# Rate Rises and Home Ownership



## Sugar Dunkaton (10 December 2009)

Now, I know this might be a little controversial. And before I get into the nuts of it I will say openly that I am not a home owner, and investment property owner or a commercial property owner, although I have run numbers on all of the above.

To the point, I am getting a little tired of everyone - especially the media who play it up like its the end of the world - whining about rate rises and how they add an extra $23 to the average Australian Mortgage every month. Yes it is a bummer that you to pay more. But one of the things that I learnt pre-twenties is that when you decided to by a house, when you decide that you can afford it, when you run your numbers, make the decisions on a mortgage rate of 10 or 12%, not some hypothetical-dream-land-official-rates-are-going-to-stay-at-3%-for-ever predictions. The  sub-prime crisis was a pure result of a vast group of people all taking out mortgages at rates that will not be able to afford in the long term (yes i know there is more to it than that, so please don't argue this point). I know the problem is not as bad over here with foreclosures  and all that due to demand greatly outstripping supply. But I am just over hearing people complain about this issue, rate rises are necessary to keep our economy in check, and if you haven't made realistic forecasts and budgets for your own financial situation. It is your own fault that you can't afford your new payments.


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## Wysiwyg (10 December 2009)

The average home price around here is 300k and at the present variable interest rates the following is the interest payable. 1/4 million dollars in interest. All the young guns out there whacking the big mortgage on must be paying phenomenal interest over the term.  Gotta love the banks.


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## Julia (10 December 2009)

Sugar, I completely agree.  I'd be surprised, though, if too many homeowners are actually complaining as you'd surely think they would have expected these and more rises.  More a case of the media finding something to comment on, ably assisted usually by Mr Swan making dire threats of what he will do to the banks if they raise rates 'too far'.

Wysiwyg:  All the more reason to have a decent deposit and to pay off the mortgage quickly.  Also, maybe to start with something affordable rather than the McMansion.


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## prawn_86 (10 December 2009)

Yep, you almost pay off twice the amount the property was worth when purchased with a 20 yr loan and minimum deposit. It means the home has no virtually double in price over that time just to make it a worthwhile financial decision


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## Wysiwyg (10 December 2009)

prawn_86 said:


> Yep, you almost pay off twice the amount the property was worth when purchased with a 20 yr loan and minimum deposit. It means the home has no virtually double in price over that time just to make it a worthwhile financial decision




Assume the house sells for 525k after 20 years then the interest paid over the term is recouped and the original house price of 300k is the gain. Compulsory saving. Smart or dumb?


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## jancha (10 December 2009)

prawn_86 said:


> Yep, you almost pay off twice the amount the property was worth when purchased with a 20 yr loan and minimum deposit. It means the home has no virtually double in price over that time just to make it a worthwhile financial decision




Dont quite follow the worthwhile bit.
 How much would you save if you were renting?


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## prawn_86 (10 December 2009)

jancha said:


> Dont quite follow the worthwhile bit.
> How much would you save if you were renting?




Obviously its a hourses for courses decision that has been covered numerous times in multiple threads. But where we live at the moment there is no way you could pay off the mortage with the rent we pay. So if you are disciplined and save the difference then it can make it worthwhile. Obviously each and every situation is different


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## Beej (10 December 2009)

prawn_86 said:


> Yep, you almost pay off twice the amount the property was worth when purchased with a 20 yr loan and minimum deposit. It means the home has no virtually double in price over that time just to make it a worthwhile financial decision




The interest in the example works out to be an average of $245/week over the 20 year period - in TODAY'S dollars - pretty cheap "rent" I would have thought? Do you think if you rented the same house for 20 years that you would pay more or less than $245/week on average on today's money? Would you have any ability to reduce your rent payable? Remembering that rent can only increase due to inflation over that time, but the interest costs on the loan are fixed, and in fact can even be reduced by paying off the principle faster than required.

Also - over a 20 year period, it is almost certain that the price of the house would at least double anyway - highly likely it's value may increase even more than that. For a PPOR it's really a no brainer if you crunch the numbers properly. Renting only looks better in the short term (maybe the first 2-5 years). Over a 20 year period the person who took on the riskier/harder path of buying their own home is almost certain to be way ahead financially.



prawn_86 said:


> Obviously its a hourses for courses decision that has been covered numerous times in multiple threads. But where we live at the moment there is no way you could pay off the mortage with the rent we pay. So if you are disciplined and save the difference then it can make it worthwhile. Obviously each and every situation is different




You don't need to be able to pay off the house with the rent for owning to be better, you just need to be able cover the interest payable over the whole 20 year period or better with the equivalent rent. I think you would find that if you added up all the rent you will pay over 20 years for the property in the example, allowing for it to increase with inflation, that you would with a lot more rent than the interest component of the above mortgage example.

