Buy the house, rent the land: ACT's new housing plan

Hi Sim,

I agree with the ACT Opposition party...Why would anyone buy a depreciating asset and rent one which is going to go up?

Someone will buy a "house" which will drop in value as time goes by and the rent they pay on the land will go up.

Sounds very dangerous.

Cheers,

Dan

 

id be happy to look an option like that... if you have a look of the major hubs in each city they are all lease hold land and have to be handed back to the government (along with the building that is on it) when the lease expirys...

would only work if they have a reasonable % on it...

with a normal house your "effectively" leasing it off the bank at an agreed fee (ie interest rate) for you to take the risk/gamble of capital appreciation...

how is leasing land outright be any different?

 

Hi Dave,

Normally at the end of the lease you don't own it (apart from a novated lease). Eg, leasing a property for a certain amount of time, if you don't renew the lease you move on. You never own it , though you have enjoyed the benefits of that property, which in accounting terms is seen as expense.

For a purchase/loan, "you" buy (equity) a property and borrow (liability) money from a bank/lender and the bank/lender has an encumberance/lien over the property until you repay those borrowed funds. When you eventually sell it, your value of equity has hopefully risen over time.

Obviously, in Australia, the main difference is the cost of renting/expense (around 3%) is cheaper than the cost of buying/interest rates (around 9%).

For the shorter term, leasing/renting is more affordable and convenient, in the long run with the "land" rent going up and the "house" value depreciating you'd be better of buying as the loan itself won't normally rise (though interest rates might) though capital appreciation over the long haul is usually more beneficial.

Cheers,

Dan

 

It's an interesting idea but Canberra land has always been on 99 year leashold anyway.

Currently residential leases can be for up to 99 years, and most are for that period. These may be automatically renewed for a further 99 years without charge. The only exception to this right is if the ACT or Commonwealth Government require the land for a public purpose [s171of the Land Act (ACT)]:

Here is some more info

Australian Capital Territory (Planning and Land Management) Amendment Bill 1997 (Bills Digest 135 1997-98)

» Canberra’s Leasehold Land System

 

More needs to be explained about this proposal, but on the surface it seems flawed and the Opposition are probably right.

Let's say someone buys one a house, $200k for land and $200k for building, with 20% of the house as deposit ($40k) plus fees. On P&I with a 25 year term, after 10 years they pay off about $30k @ 8%. They now owe $130k on the house but the land value has doubled. The government has $200k extra equity (on land they lease). If the 'home owner' wants to buy out their land the total loan would now be $530k (instead of $340-ish if they had bought it all).

On top of that, there are issues like working out how much of it you own if you sell and your house has depreciated more than you've paid off of the initial loan. For example, after the first five years you decide to sell but have only paid off $13k, but your 'house component' may have depreciated $25k (using the 40 year depreciation rate as an indicator and ignoring the higher depreciation rates of fittings). You sell and you could be $12k worse than when you started (without adding other costs)... but that is still less than lost rent money.

You could hope that the cost of building goes up, and therefore the value of your house might also go up, or not down as much, but that doesn't help if you need to buy elsewhere.

... and ...

... when you sell will REAs only want a commission based on percentage of your portion? I don't think so. ... bigger net loss.

... you've got to find a bank that thinks this is a safe idea to loan you money where you could be loosing capital faster than you pay it down. I guess they give loans for cars.

Sounds like a well intended idea that could become a nasty financial trap.

Needs more info, numbers look bad. Dave

 

I think a simple shared-equity scheme of the whole house/land would be fairer and meet the goals to provide affordable housing. This could almost be seen as the government taking advantage of 'battlers', what would A Current Affair have to say??

I can't understand why Government expects everyone to be able to own their own home, ownership rates in Australia are already very high by international standards.