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

[MarkB]

My point is , if you're running a business , there is NO parameter ( costs, capex, labour etc ) that MOVES by these factors. Nothing !! This RBA mob display clearly a history of over-reaction and then over correction.

Yeah, I'm going to challenge your math there LL by putting a different perspective on it (as much as I agree that, on occasion, the RBA does get it wrong).

But first lets back up for a moment.....

The interest rate (be it the OCR, the rate on your mortgage, your credit card, whatever) is simply the cost of borrowed money.

It is, if you will, the extra bit you have to pay back above and beyond the money itself (the principal).

So, where you see a doubling in the cost of money when the interest rate goes from 3% to 6%.

I see a rise of slightly less than 3%.

100% of the principal + 3% interest = 103%.

100% of the principal + 6% interest = 106% (an overall increase of 2.9%)

My point being that the total cost of money has actually been pretty stable.

Recent lows (using the OCR) of 102.5% and recent highs of 107.5%.

4.8% variation in 20 years is actually pretty good imo.

 

[landlubber]

Mark B ... hmmm .....Principal is capital and is repaid only once. Interest on the other hand is expense and is paid EVERY year. I'm not comfortable mixing 'em up as you suggest. Perhaps you could consider ' annual repayments of principal plus annual interest'. Even then they have very different tax implications .... Have fun. LL

 

[MarkB]

Mark B ... hmmm .....Principal is capital and is repaid only once. Interest on the other hand is expense and is paid EVERY year. I'm not comfortable mixing 'em up as you suggest. Perhaps you could consider ' annual repayments of principal plus annual interest'. Even then they have very different tax implications .... Have fun. LL

That's all true.

But my point was that the cost of interest is a cost at the margin.

It is the ongoing and additional cost of borrowing (hiring) a sum of money.

True - you only pay the principal once - but bear in mind that once you've paid the principal back you're not paying interest either (as investors we tend to not like to pay principal - as you allude to - if only for tax reasons - but that is our choice).

And even if you want to discount that particular viewpoint for the cost of money - consider the good itself.

My point is , if you're running a business , there is NO parameter ( costs, capex, labour etc ) that MOVES by these factors. Nothing !! This RBA mob display clearly a history of over-reaction and then over correction.

Money isn't like other goods.

Certainly not like the wages, R&M, tax, electricity, raw materials, etc and so on that are on the P&L of the business I work for.

Money has the potential to travel the world at the speed of light looking for the best return (for a given risk profile and subject to some restrictions).

And while it has an ongoing and residual demand for everyday transactional uses -

It is well known that when the conditions are right it multiplies so fast that it makes rabbits look like stones (easy credit and the impact of the money multiplier).

Otoh, at other times, it's pretty damn hard to come by (like at the height of the GFC when banks and NBFI's tightened their lending criteria).

All this - and then you throw in that the cost of money (the OCR) is the RBA's principal policy mechanism (they do have other options, but the OCR is their main one).....

Imo when you're trying to herd cats (the financial markets) with a munted old blunt stick (Monetary Policy), sometimes you're going to swing and miss.

But whether it is a relative 4.8%, or a relative 190% (2.5% - 7.5%) it is still only an absolute variation of 4.75% - which, tbh, is not that much.

 

[Dan_p]

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).

The bit that I don't understand why it is left out is, eventually home ownership wins over renting, be it 8, 20 or even 30 years. The important thing is after that point rent will continue to out strip mortgage repayments.

So my point is eventually the renter will have to make the sacrifice to buy a place or forever rent and fork out ever increasing rates. The longer you leave it the harder it becomes. For this reason the RBA, as a respected authority on the matter have done an injustice to the possible fhbers, who put it off and rent for another 10 years and suddenly it dawns on them, they need to do the hard yards much later in life.

 

[trey]

The bit that I don't understand why it is left out is, eventually home ownership wins over renting, be it 8, 20 or even 30 years. The important thing is after that point rent will continue to out strip mortgage repayments.