Another way to think of it: principle repayments = forced saving, rent = dead money, interest - dead money (?), . BUT, interest, unlike rent, gives the right to any capital appreciation in the underlying asset, and therefore provides more value than rent after all 

PS: On the original topic - I also agree. Rate rises are a part of life while you have a mortgage. You just deal with it - I didn't hear anyone complaining about the enormous amount of money saved while rates were at historic lows?? 

Cheers,

Beej


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## ROE (10 December 2009)

This formular always works..

Assume you pay your mortgage at 10% for 25 years

and work out if you can afford a place.

and if you can, take up a mortgage and pay off at 10% and continue to do so unless
there are absolute emergency you have to reduce the repayment...taking holiday or buying a new car, iPhone or life style excess is not an emergency 

you never ever have trouble of rate going up or down and enjoy life to the fullest 

PS: Average long term rate for the last 50 years is around 7-8 mark ... so you can safely assume
it be like that for the next 50 years


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## explod (10 December 2009)

You can rent a nice cottage down at Rosebud on the sea for $200 a week, not too bad but of course a long way to work.

The following from Jim Sinclairs Minset, and interest rates are low over there, can it happen here?, I bet it can and will, with the debt the ordinary Joe is trying to juggle we have a powder keg:-



> Palm Coast, FL – December 9, 2009 – For the second time in two months, property in Ginn-developed communities were sold at a Flagler County tax deed sale. A lot in The Conservatory and a Hammock Beach Club one-bedroom condo were sold at yesterday’s sale. In each case, there was more than one bidder; forcing the final selling price above the minimum opening bid.
> 
> The minimum opening bid is equal to the accumulated back taxes, interest, penalties, and administrative costs. The starting bid for the Conservatory lot was $17,039.53. One hundred dollars at a time, bidders arrived at the final price of $20,100 totally furnished. The lot at 403 Bourganville Drive overlooks a lake and the ninth hole of the Tom Watson-designed golf course. It sold in 2005 for $439,900.


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## Tysonboss1 (10 December 2009)

Wysiwyg said:


> The average home price around here is 300k and at the present variable interest rates the following is the interest payable. 1/4 million dollars in interest. All the young guns out there whacking the big mortgage on must be paying phenomenal interest over the term.  Gotta love the banks.




I know 1/4 of Million sounds like alot of money for interest, But try and work out how much you would pay in rent over the same period and remember the weekly rent will increase with inflation your repayments won't.


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## Wysiwyg (10 December 2009)

Tysonboss1 said:


> I know 1/4 of Million sounds like alot of money for interest, But try and work out how much you would pay in rent over the same period and *remember the weekly rent will increase* *with inflation your* *repayments won't.*



But so will wages increase in line with inflation. It is also possible during the mortgage for the variable interest rate to pop above 10 %. 

Add to that the house maintenance costs, e.g. council rates, water rates (in some places), roof/gutter/walls/floors/plumbing/electrical/rooms repairs & renovate, lawn & garden upkeep to name most.

But I do agree with you, it is a great way to save and have some financial worth after X amount of years whilst having some fun along the way.  ( while lining the bank coffers  )


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## Tysonboss1 (10 December 2009)

Wysiwyg said:


> But so will wages increase in line with inflation. It is also possible during the mortgage for the variable interest rate to pop above 10 %.
> 
> ( while lining the bank coffers  )




But see that works in the home owners favor, your wage increases as your rent increases so you maintain status qou, how ever the home owners wage also increases but the repayment stays they same,

Now I hear you yelling, "but interest rates could go up", But as the principle of the loan shrinks so does the interest, so the further into the loan you get the less interest rates mean to you.

you can either line the banks pockets for a fews years, or the land lords for ever


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## Wysiwyg (10 December 2009)

> PS: Average long term rate for the last 50 years is around 7-8 mark ... so you can safely assume it be like that for the next 50 years




ROE suggested the average was 7-8% over the last 50 years. At 8% the interest payable equals the original cost.


