Rent or buy? long term thinking

This is a double posting but I wanted to hear the SP community’s thoughts on the subject.

I tweeted this rather grim outlook on the housing market in Australia in a news article I read yesterday and now I’m just wanting to look through the different options for housing and financial planning and hear what you think is a wise next move for me.

The housing market in Australia has made many people very wealthy over the last decade or two, it’s also made most people my age seriously question if they can afford a house or if it’s even the smart choice anymore.

Realistically, I would be able to save more than $500 a fortnight long term so that savings projection is pretty conservative.

Don’t flame me :), I truly want to understand this and hear some sound advice.

Thanks,

The earlier you buy the easier it is.

I brought my first house at about 24 - 1 bedroom house with a bathroom and a sitting room and kitchen downstairs.

The repayments were very high ( interest rates then were around 15% ) but I lived frugally and after a couple of years with a couple of pay rises things were not so bad.

If you buy and as long as you do not get into negative equity you always have the option to sell if you need to.
In some cases the rental price is higher than the payments on a mortgage.

The other alternative is to buy in a cheaper area and commute; as long as the commuting costs are not to high to wipe out the benifit.

In the UK we have a lot of “shared equity” projects where you buy 2/3rds of the property and a housing association buys the other 1/3rd ( usualy on new builds ). You then only need to raise a mortgage on the 2/3rd and pay a minimal rent to the housing association for the other 1/3rd.

I think the thing about buying a house it is long term and as long as you can keep paying the mortgage you should be able t weather any changes in the market - you could always rent out a room or two to help pay the mortgage !

Thanks Rubble,

The difference in cost between rent and a mortgage is substantial, I just can’t make the numbers on a mortgage make sense.

I can rent for a quarter of the cost of repayments on a mortgage, I can also live in a much better area in a nicer house.
The banks will take a hefty $430,000 in interest in the deal also.

I do live in a cheaper area and commute already - I spend 3hr’s on transport each working day.

The market in Australia is particularly unfriendly to first home buyers, I realise it is never an easy decision and most struggle for the first few years of a mortgage.

I don’t think I need to struggle at the moment, I feel renting close to the city where I work is a much better deal for meat the moment and also gives me greater capacity to grow wealth. Savings is a greater asset to me than the sorts of properties I can afford.

I’ve also ran into a hitch with loans as my credit file has bogus data on it.
It’s a strange world.

I have a new plan, never borrow money.
I have no credit card and no debt at the moment and don’t feel like giving a bank over 400k for lending… that’s criminal.

The other thing to think of is house prices should rise.

My maths is not great so double check these calculations but as I see it:

Say you have a $300k house that goes up in value 2% over the first year at the end of the year the house will be worth $306,000

If you put $500 away every month for a year you would save $6000 and with again say 2% compound interest you would have $120 extra in interest.

So in fact you only have only saved $120 towards your house ( the house has gone up $6000 and you have saved $6000 so they cancel each other out ).
From what you say house prices are probably rising quicker than 2%.

After the second year the house will be worth $312,120 but your savings will only be worth an extra $489.65 if you still save $500/month.
House $312,120 - Savings $12,609.65 getting closer but you are not saving as much towards it as you think $729.65

This is also not allowing for the money you would be spending on rent which is basicaly lost but if you were putting it towards a mortage you would be paying a bit off your house.

Very depressing :frowning:

Really? That’s not the case here (Rome, Italy). So here it’s really easy to decide: if you got the money, or if you can find a bank that’ll give you a mortgage, then it’s definitely better to buy. After 20/30 years of payments, the house is yours, and of course any value increases are yours too, while after 20/30 years of paying rent, you have nothing.

In your case (pay 75% less for a better house in a better neighbourhood then you could affort buying it) the decision becomes more complicated.

I know this all too well - the house prices have Doubled consistently where I live in the last 10 years. This can’t possibly continue at this rate - as houses are already getting too expensive to buy and there is a shortage.
There will have to be re-zoning and more land freed up for the prices to come down.

This is also not allowing for the money you would be spending on rent which is basicaly lost but if you were putting it towards a mortage you would be paying a bit off your house.

Very depressing :frowning:

Yeah, I understand this point. It’s true, I won’t own a place of my own at the end of 30 years if I never buy.

But, I can actually save more than $500 a fortnight so my savings as far as I can tell will have me better placed in 30 years if I don’t take out a mortgage now.
Plus living in a nicer area, in a nicer house, with the freedom to move around and never owing money.

The rent for 33 years(using current rental prices) is the same amount as the interest alone on a mortgage with the banks.

I’ve always heard that buying is better but I can’t make the numbers add up to support the argument - I can make a case if the house prices continue booming like they have in the last ten years. But it’s a gamble - and a liability.

Plus I’m still young and I don’t know where I will be in 5-10 years so I’m not sure I want to set up camp just yet.

The best question is why do you like to rent or buy a house? Are you getting married or you want a haven of your own and what you can call your own?. As an individual like me, I’d like to own a house than to rent, but since money is my problem I’ll have to slip that dream away for the time being. Unfortunately if you don’t invest now, the cost of a house will become more impossible in the next years. Mortgage is the best choice if you don’t have any choice.

