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Rent vs Buy Modelling: Is it better to buy or rent a home?
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Topic Started: 1 Dec 2011, 04:54 PM (3,382 Views)
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Alex Barton
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17 May 2012, 10:13 PM
Post #46
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It all depends on home ownershipFleur Anderson Fed up with the ongoing repairs and maintenance involved with owning a home? Sick of the never-ending lawn mowing, gutter clearing, blocked plumbing and pest-extermination chores that are inextricably linked with being the master/mistress of your domain? Tempted to burn down your own house, only to be put off by a winter living in a tent and a 10-year jail term for insurance fraud? Umm . . . no, me either. It turns out there are some very important reasons home ownership is critical to your emotional and financial wellbeing. The Australian Housing and Urban Research Institute has released some research that suggests Australia is moving to a housing-based welfare system. Our homes are no longer just somewhere we sleep and keep a set of Ping golf clubs. Our homes are our superannuation nest-eggs, our unemployment insurance and our rainy day fund all wrapped into one debt-laden, interest-rate-sensitive package. And because of the importance placed on “the great Australian dream” of home ownership, households are going into greater debt for longer periods and exposed to credit risk for a greater proportion of their lives than previous generations. In the past, redrawing on your mortgage was a loan of “last resort” for borrowers, usually later in their lives. Now, more flexible mortgage products mean younger families can redraw on their equity. But instead of being used to help fund a holiday or a house renovation, redraw is being used as a type of financial buffer or an insurance against economic tough times. AHURI researchers Gavin Wood and Rachel Ong estimate 43 per cent of Australian home owners added to their mortgages without moving between 2001 and 2005, borrowing on average an extra $20,000 in cash. What’s more, the researchers found the cash wasn’t used for round-the-world trips but “pressing financial need”. Wood and Ong argue there is a growing group of Australian households that cling to the fringes of home ownership. They may own their own home – but only by the skin of their teeth. Housing wealth accounts for about 64 per cent of the gross wealth of Australian homeowners, but unlike with other financial assets, a homeowner cannot hedge against house prices or interest rate changes. Government policies also encourage people to sink all of their earning potential into having a home, as opposed to say, renting and having a fabulous share portfolio. Read more: http://www.afr.com/p/opinion/it_all_depends_on_home_ownership_dHPJCmMkAJZxGyVao9EfAM
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Mr Griffin
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18 May 2012, 08:07 AM
Post #47
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The whole problem with this rent v buy modelling as it is all theoretical straight line stuff.
If I take the long term return on equities of say 10% pa, and financing rate of 7%, then if I model borrowing $100k the modelling looks good. if I borrow $200k even better. If i borrow $1m, it looks like i'll win lotto. The problem is that is not how it works in the real world.
Storm financial did this - and their clients have since learnt that while their assumed returns of 10% pa maybe correct over a 20-30 year period, it didn't take into account the -50% return they would achieve in the short term.
When you rent v buy project, don't forget that the world doesn't work in this nice straight line stuff that financial modelling produces.
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timmy
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20 May 2012, 11:34 AM
Post #48
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Bogan scum
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i've always been wary of shares. housing solves an immediate problem for people - shelter.
what does a share give you? it's always going to be risky as hell. my super used to be all in shares and it's lost out over the last 15 years (it's now in cash and doing really well), so i'm a bit sceptical when so called investment gurus spruk shares as being good over the long term.
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I am the love child of Tony Abbott and Pauline Hanson
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zaph
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20 May 2012, 12:05 PM
Post #49
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- timmy
- 20 May 2012, 11:34 AM
i've always been wary of shares. housing solves an immediate problem for people - shelter.
what does a share give you? it's always going to be risky as hell. my super used to be all in shares and it's lost out over the last 15 years (it's now in cash and doing really well), so i'm a bit sceptical when so called investment gurus spruk shares as being good over the long term.
A house is risky, A share is risky. You could buy a share in a dud company as easily as buy a house that is a dud.
Very long term, the market wide return on each is about the same. If you alter times from 10/15/20/25 years then one will have superior returns to the other and flip flop over those time frames.
The advantage of shares is that you don't have to buy, say 300k all at once in one asset.
If you have 300k to invest then you can buy one house, which might turn out to be a dud. With 300k to invest in shares you can buy multiple companies, some might be duds and some will be performers.
A balance of each in a portfolio is probably wise.
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Strindberg
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20 May 2012, 02:27 PM
Post #50
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- zaph
- 20 May 2012, 12:05 PM
A house is risky, A share is risky. You could buy a share in a dud company as easily as buy a house that is a dud.
