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  • » Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

#1 2015-05-27 22:17:50

Bullion Baron
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Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

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One of the very early articles I wrote on this site compared the cost of buying a home with renting one in Adelaide (Rent vs Buy: An Australian "Cost Comparison"). Earlier that year I'd sold a property I owned in Adelaide (returned to renting), I put my money where my mouth is and at the time it made more sense from a financial (and personal) perspective to forgo the security of owning (or more accurately "paying off") my own home.

Almost 5 years later I am still renting the same property, the lower cost of which (less than the mortgage I had) has been an enabler to put away some extra savings and investment. In the meantime property prices have basically gone nowhere (fell around 8-10% over 2010 to 2012 and have since rebounded back to 2010 levels) and interest rates have dropped.

The comparison I did previously using figures in Adelaide, at the time most other Australian capitals were quite comparable (i.e. yields around 4-4.5% for houses), but today Sydney and Melbourne are in a league of their own. The figures I lay out below make owning look quite attractive, but that same argument probably doesn't hold true in Sydney and Melbourne where prices have gone gangbusters and yields are woeful.

I have revisited the figures from the original article and compared them with today... Read More

CONTINUED: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

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#2 2015-05-28 02:00:33

ytrader
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

Thanks BB, interesting read!
it's funny that people taking on more and more debt as interest rate falls. not understanding that the record low interest rate is a indication of a struggling economy. Most mortgages (especially in Sydney and Melbourne) require 2 incomes to pay it off. in the event where unemployment rate creeps up, where people lose their job or having their hours reduced that'll be the first phase of a burst housing bubble.

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#3 2015-05-28 02:32:00

Graeme
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

ytrader wrote:

Most mortgages (especially in Sydney and Melbourne) require 2 incomes to pay it off. in the event where unemployment rate creeps up, where people lose their job or having their hours reduced that'll be the first phase of a burst housing bubble.

This is what some people don't understand. Combine this with irresponsible lending practices from financial institutions it causes heartaches down the track.

Almost makes a mockery of the National Credit Code and the National Consumer Credit Protection Act 2009 which are meant to protect the public from themselves. neutral

My advice has always been to potential purchasers (in my previous life) is to factor in potential interest increases in the future repayments calculations to determine if they can still afford the debt. If they can't afford at least a 2-3% increases without a real increase in wages, they should reconsider their options.

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#4 2015-05-28 04:05:52

Bullion Baron
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

Good points above. Buyers shouldn't rely on low interest rates as highlighted, budget for higher and don't over extend by borrowing more just because you are able to. That said I think it's likely rates will head lower in the short to medium term...

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#5 2015-05-28 04:08:12

zedstrange
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

I have pondered this issue often, but foresight is everything and we only have historical data to measure the results on.   

I guess one thing in your favour if you rent out your primary home, and go rent yourself,  if things go pear shaped you can always boot your tenant out and move back into your own bed. Personally I would hate to be at the mercy of a landlord (i have never rented a place myself before),  who could up my rent or kick me out everytime leases expire.  It seems its rare to offer >12 months leasing here.  Overseas 5 years is not so uncommon.

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#6 2015-05-28 04:15:56

Lunardragon
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

BB,
Will your hypothesis remain valid to east suburbs of SA, for example Hyde park or Unley park?


An Opportunity comes only once. Grab it while you can!

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#7 2015-05-28 04:50:43

Bullion Baron
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

zedstrange wrote:

Personally I would hate to be at the mercy of a landlord (i have never rented a place myself before),  who could up my rent or kick me out everytime leases expire.  It seems its rare to offer >12 months leasing here.  Overseas 5 years is not so uncommon.

Having a good landlord has helped. I've been in the same place for over 5 years now. Inspections are only a quick 2 minute check whenever we renew the lease (and otherwise rarely hear from him). No attempts to jack up the rent unreasonably.

Lunardragon wrote:

BB,
Will your hypothesis remain valid to east suburbs of SA, for example Hyde park or Unley park?

The prices in those and other eastern suburbs are typically higher and yields lower, so I wouldn't invest there and the rent vs buy numbers wouldn't be as close.

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#8 2015-05-28 20:28:52

ytrader
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

Bullion Baron wrote:

That said I think it's likely rates will head lower in the short to medium term...

not so true, RBA can only set the interbank lending rate, it does not price the credit cost incurred by the banks.
the big 4 in Australia sources most of its funding from overseas, and the lending cost is determined by the cash rate (set by RBA), PLUS the bank's credit rating.
Now, with majority of the country's industry sectors (mining, manufacturing and constructions (except residential)) is pretty much in a recession state. I fear for the bank's credit rating, it'll most likely to get downgraded in the short and medium term. which then pushes up funding cost, and of course passed onto home owners.

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#9 2015-05-28 21:53:51

Bullion Baron
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

I didn't make any claim about what influences the bank rates (so not sure what you are referring to when you say "not so true").

You are right that mortgage rates might not drop at the same pace as the cash rate, but I still think rates (both cash rate & mortgage rates) are headed lower.