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## Tysonboss1 (10 December 2009)

Wysiwyg said:


> ROE suggested the average was 7-8% over the last 50 years. At 8% the interest payable equals the original cost.




funny thing is so does the rent and that with out allowing for rental increases.

a $300,000 property should attract a rental yield of about 5% meaning that the rent should be about $300 per week so even if you had no rental increases you would pay about $312,000 in rent over 20years.

However in reality you would have rental increases which would raise the total rent payable by a huge amount. 

In fact by year twenty your rent would have doubled to over $600 per week while the guy who bought a house would have finished paying for his home, yes he has to pay maintaince and rates but that would be less that $130 a week by year 20


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## ROE (10 December 2009)

I think rent or buy is up to an individual decision and I'm not sure which is better purely based on some number crunching and depend on individual skills at investing surplus capital.

For me it's a no brainer to buy if it cost me a bit more ...because I don't like renting due to the fact you cant do anything to a place you call home 

You get to go and leave when ever it suit you and stay in one place as long as you like..Rent you face the possibility someone selling under you and off you go finding another place at time it may not suit you.

Every Aussie should own their own place if they can, at the right price at the right time of course.

the rewarding is more than just financial.

I do own my own place debt free but I dis-like property investment  doesn't matter how good it get for similar reasons with owning my own home..

1. Tenants and Real Estate agents are just people I don't want to deal with... phone calls when doors are broken, or heater doesn't work or some other annoying stuff

2. some fundamentals reasons but I will open up another can of worms 
    so better leave it alone


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## Knoxy (11 December 2009)

Glad I locked 6 months ago for 5 years at 5.79% 

Imagine you bought a 500k house today fully financed and mortage rates rise so at, say, year 10 the interest rate is 10%. If you'd been only paying interest, then today you'd pay about 35k to live there and in year 10 about 50k. In year 20 you may still pay 50k.

If you rented the same house, with yields at 7% today you'd pay $35k rent. In year 10 the house might be worth 1 million (7% average annual growth). Even if yields remained a low 7%, you'd pay 70k. In year 20 the house would be worth 2 million and the rent 140k.

In a rising house price market owning is better, and long term house prices have been increasing.   

Also with a house you feel you have something of value, quite a psychological advantage even if the financials were to end up similar.


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## Wysiwyg (13 December 2009)

This from another thread that notes prices at 750k. Exponential price increases for dwellings is as we all know unrealistic but hopeful if a property investor.



> To buy prices are like 350-450k for a 1br and 600-750k for a 2br place,



At 750k these are the monthly payments and interest payable over a 20 year term. 1/2 million dollars to the bank in interest. Raise the interest rate to the average over 50 years and the numbers blow out. Take the interest rate over 10 % and the numbers become ridiculous.


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## Tysonboss1 (14 December 2009)

Wysiwyg said:


> At 750k these are the monthly payments and interest payable over a 20 year term. 1/2 million dollars to the bank in interest. Raise the interest rate to the average over 50 years and the numbers blow out. Take the interest rate over 10 % and the numbers become ridiculous.




But again the comparison to the total rent paid is very similar, Try looking at it over a life of a person rather than the life of a loan.

Try to calculate the total paid for a person who buys at 21 on a 20 year loan and lives till 75 vs some one who rents from age 21 to age 75.

Basically a home owner has one huge thing going for them, the total amount of weekly interest paid decreases every week at an ever increasing amount as the princple is paid down till one day the interest is nil,

for example week one payment may be $500 ($480 interest + $20 priciple) by year 10 the payment will still be $500 however it would be ($250 interest + $250 principle) by year 20 it is properly ($10 interest + $490 principle)

Basically the renter starts from a lower weekly cost but his rent will increase at an ever increasing compounded rate inline with inflation + some extra growth if his prefered property type becomes scarce within a city (water veiws or certain size blocks).

for example the renter may start year 1 paying $390/week rent by year 10 the rent may be $635,.. year 20 $1035,... year 30 $1685,... year 40 $2746,... year 50 $4475.

Now you may scoff at weekly rent being $4475/week but it is quite possible given 50 years of inflation and growth, My nanna was paying less than $20 a week rent back in the 70's which is a far cry from the $350 that house would attract today.


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## Tysonboss1 (15 December 2009)

Wysiwyg said:


> Raise the interest rate to the average over 50 years and the numbers blow out. Take the interest rate over 10 % and the numbers become ridiculous.




