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

[Intrigued again]

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%

No need for leverage
The actual figures for a sum $28K which would have been a reasonable deposit amount back in 1991 for a home around $140K if used to purchase shares in any of the banks as discussed earlier.

It would be worth $1.1m today with an income attached of around $70K before tax, that without adding any more cash. If you added $100.00 a week during the same period it would be worth a little under $2m, and an income of $128k before tax no leverage required.

And if you had a personal loan back in 1991 of only for $14K and put in $100.00 a week it would be worth $1.4m and an income of around $90k before tax.
And if you only saved $5.2k the first year and put $5.2K over the same period it would be worth around $850K today with the last income of $54K.

 

[tom32]

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. the larger the deposit the more chance buying ppor beats renting.

In the extreme case if you have 500k returning say 6percent p.a. In investment at the conservative end of the spectrum say aberage 6% gross return, you think you make 30k a year out of this and this would rent you something worth more than 500k for sure with some left over for further investment.

Trouble is depending on your tax bracket you then have to pay up to 13,500 of this in tax if your on the highest rate. Leaves you with 16500 a year to find a rental...

There is a point on the spectrum for everyone depending on their marginal tax rate, their own potential equity where buying beats renting. it is not just crunching the interest v rent number in isolation I'll give you the tip.

I suspect if your borrowing close to 100percent it doesn't work for a ppor in most of Australia.

The major issue with investing savings by renting over time instead of buying a ppor is that you pay tax on your earnings and pay your rent post tax. Save at first though don't think having 10k and paying 250dollars a year in tax is justification for buying, Save till buying the ppor makes sense.

 

[Redom]

Spot on about the tax distortions at play.

They definitely alter the purchase decision. Theres a few great threads about paying down non deductible debt. Interestingly, those distortions explains the Murray recommendations and im pretty sure the Henry review made a broad generalised recommendation about it too.

Having said that, there are vehicles to take some of those distortions away (leverage, structuring, etc).

Hmmm, is there an opportunity cost of using those deposit funds elsewhere. If one owned a PPOR outright, they could leverage it up and invest the money in something that generates more than the interest rate (and tax as youve pointed out)...

 

[tom32]

Spot on about the tax distortions at play.

Interestingly, those distortions explains the Murray recommendations and im pretty sure the Henry review made a broad generalised recommendation about it too.

Having said that, there are vehicles to take some of those distortions away (leverage, structuring, etc).

.

Yes the Henry review suggested tax reform around savings accounts to encourage saving.

The labor government watered this down to a 50percent reduction in your tax rate on the first $1000.00 interest you earned in a year.

They then even scrapped that because it was so marginal.

There was talk of making the tax rate 0 on the first 200 bucks just to make compliance easier, but I'm not even certain they got this in during their two terms.

While paying tax on interest is probably not an issue for many here (including me) it would be good for those in the conservative retirement years and those just starting out if only to not crush them even more than the low low interest rate you get on deposits now, then paying tax on top.

 

[Redom]

Hmm interest is income - it should be taxed in my view. Taxing it any differently to other sources of income creates distortions that make people favour certain investments over others.

Not sure about that recommendation...Treasury think about tax policy with efficiency, $$$, and complexity in mind. The $$$ associated with collecting drips of interest of people don't seem to be worth the complexity - so it sounds like a good recommendation.

 

[sanj]

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.

Same here

My capital is far too important to currently be wasting on buy and hold properties, in particular a PPOR

 

[Deltaberry]

The RBA says something similar every 2 years since 2002

 

[Ausprop]

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

yes that's it. Sometimes it's as simple as people refusing to accept a loss and hanging in for years on end when they could just move on and do a different deal

 

[Chris B]

This recent statement from the RBA is being discussed as a potential reason to not buy a PPOR when it really shouldn't change much for the majority of home buyers, who tend to buy for lots of personal reasons and financial security is an added benefit, rather than the main objective.

The main problem with renting is that most people (probably not the typical SSofters) will spend most of the money they have left after paying rent and general living expenses, so renting becomes a trap.

I don't see renting as a decision that is going to make people noticeably wealthy but there are definite advantages to consider. I always thought the main benefits of renting were to have more flexibility about where you live (and to be able to live in a place you couldn't afford to buy). As many people change jobs every few years, it can make a lot of sense to rent and be able to move to a new suburb/town/city when required.

