The RBA says you're probably better off renting..

[oracle]

Read interesting article today

The RBA?s conclusion is that house prices would have to continue to rise at the same rate as they had for the past six decades for owners to be as well off as renters.

It calculated that the annual rate at which the real (inflation-adjusted) price of a house must rise for an owner to keep pace with a renter financially was just below 2.5 per cent.

Assuming real house prices increased at the historical 2.4 per cent, buying beat renting if the owner held for more than eight years.

However if the 1.7 per cent rate experienced over the past 10 years was used, owning only beat renting over a period longer than 30 years.

From the mid-90s the big story has been falling rates but that?s not going to be a factor in the next 20 years,

Read more: here

Although, I am cautiously optimistic that real house growth will be higher than 2.5% but I do agree with the article that it won't be as high as it has been over past several decades. Discretionary income has to rise a lot and at the same time people would have to be satisfied to use that extra income towards higher mortgage payments for house prices to grow at 6-7% or higher.

Thoughts?

Cheers,
Oracle.

 

[Propertunity]

Thoughts? Oracle.

I've done pretty well doing pretty much the opposite of what the RBA says, over time. I'll keep buying then

 

[Peter_Tersteeg]

Assuming real house prices increased at the historical 2.4 per cent, buying beat renting if the owner held for more than eight years.

However if the 1.7 per cent rate experienced over the past 10 years was used, owning only beat renting over a period longer than 30 years.

There's the first problem in the analysis. I can assure you that all of the properties in my portfolio have well outperformed 2.4% annual growth over the last decade.

Property prices continually increase because of ever increasing demand. House prices may still below lower on the fringe suburbs, but demand for the more desirable areas doesn't go away, it increases with population growth.

Even if property values only increase with inflation, people are still better off in the long term by owning than renting. If inflation is constant, then we can assume that everything else is too. Property value increases, wage increases, rental increases. The one thing that doesn't increase in this perfect world is mortgage repayments, inflation actually serves to reduce the cost of a mortgage if everything else is constant.

The loan on a a property purchased 10 years ago will still have the same repayment cost today (assuming the rates haven't changed). A dollar is worth less today than it was 10 years ago, so the real cost of those mortgage payments is lower. The rent on the other had costs the tenant the same as 10 years ago in real value terms, because it's increases with inflation.

I nominate this for 'dumb article of the week'.

Fortunately there will be a lot of people who will take the as gospel, creating an endless supply of tenants.

 

[MTR]

This is a stupid article, with too many fairy assumptions and no substance and putting everything in one box makes no sense whatsoever.

 

[oracle]

There's the first problem in the analysis. I can assure you that all of the properties in my portfolio have well outperformed 2.4% annual growth over the last decade.

The 2.4% mentioned here is real growth. So add inflation on top that will be 5-5.5% nominal growth.

The article says the study was done for Owner Occupiers only who don't get any tax deductions. They have to pay somewhere between 5-6% interest costs, plus various government levies plus maintenance so you could be looking at atleast another 0.5% on top of that.

To be fair the article did say for OO who held their properties for 8 or more years were better off than renting if real growth was atleast 2.4%.

So what they are saying is it was all well and good over past few decades but coming decades they do not envisage similar growth numbers. Because the factors contributing to previous growth will not be repeated. This is their prediction and you can disagree with it.

I nominate this for 'dumb article of the week'.

I don't think so, there are some valid points and unless you can prove otherwise by providing valid arguments on future growth predications. Nobody in Japan thought they will have 0% interest rates for nearly 20+year. Nobody in US thought they will have near 0% interest rates for 6-7% and same for UK.

Ask any economist about what the new normal for Australian interest rates will be and they will tell you a much lower number than historical figure. Low interest rates are there to stimulate growth in the economy. It will have a short term burst to property prices like it has done in Sydney but once that factor has run it's course what next will take it to the next higher level above and beyond your normal inflation growth? Remember, during the GFC the low interest rate propelled Melbourne prices by over 20% but the current low interest rates are doing hardly much to Melbourne house prices beyond your inflation.

House prices will be higher no doubt 10-20 years from now. The question is how much?

Cheers,
Oracle.

 

[oracle]

This is a stupid article, with too many fairy assumptions and no substance and putting everything in one box makes no sense whatsoever.

SS seems like a place where lot of property savvy investors hang out. Yet, I don't see lot of posts that often say "Hey guys, I have just retired from property investing". May be I am wrong and people just don't share their achievements even if they are retired or retired but continue to work.

I have no doubt people who invest for the long term in property located in big cities will do well provided growth is good. What the article is saying they think growth will be OK but not good going forward.

Surely, active investors doing lot of research will do well as they buy undervalued property and also add value whenever possible. But for somebody who is not interested in active property investing or lets say an OO, who just does the bare minimum will they be better off than renting, if growth is subdued?

Cheers,
Oracle.

 

[see_change]

SS seems like a place where lot of property savvy investors hang out. Yet, I don't see lot of posts that often say "Hey guys, I have just retired from property investing". May be I am wrong and people just don't share their achievements even if they are retired or retired but continue to work.
.

I do know people from the forum who would be in a position to retire now if they wanted . They're either not posting any more or not necessarily going on about it that much. Most of the active member are still in the process

Cliff

 

[WattleIdo]

Yeah good points, oracle.
In a nut-shell, it seems RBA is suggesting that fhob and others don't have to buy now - it would be worth their while waiting. They're not likely to achieve the financial benefits that their parents did by following the crowd. Especially in Sydney.