I have the same plan. Not even a plan, it’s an oath. Never. Borrow. Money. Ever.

Well, I might make an exception to a business loan, but that would be a company not a personal loan.

Mortgage is the mother of all liabilities. So to me that’s not even a question, renting will always be a lower liability.

If you want a house, save up, then pay in full.

Thought I had made a miscalculation; the value of the savings after the second year would be $12,253 not $12,609.65
After 30 years you will have $492,075 ( not quite a million dollars ) and the house will be $543,408 based on the 2% random interest rate I used.

So you will not be tempted to dip into you savings for say a car or a holiday abroad ? You have a lot more will power than me.

Anyway as you say its your decission and the majority of replys on both this thread and Yahoo belive the oposite to you.

I find it pretty sad that the majority of people single handedly advice going in debt as the better option. Correct me if I’m wrong but in this day and age very few people are debt free. It’s a near extinct species that has to be protected at all costs. :smiley:

And I seriously doubt that debt is the better option to anything.

Here’s an interesting exercise. When asking someone for financial advice, ask them if they are in debt themselves and how they feel about it. Then ask yourself if you want to be in their shoes before taking their advice. :smiley:

If he wants financial advice he should go and see a financial advisor but he asked us for our thoughts.

I wanted to hear the SP community’s thoughts on the subject.

Tough call man, here are some of the factors that you are not considering…

  1. Houses, generally, go up in value more than 2% a year. Australia and to a lesser extent Canada are probably two of the most stable economies in the world.
  2. In Canada, can’t talk about Australia here, gains realized on your principal residence are not taxed. So 5% a year is the equivalent to a 10% gain on your taxable investments.
  3. In the USA, again can’t talk about Australia here, mortgage interest is tax deductible.
  4. You are eventually going to get sick of 3 hour commutes every day, not that buying a house is going to solve that issue.
  5. If you get married then a house will end up being a priority.

Should you buy a house, honestly there are so many pros and cons involved that I really think that it is a personal decision. House prices can drop, maintenance can easily eat into any profits from appreciation, etc… But at least when you are buying a house you are, in a fashion, investing in something instead of just paying rent to someone and having nothing to show for it.

In Canada, the costs to rent an apt and to own a house are generally pretty similar, in your case it seems that renting is much cheaper so I would lean towards renting and saving the difference.

That’s just about impossible to do, homes will almost always appreciate in value much faster than you can save money.

I used this calculator for the data and I have savings already, I realise it’s just an approximation:

So you will not be tempted to dip into you savings for say a car or a holiday abroad ? You have a lot more will power than me.

I can save that amount and have $400 a month above what I would have with the mortgage repayments.
So I think I can reasonably save that amount as well as having extra for those things.

Anyway as you say its your decission and the majority of replies on both this thread and Yahoo belive the oposite to you.

I expected most to say Buy because that’s what most people do.

Thanks for your input,

Highly simplified numbers.
buy - 300k house -> 2% 30years -> 550k approx
rent - 30k savings -> 5% 30years + 500 f/n -> 1,040,000 approx

At my current job, if I didn’t spend any money for twelve years I may be able to afford a decent house.

Clearly, this isn’t possible for the average person. This is why mortgages exist.

Unless…

You take a credit to buy an overrated overpriced house in a booming economy.
The recession comes along making house prices to freefall.
Your house now worths 1/10 from the credit value you have to pay for 30ys.
You lose your job, you have no money to pay the monthly rates.
You sell the house, but you’re still indebted to the bank.

Rent may not be the best option, but to pay for a house a price that has nothing to do with the real value it’s like buying an iSmt* :wink: Only that you lose big time money.

Taking a mortgage and losing the house from the reasons above it’s the same with paying rent, only you worry less about keeping the house in a good shape.

Mortgage is a financial cancer, but don’t let me get started on this.

It’s impossible if you don’t try. If you’re a young person, you’ll have your time to in-debt yourself. At least try to come up with a plan on how you could possibly avoid it.

But it’s a personal decision to make.

Personally, I’d agree to be homeless for a while just to avoid it. I’d be homeless for one or two years, but if I took a mortgage it would be pretty much a sentence for life.

Very good point. All this talk about how the value will keep increasing, but when you’re talking about a period of three decades, you cannot leave out the possibility of depreciation. Not necessarily a collapse, but I find it a plausible possibility that it can decrease at some point.

Look at it this way. If there’s any shape of free market in this, the prices must go up and down. If there’s no freedom at all, it’s all but a bubble waiting to burst. Considering it’s a debt fueled market, i.e. the value isn’t actually real, something close to the second option is actually more plausible, and it wouldn’t be the first time that happened. That’s a risk to be taken into account.

Except house prices rise by more than 2% a year and gains aren’t taxable.

So really it’s more like 4% versus 5% assuming housing only rises 2% a year and you’re in a 50% marginal tax bracket.

Also keep in mind that you aren’t paying cash for your house but rather a small downpayment plus your mortgage payments.

Anyway, I am not for or against buying a house, it all depends on the person’s situation just saying that your numbers are misleading.