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It’s cheaper to buy than rent

Discussion in 'Real Estate' started by Billv, 14th Mar, 2009.

  1. Billv

    Billv Getting there

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    more here
    It’s cheaper to buy than rent - realestate.com.au
     
    Last edited by a moderator: 14th Mar, 2009
  2. Mindmaster

    Mindmaster Member

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    This would be linked to FHOG which is pushing up prices in the sub 400k market and pushing down rents.

    Really hope that will finish the end of june but need to have an alternative pan if it does not.
     
  3. Billv

    Billv Getting there

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    mindmaster

    why is it a problem for you?
     
  4. Jacque

    Jacque Team InvestEd

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    I'm guessing it's a problem for him as the market is likely to grow and he's not yet ready to purchase?

    Lot of FHB activity out there right now esp in the sub $500K price bracket, as this is when the stamp duty concessions stop as well. If the grant is extended, I'd expect a lessening of immediate activity but it, too, will have a definite stop date this time- unlike 2000 when the grant was extended indefinitely.
     
  5. Chris C

    Chris C Well-Known Member

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    The advice I'm getting from my rental property manager is to expect rents to go down when we renegiotiate our rent in July.

    Not that my circumstance can be considered universal, but I expect that rents will probably start falling more soon or property prices will falls faster than rental returns will fall over the coming months.
     
  6. JustB

    JustB Well-Known Member

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    So you expect it will still be cheaper to buy than rent for the time being, if property prices fall faster than rents.

    The only way for it to become cheaper to rent than to buy, is if the rents fall faster than the corresponding property prices plus the interest rate cuts. Can't say I see that happening in the areas my IPs are in any time soon. In fact, I'm actually preparing to move into one of my IPs shortly, as it's now much cheaper to live in my own property than to rent a comparable one. My choice is purely based on $$, but obviously there are other less-tangible benefits of living in your own place vs. renting :)
     
  7. AsxBroker

    AsxBroker Well-Known Member

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    Wow, finally good news for those renting!
     
  8. Billv

    Billv Getting there

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    Asx
    From what I hear there has been some rent reductions in overpriced suburbs close to the city.
    However, the down to earth rents are not going down I am afraid.
     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The rental market is generally very localised and is strongly influenced by facilities and services nearby. The supply and demand equation can change quite significantly - much more so than for home ownership, since there's little penalty for moving out of a rental property if you find something better or more appropriate.

    It is quite possible that rents will drop in one suburb while going up strongly in a neighbouring suburb - or even for different types of dwelling within the same suburb. As such, blanket statements about the direction of rents across a broad geographical area are generally not that meaningful.
     
  10. dudek

    dudek Well-Known Member

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    JustB

    Do you mind if I ask what are the rules on moving into IP? How is CGT calculated?
    Do you need to live any fixed amount of time to cancel CGT? What if you renovate the place while still renting (same financial year) can you claim some bit out of money spent? I am very interested to know as I am planning to move to my IP as soon as my property goes up and I simply pay IP off.
     
  11. dudek

    dudek Well-Known Member

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    I believe there was NO FHOG in 1991-92 and property went up by 2%
    How long can deflation last? Just like interest rates can't physically go below zero, prices can't go down forever.

    Real estate prices may hold better than many expect, Michael Pascoe writes
     
  12. JustB

    JustB Well-Known Member

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    The IP was bought over 6yrs ago, and has only ever been an IP. That is, I never claimed the FHOG, and have never lived in it previously. As such, if I ever sell it in the future, there will be some element of CGT applicable. The CGT will be apportioned at the time of sale, based on the time the property was an IP, vs. the time the property was my PPOR.

    If I renovated the property while it's still rented out, depreciation can be claimed while it's still rented. My plan is actually to wait until I move in before doing any renovations, as these costs will be added to my cost base, thus reducing my CGT exposure should I ever sell. Check with your accountant for the pros/cons of both options for your particular situation.