 

[Peter_Tersteeg]

The 2.4% mentioned here is real growth. So add inflation on top that will be 5-5.5% nominal growth.

My portfolio has done better than 5.5% over the last 10 years. The figure is probably somewhere between 9% - 11%.

Growth is irrelevant however, it's the cost of a roof over your head. My point remains the same. Rents go up (if only with inflation). The cost of borrowing is initially high, but over time inflation erodes that cost. In the long term you're far better off if you bite the bullet and buy your own home.

Some people retire well, most don't. I've never known anyone who's retired comfortably but still rents.

 

[james start]

Some people retire well, most don't. I've never known anyone who's retired comfortably but still rents.

I know a guy that has retired, sold everything and now lives in a hotel in inner Melbourne

 

[Peter_Tersteeg]

What did he sell in order to enjoy that lifestyle?

 

[oracle]

In the long term you're far better off if you bite the bullet and buy your own home.

Are you talking in general or just Australia? And if just Australia why is Australia different to the rest of the world where growth in property is always way beyond inflation. What guarantees this above average growth in Australia that no other country in the world does?

Cheers,
Oracle.

 

[truong]

Sorry people, wrong debate, go back. The RBA paper looks at rent vs own not as a problem per se but to attempt an answer on a more important question (and more in line with its charter) i.e whether housing is overvalued or not.

http://www.theaustralian.com.au/new...valued-rba-paper/story-fn3dxity-1226988612050

Is housing overvalued?

It's not only the question on everyone's lips, but it's also the title of a research discussion paper published by the Reserve Bank of Australia on Monday.

But don't expect to find a definitive pointer to whether housing prices will continue rising in line with the 11 per cent annual gain for mainland capital city housing prices reported on on Monday by RP Data, stagnate, or turn down.

The paper, by RBA economists Ryan Fox and Peter Tulip, represents the views of the authors, and "not necessarily" the RBA. But such papers are often a good guide to the sort of things being looked at closely by the central bank.

The paper asks as its starting point whether it would be better to rent than to buy a home. If it's cheaper to rent than to buy, taking into account interest and other costs as well as expect capital gain from rising prices, then housing is overvalued.

Since 1995, housing prices have risen in real terms - that is, over and above consumer price inflation - by a bit less than 2.5 per cent. "If this rate of appreciation is expected to continue then our estimates suggest that houses are fairly valued," Tulip and Fox concluded.

But, as they acknowledge, forecasting housing prices is a business plagued by uncertainty and "many observers have suggested that future house price growth is likely to be somewhat less than this historic average," they said. "In that case, at current prices, rents, interest rates and so on, the average household is probably financially better off renting than buying."

In other words, housing prices are not overvalued if prices are going to rise at the average rate. But they are overvalued if price rises, in retrospect, turn out to be slower than normal.

 

[james start]

Well actually he gave all his furniture etc away and his income from a fairly famous business pays for his lifestyle room service and minibar lol

 

[chrispy]

Oracle

I am retired on RESI income.


I am not the only one ... we just do it and get on with enjoying life ....

Chris

 

[james start]

Oracle

I am retired on RESI income.


I am not the only one ... we just do it and get on with enjoying life ....

Chris

I am envious, how long did it take you? I am buying 1 a year on outskirts of major city's, do you think I will make it in 9 years? I only want 70k per annum tops

 

[Intrinsic_Value]

Although, I am cautiously optimistic that real house growth will be higher than 2.5% but I do agree with the article that it won't be as high as it has been over past several decades. Discretionary income has to rise a lot and at the same time people would have to be satisfied to use that extra income towards higher mortgage payments for house prices to grow at 6-7% or higher.

Thoughts?

Cheers,
Oracle.

If inflation growths at say 3% long term and GDP at 2%, then over at least a couple of decades property WILL grow by at least 5% pa

There maybe be long time frames of sub-5% in the years to come, but over 20 years + i nearly guarantee it will be at least 5%.

So the key is to add 5% to your current real rental return (incorporating all holding costs, including interest), and see whether its worthwhile.

If it works out at 5%, then your risk is effectively hedged long term. If the end result is greater than 5% then that's icing on the cake. But im certain 5% will be the minimum

One point I would make if using this model, don't use historically low interest rates, add a couple of % points to your cost factor)

 

[tobe]

Finally. Has anyone interviewed Steve Keen yet on this? Didnt he sell his Sydney PPOR and rent a couple of years ago?

he must be hugely better off by now.....

 

[greedy2000]

Finally. Has anyone interviewed Steve Keen yet on this? Didnt he sell his Sydney PPOR and rent a couple of years ago?

he must be hugely better off by now.....

I think Oracle is spot on with his views.

Dependinging on what Steve Keen did with his funds he may very well be hugely better off, putting it in the sharemarket over the last couple of years would have significantly outperformed

 

[Rolf Latham]

Dependinging on what Steve Keen did with his funds he may very well be hugely better off, putting it in the sharemarket over the last couple of years would have significantly outperformed

If we are talking straight cash, and we assume average Sydney Market growth vs Average Index fund growth and no borrowings the result will be very different if leverage and risk comes into play.

Its nutso to gear a share Portfolio above 50 ish unless you have cash on the side to meet the inevitable margin call.

ta
rolf