So my point is eventually the renter will have to make the sacrifice to buy a place or forever rent and fork out ever increasing rates. The longer you leave it the harder it becomes. For this reason the RBA, as a respected authority on the matter have done an injustice to the possible fhbers, who put it off and rent for another 10 years and suddenly it dawns on them, they need to do the hard yards much later in life.

this is very true. i dont like RBA.

 

[Redom]

The bit that I don't understand why it is left out is, eventually home ownership wins over renting, be it 8, 20 or even 30 years. The important thing is after that point rent will continue to out strip mortgage repayments.

So my point is eventually the renter will have to make the sacrifice to buy a place or forever rent and fork out ever increasing rates. The longer you leave it the harder it becomes. For this reason the RBA, as a respected authority on the matter have done an injustice to the possible fhbers, who put it off and rent for another 10 years and suddenly it dawns on them, they need to do the hard yards much later in life.

I think everyone forgets that the capital the homeowner owns has an opportunity cost.

For example, assume a person owns their own home worth $500,000. They have no debt, and pay nothing every week (hooray to the great Australian dream!).

Vs the renter of a $500,000 home, who pays $500 in rent p/w and instead has $500,000 in an investment fund. Now if that investment fund returns more than 5%, say 6% for example sake, than the renter will receive around $600 p/w - making him $100 p/w ahead.

Now does the $100 p/w difference offset the C.G?

The point is, the RBA actually input the opportunity cost of the $500,000 in equity that the person has in their property. It could be allocated elsewhere and generate a return.

As a gen Y'r, that is unlikely to benefit from 8%+ CG for decades, the analysis is very credible and makes a good point - one that isn't well appreciated.

My return on my capital far exceeds 5% (interest cost) - and I don't live in an area with a particularly buoyant market, so it makes sense for me to allocate my capital elsewhere. If the market was buoyant, i'd redo the maths and see where my capital is best allocated.

Cheers,
Red

 

[Dan_p]

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.

I have read over a lot of your posts over the years and you make a lot of sense. Your not afraid to make bold predictions and mostly you are on the money.

 

[Ausprop]

I think everyone forgets that the capital the homeowner owns has an opportunity cost.

yes I was assuming 100% LVR or close to. mind you under any scenario, risking your house money to chase a higher return elsewhere is a bold move

if you have little or no capital tied up and the rents/interest bill are similar then inflation is your friend and success is assured

 

[Dan_p]

I think everyone forgets that the capital the homeowner owns has an opportunity cost.

For example, assume a person owns their own home worth $500,000. They have no debt, and pay nothing every week (hooray to the great Australian dream!).

Vs the renter of a $500,000 home, who pays $500 in rent p/w and instead has $500,000 in an investment fund. Now if that investment fund returns more than 5%, say 6% for example sake, than the renter will receive around $600 p/w - making him $100 p/w ahead.

Now does the $100 p/w difference offset the C.G?
Cheers,
Red

I gather you are paying the rent with your wages right, so once you hit retirement age you are required to eat into your investment at $600 per week to stay under your roof. In actual fact, the rent may be $1500 by then, but whos counting. And for what, to make a "Possible" couple of percent greater return on your left over money after paying rent.

As the mortgage repayments are being eroded by inflation there are ample opportunities to invest the excess income you would have from two key components inflation and promotion.

You may be clever, but can you put your hand on your heart and tell me rent and invest the rest is better for the masses who may not be a savvy and disciplined as you are?

 

[Ausprop]

I think everyone forgets that the capital the homeowner owns has an opportunity cost.

For example, assume a person owns their own home worth $500,000. They have no debt, and pay nothing every week (hooray to the great Australian dream!).

Vs the renter of a $500,000 home, who pays $500 in rent p/w and instead has $500,000 in an investment fund. Now if that investment fund returns more than 5%, say 6% for example sake, than the renter will receive around $600 p/w - making him $100 p/w ahead.