Talk about numbers that look ridiculous,

I just did some rough sums of how much rent a person would pay over their life time once rental increases are factored in.

A property that starts at a weekly rent of $300/week will cost you $5,702,320 over your life once you factor in rental increases.

Suddenly paying a bit of interest doesn't look so bad.


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## Wysiwyg (15 December 2009)

Tysonboss1 said:


> Talk about numbers that look ridiculous,
> 
> I just did some rough sums of how much rent a person would pay over their life time once rental increases are factored in.
> 
> ...



Depends whether you like to give or receive. 

Unfortunately this calculator only goes to 30 years and I assume you used 40 years as a working life so it will be substantially more. The princely sum of $3,651,804.20 is the end result of depositing $5000 per month for 30 years.


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## Tysonboss1 (15 December 2009)

Wysiwyg said:


> Depends whether you like to give or receive.
> 
> Unfortunately this calculator only goes to 30 years and I assume you used 40 years as a working life so it will be substantially more. The princely sum of $3,651,804.20 is the end result of depositing $5000 per month for 30 years.




I worked it out over 50 years as I thought 25yrs old to 75yrs old was a reasonable amount of time some one who chose to rent for life would have to rent.

My numbers would also be quite conservative because I added the rent increase for each 10year period at the end off the ten years, where it would normally compound over the 10 years.

A renter would also most likely have to trade down over their life as certain property types will out pace their wage growth,.. for example an average worker renting a large three bedroom home at bondi beach in the 60's would certainly have found the rental increases over the years growth much faster than his or her wage to the point it became unaffordable,


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## Beej (16 December 2009)

Wysiwyg said:


> Depends whether you like to give or receive.
> 
> Unfortunately this calculator only goes to 30 years and I assume you used 40 years as a working life so it will be substantially more. The princely sum of $3,651,804.20 is the end result of depositing $5000 per month for 30 years.




I don't really see the relevance of this to the cost of renting vs owning argument????

Cheers,

Beej


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## TOBAB (17 December 2009)

ROE said:


> I think rent or buy is up to an individual decision and I'm not sure which is better purely based on some number crunching and depend on individual skills at investing surplus capital.
> 
> For me it's a no brainer to buy if it cost me a bit more ...because I don't like renting due to the fact you cant do anything to a place you call home
> 
> ...




Bravo. Currently have an investment property and just no worth the hassle. It's a great place recently renovated in an excellent location. Problem is the tenants. We've made a tidy paper profit over the past 12 mths but would be happy to sell tomorrow.

As for own place - avoid renting if able. Surely everyone wants to be in control of their own destiny. Moving house has to be one of the most painful excersises around.


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## basilio (16 July 2019)

IMV the BIG concern for peoples personal security and in particular survival after retirement is owning their own home outright. No debts. No mortgage.

In the last 30 years the change in the situation for Australians with regard to home ownership has been momentous. Check out the analysis in Greg Jerichos story.

* A shrinking tax base is a recipe for disaster for Australia's ageing population *
Greg Jericho
The worry is not how those currently retired are coping, but what is in store for those hoping to do so in the next 20 years
https://www.theguardian.com/busines...recipe-for-disaster-for-our-ageing-population


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## sptrawler (16 July 2019)

How I bought my first house, was buy a block in a country town where I found work, then I bought a house like this and had it transported.

https://www.gumtree.com.au/s-ad/glenroy/property-for-sale/relocatable-house/1222665915

Spent two years fixing it up, then sold it and made 300% profit, then chased a job in the City and bought a house in the suburbs with a small loan.
If someone wants to start at the bottom and work up, it can still be done, but now I know with my kids and their friends, they want to start at step 2 or step 3.
Also they want to take their kids on holidays to Legoland, the Gold Coast theme parks etc, then complain how hard it is.
Luckily we do have a pension scheme, which with super should provide them a reasonable retirement, because there is no way they are going to save anything themselves.


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## basilio (17 July 2019)

In my view the* fundamentals *of  any average worker buying a house are now totally out of the window.

When we (most posters on ASF) were young in the 60's and 70's it was straightforward for a  person on a wage to save 5-10k for a deposit and then buy a house with mortgage payments capable of being serviced by one persons wage.   Repayments were 33% of gross wages or 25% of net. If you were on the assembly line you got a poorer house in a poorer suburb. If you had a better job the house was 20% more expensive. Probably 60% of housing stock in Melbourne was accessible to these tiers of workers

It was that simple.

