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

[Redom]

Haha most forecasters will openly admit that they get most of what they say doesnt eventuate. Esp the tax guys @ Treasury. Too many competing variables at play.

Re property prices, most macro data uses median Aus prices. When you segment it down to individual submarkets, of course you'll get variability in results. But looking at the overall property market, and the long term drivers, it just isnt happening without significant financial innovation (something to drive releveraging ontop of current leveraging). That drove a large part of the growth over the previous three decades, and now we'll be relying on more slower moving fundamentals (population/migration outstripping supply, etc).

But hey, i'm a trained economist that worked for the very institutions that have consistently got forecasting very very wrong. So my opinion is likely to be well off the mark!

"Property prices will not grow as fast over the next three decades", disagree with this comment, it will be totally dependent on where and which market you are playing in. All markets do not rise and fall at the same time and I think we all know that.

 

[thatbum]

I am not looking at overall repayments, only the interest, otherwise the argument is useless as the Interest is the cost, the principal is savings/investment or whatever you want to call it.

I pay $340 per week in interest on my mortgage, and prior to moving in it was rented out at $400 per week. My LVR is 80%.

I'm only looking at interest as well.

Assuming 100% LVR + plus purchasing costs because that's what it costs to purchase, and the opportunity cost on your loan deposit.

Is it still cheaper to buy?

 

[boeman]

I'm only looking at interest as well.

Assuming 100% LVR + plus purchasing costs because that's what it costs to purchase, and the opportunity cost on your loan deposit.

Is it still cheaper to buy?

I am neither for nor against, I just found in my situation of 20% deposit and with a budget of $450k for the purchase and avoiding stamp duty and LVR, it was financially cheaper for me to buy my property.

Change that around to a 10% deposit, a $600k property where stamp duty and LMI is applicable and I would be better off renting the house in question.

Apples and oranges I guess depending on the sample?

 

[VYBerlinaV8]

I am neither for nor against, I just found in my situation of 20% deposit and with a budget of $450k for the purchase and avoiding stamp duty and LVR, it was financially cheaper for me to buy my property.

Change that around to a 10% deposit, a $600k property where stamp duty and LMI is applicable and I would be better off renting the house in question.

Apples and oranges I guess depending on the sample?

Spot on...

 

[thatbum]

I am neither for nor against, I just found in my situation of 20% deposit and with a budget of $450k for the purchase and avoiding stamp duty and LVR, it was financially cheaper for me to buy my property.

Change that around to a 10% deposit, a $600k property where stamp duty and LMI is applicable and I would be better off renting the house in question.

Apples and oranges I guess depending on the sample?

I was trying to compare apples with apples.

If the rent for your place was $400/week and the price was $450k, I still can't see how it was cheaper for you to buy rather than rent?

 

[landlubber]

Another POV

When you get "retired" by your employer in your later years and you have no income ......believe me ...then it's MUCH cheaper to OWN than to RENT. I'm in my 60's and very comfortable thanks to "the Jan property plan" and some hard work.....but I'm telling you the chickens DO come home and if you get old and un-employable and maybe a marriage break-up along the way that destroyed the assets ....if you're still renting man , it is not the "better off" alternative ...whatever the f----ng stupid RBA says !!! THINK ahead !! Be warned. Don't drink the f-------g kool-aid !! LL

 

[Shadow]

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

Steve Keen sold his Sydney home in 2008.

At the time he sold it he said prices were going to fall 40% within a few years.

But what actually happened is that Sydney house prices are now up nearly 50% on their 2008 levels.

So Sydney property has equalled or outperformed the sharemarket over that period (depending on which month in 2008 we count from).

But the important point here is that Sydney property would typically be leveraged, and Steve did have debt on his home when he sold it, so the amount of cash available to invest in the sharemarket after paying off his loans was probably pretty small compared to his prior leveraged exposure to Sydney property.

Plus he has had to pay rent for the past six years.

Financially, it was a disastrous move for Steve.

 

[Peter_Tersteeg]

I hear you landlubber.

I knew someone who was a couple of months away from owning his home outright when his wife left him, forcing him to sell the house to pay her out. The second wife basically spent their way out of ever getting back on their feet until he eventually left.

The last house he lived in was a tiny 10 sqm caravan parked on a friends property so he could make ends meet on his pension.

 

[Redom]

Again, not sure how this all makes sense...why does home ownership have anything to do with this? Are you talking about the warm and fuzzies humans associate with the security of 'owning' rather than 'renting' the roof over the head? The same warm and fuzzies the RBA has obviously excluded from their analysis.

That roof over your head has a cost. If you own you pay interest, if you leasing you pay rent, if you own your house outright you are effectively paying the opportunity cost from having your capital elsewhere (interest rate).

The RBA take a few assumptions and compare the three (or rather, the first two).

When you get "retired" by your employer in your later years and you have no income ......believe me ...then it's MUCH cheaper to OWN than to RENT. I'm in my 60's and very comfortable thanks to "the Jan property plan" and some hard work.....but I'm telling you the chickens DO come home and if you get old and un-employable and maybe a marriage break-up along the way that destroyed the assets ....if you're still renting man , it is not the "better off" alternative ...whatever the f----ng stupid RBA says !!! THINK ahead !! Be warned. Don't drink the f-------g kool-aid !! LL

 

[Redom]

Haha quality post, you've just owned a Doctorate in Economics.

What you do allude to is that owning is considerably better during upswings. There is a wealth transfer that takes place to home owners during this phase of the housing cycle.

