georgie

1 Dec 2011, 05:22 PM

I think u failed to take into account the opportunity cost of the money in the bank for the renter. I think someone who takes their finances seriously in making the decision to rent over buy unlike the mass's will have some way of turning that unspent money on productive investments.

Frank Castle

1 Dec 2011, 05:31 PM

Like buy some of those shares than went infinity and beyond?

http://www.dailyfinance.com/photos/25-worst-performing-stocks-of-the-past-decade/4017344/

micnugget

1 Dec 2011, 05:51 PM

Yeah I gave the renter a 70k head start on their savings.

I know what your saying georgie - 6.5% in the bank getting taxed at 40% isn't the best alternate investment but it was what I saw as an 'average' investment with low risk.

efy6rph

1 Dec 2011, 06:56 PM

With compounded Interest the renter has $1.25M in the bank (assuming no tax????).
Also if the renter is a saver their contribution will increase with CPI each year so this is the worst case result.

You have also not accounted for capital losses , or at least provided the "option",
From a bearish perspective, assuming it is 30% overvalued, you'd be looking at 315K now, if that keeps up with CPI it will sell for around $600K in 25 years.

So from a Bears perspective you could have a minimum $1.25M in the bank, or a house worth $600K.

From a Bulls perspective you could have $1.25M in the bank or a $942K house.

If the renter increases their contribution by CPI they will have around $1.5M after 25 years.

Either way renting wins hands down.

peter fraser

1 Dec 2011, 07:11 PM

A lot of the variable input into the equation really are variables, so during some cycles with high interest rates or low price rises, or perhaps low returns on investments, all of the above could turn either way.

However one glaring point that should be mentioned, if the loan was over 25 years that mortgagee can now save all of their income after deducting living expenses, whilst the renter has to pay rent on top of basic living expenses. So how do you see the dynamic changing over the second 25 years when rents increase, but the home owner is immune to that cost.

life doesn't end after 25 years.

peter fraser

1 Dec 2011, 07:11 PM

So how do you see the dynamic changing over the second 25 years when rents increase, but the home owner is immune to that cost.

peter fraser

1 Dec 2011, 07:11 PM

A lot of the variable input into the equation really are variables, so during some cycles with high interest rates or low price rises, or perhaps low returns on investments, all of the above could turn either way.

However one glaring point that should be mentioned, if the loan was over 25 years that mortgagee can now save all of their income after deducting living expenses, whilst the renter has to pay rent on top of basic living expenses. So how do you see the dynamic changing over the second 25 years when rents increase, but the home owner is immune to that cost.

life doesn't end after 25 years.

georgie

1 Dec 2011, 07:24 PM

peter fraser

1 Dec 2011, 07:11 PM

A lot of the variable input into the equation really are variables, so during some cycles with high interest rates or low price rises, or perhaps low returns on investments, all of the above could turn either way.

However one glaring point that should be mentioned, if the loan was over 25 years that mortgagee can now save all of their income after deducting living expenses, whilst the renter has to pay rent on top of basic living expenses. So how do you see the dynamic changing over the second 25 years when rents increase, but the home owner is immune to that cost.

life doesn't end after 25 years.

Your looking at this the wrong way. The text book says you buy a property and repay the mortgage over 25 years. In life, well currently with the new generation buying and living in one house with one mortgage for 25 years will not exist for the majority. People tend to live in one house for an average of 7 years then move on.

Now, people who have a mortage and are 7 years in will hopefully pay off the remainder of the mortgage with the capital they have accumulated when the property is sold. When people buy elsewhere they usually upgrade. No one downgrades unless your old and looking for a smaller home or relocating for work. So, this means your debt and your repayments litetrally stay the same over a 25 year period as you keep upgrading. If you downgrade unless you are spending the money elsewhere it means the property market has gone down and you have sustained a loss.

Renting means you can have the lifestyle of moving with ease and save the costs of stamp duty and interest repyaments, interest repyaments are 99% of the time more than the weekly rental of a property in the first 5-10 years. If people stayed in one house for 25 years they would be better off buying but as we know, with the new generation, everyone will be moving frequently so in the long term renting is better because you save on the costs eg stamp duty, solicitor fee's & agents fee's and the renewed interest costs on the upgrading.

Aussiehouseprices

1 Dec 2011, 07:44 PM

2) As has been mentioned, I'd factor in those 5% buying costs around 3 times over a 25-year period, not just once.