Now does the $100 p/w difference offset the C.G?

The point is, the RBA actually input the opportunity cost of the $500,000 in equity that the person has in their property. It could be allocated elsewhere and generate a return.

As a gen Y'r, that is unlikely to benefit from 8%+ CG for decades, the analysis is very credible and makes a good point - one that isn't well appreciated.

My return on my capital far exceeds 5% (interest cost) - and I don't live in an area with a particularly buoyant market, so it makes sense for me to allocate my capital elsewhere. If the market was buoyant, i'd redo the maths and see where my capital is best allocated.

Cheers,
Red

if we say it's $100pw less tax = say $60

vs. cap growth on the $500k, say conservative 3% = $288pw , compounding
plus debt deflation, same again, but straight line

it's still a large chaslm to bridge

 

[Ausprop]

You may be clever, but can you put your hand on your heart and tell me rent and invest the rest is better for the masses who may not be a savvy and disciplined as you are?

what "rest" are you referring to?

 

[sanj]

You may be clever, but can you put your hand on your heart and tell me rent and invest the rest is better for the masses who may not be a savvy and disciplined as you are?

i actually agree with you on this point. we live in a country where a significant % are utterly hopeless at managing money and so PPORs as a form of forced savings/investment isnt a bad thing. my issue is when people seem to feel it is the only way, i personally think it's a bit small minded.

 

[Redom]

You may be clever, but can you put your hand on your heart and tell me rent and invest the rest is better for the masses who may not be a savvy and disciplined as you are?

I completely agree Dan. My point is to defend the RBA's analysis. They are not stupid. They haven't made this up. And they very clearly state that they don't make assumptions about behavioural financial characteristics of Australians.

It is the newspapers that turn it into a headline.

I personally think purchasing a house is a great decision for MOST people...even if it declines in value. The disciplinary effect it has, and its store of value over time, is likely to yield better long run positions than not having that debt.

 

[Redom]

I gather you are paying the rent with your wages right, so once you hit retirement age you are required to eat into your investment at $600 per week to stay under your roof. In actual fact, the rent may be $1500 by then, but whos counting. And for what, to make a "Possible" couple of percent greater return on your left over money after paying rent.

Hmm I don't think this is a question where the answer changes depending on your age either Dan.

The investment opportunity is similar (obviously impacted by policy distortions) regardless of age.

If anything, it makes sense to rent than own in later stages - i'm no expert, but income seems more important than idle stocks of capital.

 

[Dan_p]

what "rest" are you referring to?

The rest,

after the tenant pays the rent what is left for investing. You must remember rent is not the only necessity for the large majority of tenants right, so what is left after rent and, food, bills, rego, foxtel, beer, tabacco, trip to the movies, more beer, pokies and so on.

Even with great will power, on an average income how much is left after paying the bare necessities ie, rent, bills, food. It might only be $100 a week for investing, how is that going to make the vast majority better off?

 

[Dan_p]

Hmm I don't think this is a question where the answer changes depending on your age either Dan.

The investment opportunity is similar (obviously impacted by policy distortions) regardless of age.

If anything, it makes sense to rent than own in later stages - i'm no expert, but income seems more important than idle stocks of capital.

I think it does change on your age, very much so. At some point average joe wants to stop working and retire right? unless average joe has invested well with his couple of hundred bucks after rent and commitments he won't be able to retire because he will still have to pay, exponentially , for shelter.

Who is the RBA article directed to? Astute investors or the general public who have little to no idea where to invest their money with ill discipline?

How many of the general public can invest well enough with a small percentage of their income to be able to live comfortably?

 

[Redom]

Fair point - age does certainly when you take into account behavioural elements.

RBA excludes that from their analysis. Pretty sure the RBA just released a research paper with quality analysis to quash down a myth that spruikers perpetriate everywhere...'must buy your own home'.