However, on the flip side, when the market is on the downswing, its better of renting.

Its generally a mugs game trying to predict the timing of such swings (as Steve Keen found out!).

RBA look at it over multiple cycles, take assumptions and present their analysis.

Steve Keen sold his Sydney home in 2008.

At the time he sold it he said prices were going to fall 40% within a few years.

But what actually happened is that Sydney house prices are now up nearly 50% on their 2008 levels.

So Sydney property has equalled or outperformed the sharemarket over that period (depending on which month in 2008 we count from).

But the important point here is that Sydney property would typically be leveraged, and Steve did have debt on his home when he sold it, so the amount of cash available to invest in the sharemarket after paying off his loans was probably pretty small compared to his prior leveraged exposure to Sydney property.

Plus he has had to pay rent for the past six years.

Financially, it was a disastrous move for Steve.

 

[Ausprop]

Uh want to share where it is in Perth where its cheaper to buy than to rent? Because the yields must be amazing and I'm having trouble finding such high yielding IPs at the moment.

I know where I'm renting is about half the price of the comparable mortgage + annual expenses. I believe the general trend in Perth (if not around australia) is that yields get worse as you move up the price brackets too.

straight off the top of my head... Mandurah villas 3x2, rent $370pw, cap value $300k. I know by the time you factor in rates etc it would still be negative but it would need to be a long way negative before you would consider throwing away leasing over financing. It's far from an isolated example. IRs are the risk, but if they move much then rents lag behind anyway

 

[joeExpat]

I've rented most of my life, have stopped working and still rent. There are many advantages renting that make it preferable for some people, I don't want to tie up capital and pay large entry and exit costs for somewhere I might not want to live in a few years. If I want to move suburbs or countries it's much easier and cheaper renting.

 

[greedy2000]

Steve Keen sold his Sydney home in 2008.

At the time he sold it he said prices were going to fall 40% within a few years.

But what actually happened is that Sydney house prices are now up nearly 50% on their 2008 levels.

So Sydney property has equalled or outperformed the sharemarket over that period (depending on which month in 2008 we count from).

But the important point here is that Sydney property would typically be leveraged, and Steve did have debt on his home when he sold it, so the amount of cash available to invest in the sharemarket after paying off his loans was probably pretty small compared to his prior leveraged exposure to Sydney property.

Plus he has had to pay rent for the past six years.

Financially, it was a disastrous move for Steve.

Well lets say Steve sold his $1,000,000 fully paid Sydney OO and purchased $1 Million Dollars of CBA stock at $40.... back in 2008. or pretty much any other bank stock. If he had debt lets assumed he took out a Margin Loan

he would have a portfolio worth just a tad over $2M and a fully franked income stream worth about $95,000 pa.

I would rather that than a property in Sydney anyday

 

[greedy2000]

^^^^ but I am cherry picking above, but you can do that with any data to support your view, doesn't means its right or not....

 

[bernie006@hotma]

Hi Oracle
u r right.lucky for most in Australia prices never went down.plus negative gearing.
I'm Germany. Have 4 houses.2 in Vegas and 2 in Australia.
Owning a house or investment is good for people who would spend excess money.
article is right if people would rent and invest excess money.
Home owner ship is in many cases financially not smart.
you pay interest, insurance, rates repairs etc.
plus all the hours people work on their home on wkends.
it is proven that you would make more money by not owing your house.
Australia is indeed lucky that prices go up and up.
I bought house for 72000 which was 7 years ago sold for 300000 in Vegas.
Without inflation etc.the previous owner lost 228000 !

 

[Shadow]

Well lets say Steve sold his $1,000,000 fully paid Sydney OO and purchased $1 Million Dollars of CBA stock at $40.... back in 2008. or pretty much any other bank stock. If he had debt lets assumed he took out a Margin Loan

he would have a portfolio worth just a tad over $2M and a fully franked income stream worth about $95,000 pa.

I would rather that than a property in Sydney anyday

Yeah right, Steve Keen is going to buy bank stocks when he expects a 40% house price crash.

He'd have been more likely to short the banks!

Anyway, he didn't have a $1 million fully paid house. He had a $400K unit with a lot of debt on it at the time.

Buy yes, picking the right stock can be a winner, but it's a pretty high risk strategy. It's easy to know what the right stock was in hindsight.

 

[boeman]

I was trying to compare apples with apples.

If the rent for your place was $400/week and the price was $450k, I still can't see how it was cheaper for you to buy rather than rent?

$450k house minus my 20% deposit.

Borrowing $360 000 at 5.19% over a 30 year period the interest only payment is $360 per week.

 

[Redom]

With rates at 'historical lows', the interest cost < rent repayments on quite a large pool of properties.

That is only one factor/part of the assessment of whether buying is cheaper than renting.

Its a static statement, not dynamic over a period of time (eg 30 year loan term).

 

[strongy1986]

If you decide to rent because it's cheaper then good luck to you

What a lot of people don't realise is that after 25 years you will actually own an asset worth a heap. Renting you won't own anything

Ok assuming you decide to rent and think you can get better returns in the share market. How many people have the knowledge and balls to successfully leverage into the share market ? Stuff all

Without leverage, your returns on investing excess money saved by renting will never compete with the gains made from property, even if only gaining 3 - 4%

You could always rent and buy property elsewhere, at least you have leverage

 

[Mindmaster]

many smart people get distracted with fixating on investment returns and forgetting velocity. it's strange

By velocity of returns, do you mean how long it takes to make your profit?

ie $20k in 6 months is better than $$60k in 2 years