In 2019  it is just madness. The fact that buying houses has become an investment game for many people who have negatively geared their properties and bought them with little deposit has turbo charged prices.


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## Smurf1976 (17 July 2019)

sptrawler said:


> How I bought my first house, was buy a block in a country town where I found work, then I bought a house like this and had it transported.



I did it the other hard way.

Worked 7 days a week, mostly 12 hour days but some went a few hours longer. Did that for a few years.

Couldn't do it these days - health and safety etc would make it illegal.


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## sptrawler (18 July 2019)

basilio said:


> In my view the* fundamentals *of  any average worker buying a house are now totally out of the window.
> 
> When we (most posters on ASF) were young in the 60's and 70's it was straightforward for a  person on a wage to save 5-10k for a deposit and then buy a house with mortgage payments capable of being serviced by one persons wage.   Repayments were 33% of gross wages or 25% of net. If you were on the assembly line you got a poorer house in a poorer suburb. If you had a better job the house was 20% more expensive. Probably 60% of housing stock in Melbourne was accessible to these tiers of workers
> 
> ...





What are the house prices out of Melbourne, somewhere like Sunbury like, 40minute train ride?


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## basilio (18 July 2019)

sptrawler said:


> What are the house prices out of Melbourne, somewhere like Sunbury like, 40minute train ride?



https://www.realestateview.com.au/real-estate/melbourne/outer-north/sunbury/houses-for-sale/

Median price is $540k . Some  (older , tired) around mid -high 400's . 
Sunbury suffered badly after the pilots strike.


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## Value Collector (18 July 2019)

basilio said:


> https://www.realestateview.com.au/real-estate/melbourne/outer-north/sunbury/houses-for-sale/
> 
> Median price is $540k . Some  (older , tired) around mid -high 400's .
> Sunbury suffered badly after the pilots strike.




Looking at median figures is misleading.

There are lots of cheaper properties well below the median, In the major cities.

https://m.realestate.com.au/property-unit-nsw-liverpool-131359386


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## Klogg (18 July 2019)

Value Collector said:


> Looking at median figures is misleading.
> 
> There are lots of cheaper properties well below the median, In the major cities.
> 
> https://m.realestate.com.au/property-unit-nsw-liverpool-131359386




Two big problems with this debate. 

1) Most people look at median prices and think it's not possible - your point exactly
2) And the other -tThere's no thought about the alternative to property

As it stands, renting is the logical option. A very simple DCF type approach tells you this is the case, without considering the risks behind a massive mortgage.

I can quite easily buy the townhouse (Ashburton, VIC) I'm renting by selling about 40% of my portfolio. That's beside the point. My opportunity cost for doing so is way too high. If you invest in productive assets that can return more than 3% per annum (above gross rental yield in my suburb), you're already ahead.

Personally, first home buyers are lucky to be rejected by banks. If they can't afford a mortgage by a bank's standard (Royal Commission findings anyone?), then they'd most definitely be tight on cash for many years.




> If someone wants to start at the bottom and work up, it can still be done, but now I know with my kids and their friends, they want to start at step 2 or step 3.




Difference is it takes much longer. They no longer have the tailwind of falling interest rates and de-regulation of financial services. In fact, they'll reach retirement age and likely still have a small mortgage. 

At 32, there's no chance in hell I'd be trying to 'start at the bottom', commute for over an hour either way to service a loan. Then start again once I move to step 2... It's basically voluntary slavery.


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## Smurf1976 (18 July 2019)

Value Collector said:


> Looking at median figures is misleading.
> 
> There are lots of cheaper properties well below the median, In the major cities.



Agreed that is true but then the vast majority of first home buyers will also be on a below median income given that, broadly speaking, income tends to rise in real terms with age and career progression.


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## Smurf1976 (18 July 2019)

Klogg said:


> At 32, there's no chance in hell I'd be trying to 'start at the bottom', commute for over an hour either way to service a loan. Then start again once I move to step 2... It's basically voluntary slavery.




Frequently buying and selling houses is a dud idea yes unless you're doing something which adds value to them.

Every move costs serious $ with stamp duties, agents fees, removal costs, the huge amount of time it all takes up which could otherwise be used more productively, etc.


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