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

[sanj]

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

What about the opportunity cost of your capital being tied up? I'd argue that's a lot more than stuff all.

Dan I can see your point and you're right it is prob the best way for the masses but let's not forget the masses will retire on the pension having wasted the opportunities presented to them along the way, surely our sights should be set higher than the masses

 

[Ausprop]

What about the opportunity cost of your capital being tied up? I'd argue that's a lot more than stuff all.

most people starting out have little or no capital tied up

I agree that tying up $2 - $3m in a ppor is questionable, but then if you are chasing high risk high returns on your 'house' money then you are operating on a different risk profile anyway

 

[sanj]

most people starting out have little or no capital tied up

I agree that tying up $2 - $3m in a ppor is questionable, but then if you are chasing high risk high returns on your 'house' money then you are operating on a different risk profile anyway

True but it again shows why PPORs aren't always the best options which is what I've been saying from the very start. Even say $150k worth of capital tied up in say a 600k property growing at 6% can potentially be used much better say in a development or actively running a business or buying shares in a public or private companies or whatever.

Th way buy and hold properties are sometimes viewed as the holy grail around here is myopic imo.

 

[Ausprop]

True but it again shows why PPORs aren't always the best options which is what I've been saying from the very start. Even say $150k worth of capital tied up in say a 600k property growing at 6% can potentially be used much better say in a development or actively running a business or buying shares in a public or private companies or whatever.

Th way buy and hold properties are sometimes viewed as the holy grail around here is myopic imo.

yes... risk profile.

my comments were also assuming an inflationary environment. If things should become deflationary then all bets are off

 

[Dan_p]

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.

I am not assuming anything, just plain numbers in that example, you simply have less money to invest because you are renting. In my example out of the $1000 per week, $500 is going to rent another $300 to expenses and the remaining $200 can go to investing, using leverage as you say. The owner occupier has $600 in the example and all of this is going onto their ppor investment, leaving some left over to leverage in something else if wanted.

Perhaps the maths doesn't lie in your situation because you have more income to use in other investments and of course behaviorally, but are you a fine example of the majority of renters?

 

[Ausprop]

Th way buy and hold properties are sometimes viewed as the holy grail around here is myopic imo.

the tax skew towards passive vs. active investment is also a large factor influencing this attitude. time they did away with it really.

 

[Dan_p]

but let's not forget the masses will retire on the pension having wasted the opportunities presented to them along the way, surely our sights should be set higher than the masses

and this is the take I have been getting at. The article is written for the masses who miss opportunities and may well be stuck renting for life due to reading such articles because they are never going to invest in other things anyway

 

[Deltaberry]

If I listened to the RBA every year, I'd be a very poor guy (eg punting against real estate, punting against the A$)

 

[Redom]

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.

I think this is the point that i have question marks over. The RBA makes assumptions about the rate of movement in the market - based on forecasts and a rate of growth. The higher that rate of growth, the more of an investment your PPOR.

Your full $600 is not an investment. Most of that is likely to be an interest cost that your paying NOT to generate you money (which is what an investment is) - but to put a roof over your head. Your interest cost is the same cost a person pays in rent. The ownership you have entitles you to any equity gains that property makes. But what if those equity gains are slow or non existant? If it is, then you've 'misallocated your capital' into unproductive investments.

Now, the RBA takes a few assumptions equating that interest and rental cost, and then determines whether its best for you to be in an ownership or 'lease and invest' model.

The math can give you an answer. It all depends on the assumptions you take.

But once you take away the behavioural and discipline effects from the analysis - from a financial lense, it is no longer a clear cut 'owning is better than renting'. That statement is only true in rising markets, and the market is less likely to rise at the same pace (according to RBA assumptions used) as it has done over the last few decades.

 

[Ausprop]

The math can give you an answer. It all depends on the assumptions you take.

But once you take away the behavioural and discipline effects from the analysis - from a financial lense, it is no longer a clear cut 'owning is better than renting'. That statement is only true in rising markets, and the market is less likely to rise at the same pace (according to RBA assumptions used) as it has done over the last few decades.

exactly - assumed growth is everything. and the inflation rate (to work out how fast the debt deflates). some of the markets I look at have had double digit growth since January, so the RBAs assumptions are just that... their own assumptions.

 

[Dan_p]

But once you take away the behavioural and discipline effects from the analysis - from a financial lense, it is no longer a clear cut 'owning is better than renting'. That statement is only true in rising markets, and the market is less likely to rise at the same pace (according to RBA assumptions used) as it has done over the last few decades.