The prospect of lots of low income earners never purchasing a home, concerns me, as without financial education, there are likely to be lots of people retiring with very little to their name besides compulsory super.

Being committed to paying a home loan is not for everyone and is a stressful burden for many, it has the benefit of being forced saving. Many people need this, as they don't have the discipline to plan what they are doing with their money and effectively save & invest. If you are going to make renting a long-term prospect, it is important to save (and invest) a percentage of your income each month.

 

[Redom]

Good post Chris.

The behavioural aspects of personal finance often make purchasing a house a wise decision. It alters spending/saving behaviour, as people are often more incentivised to pay down debt than watch their savings grow.

 

[red liverbird]

I think motivations are always important to consider - regulators and policy makers included.

Taking a step back from the numbers what do I see - a policy maker thats struggling to control the hosuing market and balance its obligations to the rest of the economy. Whats released - a research paper designed to create a headline saying think twice about buying.

To be honest, this seems more like a crazy attempt at unconventional monetary policy than a genuine warning about the state of the market!

 

[Redom]

Haha interesting take - I agree with the motivations.

Although I think their analysis is factual and raises a valid point.

Legitimacy is something the RBA don't lack...whatever their motivations.

 

[landlubber]

To be honest, this seems more like a crazy attempt at unconventional monetary policy than a genuine warning about the state of the market!

... particularly where our Uncle G. is concerned. LL

 

[landlubber]

Legitimacy is something the RBA don't lack...whatever their motivations.

OMG ...gimme strength! Have you ever looked at a graph of the cash rate for the last 20 years ...or so ? Be honest ... Does it look like a "smooth considered" graph to you or a litany of too late over-corrections, both to the downside and the upside ?
http://www.rba.gov.au/chart-pack/interest-rates.html

There's a link to the rba website. Honestly, we would all be better off if these blokes were limited by law to "x" deviation from a moving average . They over correct in each direction continually, thereby creating the booms and busts in our economy. And for this Uncle Glenn gets a mill plus in base pay. Times more than Yellen with the US fed. Un-freakin-believable !! LL

 

[landlubber]

BTW ...you have to go to the link ...then select "Australian Cash Rate" . It's the second line down under "View" .... LL

 

[Redom]

Not sure why them changing the interest rate in response to economic circumstances is viewed as a bad thing. Its their job.

The RBA's goal is to keep inflation between 2-3% over the course of the economic cycle.

Take a look at that chart and let me know how they've gone.

 

[Hoffy]

OMG ...gimme strength! Have you ever looked at a graph of the cash rate for the last 20 years ...or so ? Be honest ... Does it look like a "smooth considered" graph to you or a litany of too late over-corrections, both to the downside and the upside ?
http://www.rba.gov.au/chart-pack/interest-rates.html

There's a link to the rba website. Honestly, we would all be better off if these blokes were limited by law to "x" deviation from a moving average . They over correct in each direction continually, thereby creating the booms and busts in our economy. And for this Uncle Glenn gets a mill plus in base pay. Times more than Yellen with the US fed. Un-freakin-believable !! LL

Why do you expect to see a smooth cash rate? It is simply the tool to help in managing inflation. That is the measure of their success. Here is the chart http://www.rba.gov.au/inflation/inflation-target.html

Pretty successful wouldn't you say?

Edit: sorry for making same point as Redom. Posted before I saw it.

 

[Redom]

Haha Hoffy - I don't mind. Glad that others agree. RBA have done a pretty remarkable job at achieving their goal.

 

[red liverbird]

Haha interesting take - I agree with the motivations.

Although I think their analysis is factual and raises a valid point.

Legitimacy is something the RBA don't lack...whatever their motivations.

That's why it could actually work!!!! You gotta have legitimacy otherwise the market stops listening.

At least from my perspective it feels like the RBA has strengthened its rhetoric on the housing market over the last 18 months but hasn't really come up with anything concrete it intends to do about it.

 

[Redom]

Yeah definitely - but trying to talk down a slower moving housing market doesnt really work i dont think. In financial markets, where prices respond to news everyday, it has better short term effects.

Theres been some good SS debate as to whether the RBA will use their blunt stick to bat the sector down for stability purposes.

That's why it could actually work!!!! You gotta have legitimacy otherwise the market stops listening.

At least from my perspective it feels like the RBA has strengthened its rhetoric on the housing market over the last 18 months but hasn't really come up with anything concrete it intends to do about it.