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#10 2015-05-29 03:29:16

robertc400
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

Good Post BB.
One thing to take into account, despite any rise or fall in property prices and despite interest rates (up or down) and despite the pro's and con's of renting v's owning, if you had of bought 5 yrs ago you would own one fifth of the property by now (assume 25 yr loan).   smile

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#11 2015-05-29 03:38:22

Miloman
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

Markets are irrational... and do so for a very long period of time.


Want to get healthy? Watch my youtube channel "All Things Good" http://goo.gl/Ltke4g

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#12 2015-05-29 05:08:39

Porcello
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

smile

robertc400 wrote:

Good Post BB.
One thing to take into account, despite any rise or fall in property prices and despite interest rates (up or down) and despite the pro's and con's of renting v's owning, if you had of bought 5 yrs ago you would own one fifth of the property by now (assume 25 yr loan).   smile


Since the portion of interest is much higher in the first years compared to the portion of principal payment, you would own slightly more than 10% after 5 years.

Edit: ok, if you consider a downpayment of 10% then you are right. My apologies

Last edited by Porcello (2015-05-29 06:43:28)


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#13 2015-05-29 07:08:44

robertc400
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

^^^

Yes I did not word it quite right, but I did mean time wise.
Hence if you can affort the repayments, the sooner you can jump in the better.

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#14 2015-05-29 07:13:29

danman49
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

Good read.  Do you think the tightening of investment loan requirements will help take some heat out of the market and drop prices in Adelaide as well as Melbourne and Sydney?  You can tell me at the meet on Sunday smile

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#15 2015-05-29 07:59:39

Bullion Baron
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

robertc400 wrote:

Hence if you can affort the repayments, the sooner you can jump in the better.

If capital growth is nil, rent is cheaper than the interest on a mortgage and you are able to save the difference, then you'd be better off not jumping in sooner. So things have worked out well for me in Adelaide over the past 5 years, but if you'd tried that in Sydney you'd be well behind the person who bought.

danman49 wrote:

Good read.  Do you think the tightening of investment loan requirements will help take some heat out of the market and drop prices in Adelaide as well as Melbourne and Sydney?  You can tell me at the meet on Sunday smile

Investor activity in the Adelaide market is nowhere near as hot, so I don't think it will have a huge impact. Everything is more conservative in Adelaide, even the investor lending smile

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#16 2015-05-29 08:49:21

robertc400
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

^^^
Yes, but I dont think you would be saving 300 - 500K
In 20 more years you would have owned your home outright. In 20 yrs if your still renting, who's the one loosing out, bigtime.
Unless I have it all wrong. Which I could have. I'm not the smartest tool in the shed.

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#17 2015-05-29 23:11:47

Bullion Baron
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

robertc400 wrote:

^^^
Yes, but I dont think you would be saving 300 - 500K
In 20 more years you would have owned your home outright. In 20 yrs if your still renting, who's the one loosing out, bigtime.
Unless I have it all wrong. Which I could have. I'm not the smartest tool in the shed.

I wouldn't expect there to be no capital growth over 20 years. Over that time frame it's unlikely renting & saving/investing would come out in front, but over a shorter time frame (e.g. several years) if there is no capital growth, rent is less than the mortgage interest & you have the discipline to save the difference then yes you can end up in front by renting and putting off a purchase to later. I am not saying that it's a strategy that will work for everyone, most would probably just spend the difference, but there are people out there that can and do save hundreds of thousands of dollars over a long period of time, so not sure why you would find that unbelievable.

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#18 2015-05-30 02:29:33

robertc400
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

Simple calc - Given that the outlook over 25yrs is in the renters favour.
The difference between renting and buying might be $50 a week (or is that too small?), in the renters favour.
50 x 52 = 2600 x 25yrs = $65K
Even if it was a $100 a week, its still only $125K over the life a mortgage. Plus interest of course.
You would own a $300 - 500K home in that time. And properties double in that time too (if not doubling twice). A $1 - $2M loss in my book.
Imagine waiting 5 lots of 5 yrs. The buyer has no mortgage and the renter is still forking out $350 - 600 a week in rent.
Am I missing something ?

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#19 2015-05-30 02:52:12

Bullion Baron
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

robertc400 wrote:

Am I missing something ?

The calcs I do usually compare interest only vs rent (both are dead money). The numbers from the blog post showed around a $50 weekly difference, but if you are only paying the interest component then you aren't paying down the principal. If you paid interest only for 25 years then you'd still have the principal owing at the end.

Re capital growth (looking at a situation over the long term), as I said:

"I wouldn't expect there to be no capital growth over 20 years. Over that time frame it's unlikely renting & saving/investing would come out in front"

But in a real situation there are far more moving parts, e.g. most people don't buy and live in a single house for 25 years and changes to the inputs can change dramatically (e.g. interest rates or rent paid for the equivalent).

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#20 2015-05-30 05:04:04

Porcello
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Re: Bullion Baron: Rent vs Buy: An Adelaide "Cost Comparison" Revisted

In Auckland there is a huge housing bubble and there is no way I will buy right now even if I can afford it. By renting I'm saving at least 30k NZD per year on an equivalent house compared to a mortgage and I don't have to fork out the 20% initial downpayment. It's always about timing..... Timing it's just not right, now.

Btw, also money spent on PM is dead money.... It's an insurance and by renting you insure yourself against a property bubble burst.

Last edited by Porcello (2015-05-30 05:06:07)


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