Much of the property affordability debate seems to centre on the idea that it is cheaper to rent than to buy. On a one year basis that seems to be true in most instances (albeit this is a flawed and simplistic perspective). But rarely do we consider the position of the potential vendor. Since it takes two to trade, I thought it is probably worth examining the financial impact of a sale and lease back analysis from the perspective of the Owner Occupier (OO).
Much of the analysis will depend on the assumptions. So I have attached a spread sheet for those who wish to look at different scenarios.
My assumptions Assuming a property value of 100, and a mortgage of 60, the sale of the family home will result in cash of 40 (ignoring costs). Assuming 2% cost of sale, net cash is 39.2.
This will give interest income of $0.98 per annum at 2.5%. Assuming 40% marginal tax, $0.39 of this amount is lost to the ATO.
To prevent a decline in his/her standard of living, the Vendor will now rent the equivalent premises. I have assumed net rent equal to 2.5% of the value of the property, or $2.5 per annum (growing at 3% per annum).
I have also added an annual income of $6 (after payment of taxes, and all other non-property expenses). This amount is assumed to grow at 3% per annum available to meet the rental and savings needs.
The cashflows and equity position for the vendor look like this. So after ten years, the vendor has 88.3 in equity.
To achieve the same outcome, property prices need to be roughly flat in nominal terms over ten years (100.5). After accounting for ten years of inflation at 2.5%, this is the equivalent of a real price of 78.5. A 21.5% REAL decline in house prices. This all depends on the assumptions so please feel free to play with the attached spreadsheet. Note numbers in red are the variables. Numbers in black are formulas.
Much of the property affordability debate seems to centre on the idea that it is cheaper to rent than to buy. On a one year basis that seems to be true in most instances (albeit this is a flawed and simplistic perspective). But rarely do we consider the position of the potential vendor. Since it takes two to trade, I thought it is probably worth examining the financial impact of a sale and lease back analysis from the perspective of the Owner Occupier (OO).
Much of the analysis will depend on the assumptions. So I have attached a spread sheet for those who wish to look at different scenarios.
My assumptions Assuming a property value of 100, and a mortgage of 60, the sale of the family home will result in cash of 40 (ignoring costs). Assuming 2% cost of sale, net cash is 39.2.
This will give interest income of $0.98 per annum at 2.5%. Assuming 40% marginal tax, $0.39 of this amount is lost to the ATO.
To prevent a decline in his/her standard of living, the Vendor will now rent the equivalent premises. I have assumed net rent equal to 2.5% of the value of the property, or $2.5 per annum (growing at 3% per annum).
I have also added an annual income of $6 (after payment of taxes, and all other non-property expenses). This amount is assumed to grow at 3% per annum available to meet the rental and savings needs.
The cashflows and equity position for the vendor look like this. So after ten years, the vendor has 88.3 in equity.
To achieve the same outcome, property prices need to be roughly flat in nominal terms over ten years (100.5). After accounting for ten years of inflation at 2.5%, this is the equivalent of a real price of 78.5. A 21.5% REAL decline in house prices. This all depends on the assumptions so please feel free to play with the attached spreadsheet. Note numbers in red are the variables. Numbers in black are formulas.
Enjoy!
Catweasel say it the agree.
It can work the well if experiment in cardboard box.
If mouse not the sell, it a chained to white picket fence.
And that best the place for it.
If it the move, opportunity the cost is a potentially the massive,
The "suburban houses are forever a good investment" mantra of the last decade or so is as good an advertizing scoop as the DeBeers "Diamonds are forever" advertizing campain that was foisted on the American public back in the last century. As good and just as much a lie I am afraid. What complicates the property issue is mortgage interest rates, and no one can predict where they will be in 2 years let alone 10 years time. If rates go ballistic then all spreadsheets are in the trash can and property markets as well.
This is not the point in history to be leveraged, and certainly not for decade after decade on a single asset class. Take the last 7 or 8 years of price movement in Australia as a warning before you dive in and risk the next 20 or 30 years.
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sale_leaseback.xlsx (13.52 KB)