Very long term, the market wide return on each is about the same. If you alter times from 10/15/20/25 years then one will have superior returns to the other and flip flop over those time frames.
http://australianpropertyforum.com/topic/9556775/
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Housing costs to Income broadly unchanged since 1994 - re-ratified here
The People of Australia have the highest median wealth in the World
2002-2012 10 year house price growth the SLOWEST since 1952-1962
1990-2010 20 year house price growth the SLOWEST since 1950-1970
CHRIS BECKER NOW NEUTERED
"There are two kinds of people in this world: ones that fiddle around wondering whether a thing's right or wrong and guys like us." (Hugo to Gagin in Ride the Pink Horse)
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Sweetdish
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20 May 2012, 08:46 PM
Post #51
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In the short term it may or may not be good to buy but in the long run it will always without fail be better to buy rather than rent.
The reason for this is simple; your monthly costs will initially be higher as a buyer, but over time it will be cheaper and cheaper until it costs you nothing. Renting will always without fail cost you more and more every year and in some cases perhaps the increase in rent may even be higher than the rate of inflation.
Let me give you an example.
Lets say you buy a place today for $500K.
You borrow everything and with a 30 year loan it costs you roughly $3500 per month including strata etc.
This $3500 may change over the coarse of the loan due to interest but on average stay roughly the same until its paid off.
So 10 years from now its still costing you $3500, which in that time will be much easier to pay off due to inflation.
On the flip side you can rent the same property for about $2200 per month.
Initially thats a lot cheaper but after 10 years time, it will probably cost you at least $3500 to rent the same property, and thats being conservative, it will probably cost more.
In 30 years time it will probably cost you $10000+ per month to rent the same property and $0 per month (plus strata fees or similar) if you bought it.
Thats the simple truth about buying vs renting. In the long run its impossible to loose and if you live in the property the up and downs of the property market are completely irrelevant.
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Sweetdish
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20 May 2012, 09:01 PM
Post #52
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Furthermore, a comparison between stocks and property is not that straight forward.
You cant really compare putting $50K cash into stock vs putting $50K cash into a property.
There are no $50K properties that I am aware of, that $50K is likely a 10% deposit on a $500K property.
So to compare, you have to leverage yourself with stocks and borrow $450K on top of your initial investment.
And remember you have to pay tax on any profits from stocks, but if you live in a property you pay 0% tax if you do sell it.
And, the real cost of the property loan will always be smaller because in real terms its only really costing you the difference between renting and the mortgage plus strata costs.
If you add all that up, the stocks need to outperform a property by about 3 to 1 to be as a good investment as a property of the same value.
And don't forget, some stocks can in the long run be worth nothing, that will never happen with a property
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Aussiehouseprices
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20 May 2012, 09:19 PM
Post #53
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- Sweetdish
- 20 May 2012, 08:46 PM
In the short term it may or may not be good to buy but in the long run it will always without fail be better to buy rather than rent.
Only if your assumptions about the future are correct. You can test different scenarios here:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
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stinkbug
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20 May 2012, 09:23 PM
Post #54
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- Aussiehouseprices
- 20 May 2012, 09:19 PM
In theory, true. In practice, not so much.
I know lots of people who bought homes at various times, and almost all of them have equity in one form or another. Of all the people I know who rent, very few of them have more than minimal savings.
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AREPS
TAMPON
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hoofarted
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21 May 2012, 06:09 AM
Post #55
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I bought a property about 10 years ago. I *was* accumulating equity... until 4 years ago... now it is losing equity.
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stinkbug
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21 May 2012, 07:07 AM
Post #56
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- hoofarted
- 21 May 2012, 06:09 AM
I bought a property about 10 years ago. I *was* accumulating equity... until 4 years ago... now it is losing equity.
Perhaps you could review the situation in another 15 years when you own the property outright. Remember, a third of Australians live in homes that are owned outright with no loan.
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Frank Castle
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21 May 2012, 07:14 AM
Post #57
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Business As Usual
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- hoofarted
- 21 May 2012, 06:09 AM
I bought a property about 10 years ago. I *was* accumulating equity... until 4 years ago... now it is losing equity.
If I remember right its paying bucketloads of cash over and above any holding costs isnt it?
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Sweetdish
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21 May 2012, 01:32 PM
Post #58
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- hoofarted
- 21 May 2012, 06:09 AM
I bought a property about 10 years ago. I *was* accumulating equity... until 4 years ago... now it is losing equity.
The up and downs of the property market are completely irrelevant if you live in the property.
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Sweetdish
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21 May 2012, 01:44 PM
Post #59
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- Aussiehouseprices
- 20 May 2012, 09:19 PM
I had a look at that tool - love it. thanks.
I entered an average increase in value of 2% and a yearly increase in rent of 3% in which case my monthly costs would be less after 11 years.
It doesn't say what happens when you have paid of the mortgage vs still keep on renting.
For some people that will be the difference if having a decent retirement vs a really crap one.
-Imagine using your super to pay rent....
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hoofarted
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21 May 2012, 01:57 PM
Post #60
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- Sweetdish
- 21 May 2012, 01:32 PM
The up and downs of the property market are completely irrelevant if you live in the property.
I do not live in it.
As Frank says, it is paying "bucket loads of cash" but it is not paying for the losses in equity.
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11:38 AM May 19
