a dumb choice despite making 1-$10m.

As I always say, not really here to prove who's right. Just here to share ideas on wealth creation.
 
Add a little CG to the mix and you would be ahead.
No doubt, as highlighted on the first page:
Even with 100% lend property still comes ahead due to the magic of time.

Using the above stats, with rent increase input of 2.5%, 8% CG increase of property and a 7 year time frame...
& yet here we are 5 years into that 7 year time frame and in Adelaide there's been no growth (at the capital city median level), likewise for Brisbane, Hobart is lower than 5 years ago. Sure Melbourne & Sydney have boomed, but they are probably approaching a level now from where there will be no growth for a 5+ year period too.
 
Many investors will only play in their backyard as they are not comfortable with the risk and work required to succeed in other markets. It makes sense to invest in markets that are rising.

Therefore they miss out on potential boom markets, lost opportunities and gains. All to their own

Mir:)
 
& yet here we are 5 years into that 7 year time frame and in Adelaide there's been no growth (at the capital city median level), likewise for Brisbane, Hobart is lower than 5 years ago. Sure Melbourne & Sydney have boomed, but they are probably approaching a level now from where there will be no growth for a 5+ year period too.
that's the thing, the gains are lumpy and cannot be predicted. I recall Melbourne had a huge boom during or just after the GFC? it defied all logic at the time. you can sit there for 10 years owning and get no gain, then sell, then a year later the dam thing doubles.
 
If something hasn't moved for 10 years, odds are you should buy en masse. It would've fallen in real terms by around 35-40%. Selling would be the biggest newbie mistake I can think of.

Unless this is Japan we're talking about where the cost of everything else depreciates even faster.
 
If something hasn't moved for 10 years, odds are you should buy en masse. It would've fallen in real terms by around 35-40%. Selling would be the biggest newbie mistake I can think of.

Unless this is Japan we're talking about where the cost of everything else depreciates even faster.
plenty of examples, to name a few.... I heard a few weeks back it seems Mandurah development sites are back to what they were 11 years ago (I paid $70k a site in 2004, I can't remember exact numbers now but agent was telling me of some comparable ones selling less than that). I know up in Bundaberg there are modern 4x2 homes selling for 2/3's of what they were worth in 2008. Subiaco houses such as this:

http://www.realestate.com.au/property-house-wa-subiaco-119280851

are still down 25-30% on prices from 7 years ago. My old neighbours would be unhappy! I crystalised my 25% drop and moved on. (And given that many on here are suggesting further falls of 20%+ in Perth that will put them at half the price of 7 years ago)

I am not sure if Gold Coast has recovered but I expect it is similar to above.
 
If something hasn't moved for 10 years, odds are you should buy en masse. It would've fallen in real terms by around 35-40%. Selling would be the biggest newbie mistake I can think of.

Unless this is Japan we're talking about where the cost of everything else depreciates even faster.
I agree, I looked at a few places in Brisbane 2013 and 2014 that were selling for pretty much the same price 5-7 years earlier, and with the current yields made them no brainers to purchase......to me anyway,

Time, as always, will tell.
 
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