If the rent is so close to cost of the mortgage for the first 8 years, then after that it is cheaper to have your 8 year old mortgage, who cares if the asset has stayed the same, because after that it is going to be cheaper to continue with your mortgage, giving you more money to invest in other assets.

What are RBA's thoughts projected at 30 years time rent v buy?

considering you would pay nothing on your mortgage, but rent would be up by loads.

So how is that a better position to be in terms of cashflow

 

[Redom]

exactly - assumed growth is everything. and the inflation rate (to work out how fast the debt deflates). some of the markets I look at have had double digit growth since January, so the RBAs assumptions are just that... their own assumptions.

Yep - their assumptions are definitely debateable.

But based on their assumptions, maths seems right.

 

[plusnq]

The math can give you an answer. It all depends on the assumptions you take.

But once you take away the behavioural and discipline effects from the analysis - from a financial lense, it is no longer a clear cut 'owning is better than renting'. That statement is only true in rising markets, and the market is less likely to rise at the same pace (according to RBA assumptions used) as it has done over the last few decades.

Interesting assumption. My memory of investment return analysis from my MBA was that a large part of stock market returns were in fact due to human investment behaviour. Only a small amount of returns was able to quantified as due to fundamentals. Even then analysis couldn't help with timing.

 

[joeExpat]

considering you would pay nothing on your mortgage, but rent would be up by loads.

So how is that a better position to be in terms of cashflow

It?s misleading to compare the two assuming leverage on one and ignoring the opportunity cost.

Lets take a simple rough example, a 1M house owned outright that rents for $700 a week.

Own: Cashflow $2500 rates $2500 insurance $3000 maintenance
= MINUS $8000 a year

Rent: $36400 rent, 5.5% dividends = 55000 income, mostly franked but lets say 5000 tax, 1000 maintenance.
= PLUS $12600

So you're 20K a year better off renting.

After 10 years the numbers look even better for renting since you?ve got that excess 20K accumulating, even when assuming same growth rates (though the stock market will generally outperform property).

For me renting wins over short and long term and I get to live in a better place than otherwise.

 

[pieman]

It?s misleading to compare the two assuming lev

So you're 20K a year better off renting.

You forgot CG.
I have 2m tied up in my ppor and use to contemplate selling, investing in high yield shares and renting and then kids came along and i relised there was more to owning your own house than having the burden of moving from rented house to house with kids in tow

 

[landlubber]

Unemployment at 6.4%

http://www.heraldsun.com.au/busines...016520166?nk=d068118dbeee9e6d5e1513b0fc12cece

Can somebody tell Uncle Glenn at the RBA all this theory and pontificating is fine but if you're unemployed you can't rent or buy ....here comes reality folks. LL

 

[Hoffy]

The owner occupier has $600 in the example and all of this is going onto their ppor investment,

Really?!

No, it's mostly going to the bank and then to me via my bank dividends in my leveraged share exposure.

Again, you're simply not comparing apples with apples. But you're happy with your approach and you can't ask for much more than that. Good luck to you.

 

[Dan_p]

You forgot CG.
I have 2m tied up in my ppor and use to contemplate selling, investing in high yield shares and renting and then kids came along and i relised there was more to owning your own house than having the burden of moving from rented house to house with kids in tow

Exactly, stability is a big thing.

The average renter is not moving into a $1mil house. I think some of ther renters on this thread are taking this personal by proving how well they have done. The story isn't about them, its about the every day joe who is not a savvy investor and will simply blow the extra money, have little to nothing to show for renting 30 years, except still having to rent. Its a no brainer, especially if rent and mortage are close for the firs t8 years then after that it is cheaper to own.

I rented in Perth and had to move twice in a year, the RBA fail to add these issues into the equation. If you have to move when you own, you can simply rent out your house, and if you have had it for over a year, it should be putting money into your pocket, or sell it.

 

[Dan_p]

Really?!

No, it's mostly going to the bank and then to me via my bank dividends in my leveraged share exposure.

Again, you're simply not comparing apples with apples. But you're happy with your approach and you can't ask for much more than that. Good luck to you.

With the example. If he is taking home $1,000 a week and pays $500 rent, then how much can he invest and leverage?

Your method works for you, do you really think your method will work for the masses?

 

[sanj]

With the example. If he is taking home $1,000 a week and pays $500 rent, then how much can he invest and leverage?

Your method works for you, do you really think your method will work for the masses?

I don't think a single person had disagreed with you re the masses but this is somersoft, by definition we should all be aiming higher than the masses and discussing ways that might assist that.

90% of people in this country retire on the pension, the masses well and truly don't have a clue when it comes to managing money