Stylised example: I imagine a bunch of newly married 30 or so year olds having dinner talking with great pride about owning their home, what this great asset is (despite paying heaps in interest costs!), etc...there's one couple, say couple X, at the dinner that dont own. The other couples all reassure couple X that all will be fine, and that they'll get there eventually...with a tone of pity.

The above is the biggest misconception in personal finance. Owning your own home is not a better from a financial point of view. It is highly debateable when you take away the touchy feely and assume peoples savings patterns dont change as a result of owning.

The RBA put together some real solid analysis that highlights the above.

 

[Dan_p]

Fair point - age does certainly when you take into account behavioural elements.

RBA excludes that from their analysis. Pretty sure the RBA just released a research paper with quality analysis to quash down a myth that spruikers perpetriate everywhere...'must buy your own home'.

Stylised example: I imagine a bunch of newly married 30 or so year olds having dinner talking with great pride about owning their home, what this great asset is (despite paying heaps in interest costs!), etc...there's one couple, say couple X, at the dinner that dont own. The other couples all reassure couple X that all will be fine, and that they'll get there eventually...with a tone of pity.

The above is the biggest misconception in personal finance. Owning your own home is not a better from a financial point of view. It is highly debateable when you take away the touchy feely and assume peoples savings patterns dont change as a result of owning.

The RBA put together some real solid analysis that highlights the above.

I guess the point I am trying to make is the power of investing when living in your ppor with a mortgage, you are dedicating so much more money into an investment than a renter. I know a lot of the guys on here are investing well in other areas, but the majority are not.

Simple example of what I am getting at, say you are earning $1,000 per week after tax and renting for $500, after expenses which would be around $300 a week you are left with $200 per week to invest.

Same person has a mortgage and is pumping $600 per week into an investment, sure maybe not the best investment class in the world, but an investment non the less.

Fast forward 30 years the renter is bringing home $2,000 per week and paying $1,000 in rent and $500 on expenses so has $500 to invest with. Hopefully this person has invested extremely well with $200 per week.

The buyer has paid off his property and has $1500 to continue paying off other investments.

I see your point, its not the be all and end all, but for most it is the only way, and there is a feel good to owning your own home, it is a bit of a status thing for many aussies.

Personally I am pumping around $70k per year into property, doubt I would be saving that much if I was renting, doubt even further I would even have that much left after renting. Can you see my point? I can build a much much bigger asset base this way.

 

[Ausprop]

I still maintain that for the stuff all difference in cost between renting and owning you may as well own and get the significant investment returns.

different of course if you want to live in a multi million $ apartment that has a terrible yield on it, in which case renting is best

 

[Hoffy]

I guess the point I am trying to make is the power of investing when living in your ppor with a mortgage, you are dedicating so much more money into an investment than a renter. I know a lot of the guys on here are investing well in other areas, but the majority are not.

Simple example of what I am getting at, say you are earning $1,000 per week after tax and renting for $500, after expenses which would be around $300 a week you are left with $200 per week to invest.

Same person has a mortgage and is pumping $600 per week into an investment, sure maybe not the best investment class in the world, but an investment non the less.

Fast forward 30 years the renter is bringing home $2,000 per week and paying $1,000 in rent and $500 on expenses so has $500 to invest with. Hopefully this person has invested extremely well with $200 per week.

The buyer has paid off his property and has $1500 to continue paying off other investments.

I see your point, its not the be all and end all, but for most it is the only way, and there is a feel good to owning your own home, it is a bit of a status thing for many aussies.

Personally I am pumping around $70k per year into property, doubt I would be saving that much if I was renting, doubt even further I would even have that much left after renting. Can you see my point? I can build a much much bigger asset base this way.

It's not an apples with apples comparison though. The home owner is using leverage but you assume the renter will not.

You are right on the behavioural stuff of course, and for many that will be the clincher, but you're not right on the maths. The RBA is.

I'm an owner occupier. Only because my wife insisted. Otherwise I would be happily renting and I know I would be better off. The maths doesn't lie.