    But as I originally mentioned, my main reason for moving into the IP is simply due to the fact that the interest repayments + expenses (levies, rates etc) are significantly less than standard rent in the local suburbs. Plus, I've got a 100% offset account linked with the loan where I can park my cash buffer and excess savings each month, further reducing my interest costs. I also have a LOC secured against this IP, which has been used to invest in shares, so this portion remains deductible debt. My plan will be to debt recycle the non-deductible portion over the next 3-5yrs.
     
  13. bubblebobble

    bubblebobble Member

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    The problem with claiming that buying is cheaper than renting is that they have failed to factor in the significant costs of owning property. They have also assumed that rents won't fall. In addition, likely capital loss in the short term is also ignored. We also know that interest rates won't stay this low forever, though fixed loans are available of course, at a significant premium if it is to be locked in for any significant length of time.

    To compare this worldwide financial crisis to the last recession, when property was much more affordable and households had much less debt is erroneous.

    Also, prices may have increased 2% but inflation was more than this, a negative real return was the result.
     
  14. Billv

    Billv Getting there

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    This statement would be true if the overall increase was only 2% above inflation and if we were using our own money to buy the house which is not the case.

    In general first home buyers are using only 10 or 20% max of their own
    money and the rest is borrowed.
    So the return on their small deposit is much much greater than the 2% you are talking about.

    As an example, assuming we've got the FHOG and used $10K of our own money as a deposit on a $300K house a 2% annual increase in value would be $6K which is a 60% return on our 10K deposit. Good luck getting that return anywhere else.
     
  15. Smartypants

    Smartypants Well-Known Member

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    Tend to agree.

    It appears the figures only take loan repayments into consideration against that of rental repayments.

    What about land rates, water rates (renters sometimes pay water usage), insurance and general maintenance....something a renter wouldn't currently pay.

    Also, as already mentioned, when rates sneak up again, this will add another twist to the figures.
     
  16. dudek

    dudek Well-Known Member

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    Just keep splitting hair into half… Producing imaginary figures and speculating what if. What is better rent or owning the place? This should never even make as an argument. IT IS ALWAYS BETTER TO OWN RATHER THAN RELAY ON SOMEONE’S MARCY AND LIVE IN HIS/HER PLACE. People are coming with different argument to hide real reason for not being able to do things. They callit “excuses” How come some of you are so smart in calculating and splitting the hair in half yet can’t even figure out what and how to do to own your own place?
     
  17. Smartypants

    Smartypants Well-Known Member

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    Hi dudek.

    The theme is whether or not it is cheaper to rent or buy, not better.

    I was merely pointing out some figures that have been left out of the equation which can skew the overall figures.
     
  18. dudek

    dudek Well-Known Member

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    JustB,

    Thanks for advice. You are right; I will run this through my accountant to work out details. At least I know it is possible to work out the IP/PPoR bit.
     
  19. bubblebobble

    bubblebobble Member

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    I thought that the increase was in nominal terms BV. Are you sure the increase was in real terms? I have read and seen charts that said Australian house prices failed to keep pace with inflation in the early 90s.

    Certainly leverage can magnify percentage increases, decreases and costs. I was talking about the return of the asset class overall. Everyone will have different levels of leverage, though I do agree that many properties are highly leveraged and more so today than ever. You will no doubt recognize the precarious position that this can place buyers in if their circumstances change, and that if we use the magnifying effect of leverage to calculate our return we also need to do that for losses and costs. It is, after all as many people who took out margin loans in recent years have discovered, a double edged sword.

    Using the calculation from your example BV, the fall of over 3.3% across the Australian housing market last year would produce a 99% loss on the buyer’s initial capital sum invested. In cities like Perth, where prices have dropped from 6.7%-12% last year (not factoring in inflation) depending on whose data you use, obviously leveraged losses would be much worse.
     
  20. Mindmaster

    Mindmaster Member

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    BV as Jacque guessed, I'm not ready to buy. I'm still doing number crunching and research to see whether I should build units on my single IP or buy an second IP which I could not do until July.

    So if FHOG finishes in Jun, I'm hoping for a drop or least not a continued increase in prices. If it continues, well I'm not too keen to buy when all the sheep are buying and driving prices up before me.

    A fair call?