Is home ownership a sound strategy?

[jpldavis]

Apologies if this question is off point (this is Aussie Stock Forums after all) but I would find any opinions interesting.

Essentially, I am struggling to come up with a sound financial reason to own a home. So far as I can tell:

1. You pay a fortune in interest (for which there is no tax benefit)

2. The 'asset' really isn't one... at least until you've realised the value

3. The risks are high... think 18% interest rates in the early 90s... you can very easily lose everything

4. The growth in value of residential property is, over the long term, pretty modest.

5. It appears that the cleverest way to own residential property is to own a rental property

Am I missing something here? It seems I would be much better off financially, over the long run, by living in rented accommodation, and putting my money, tax effectively of course, into a portfolio of assets of different types.

What am I missing? Or is home ownership simply still the Aussie dream, and a strategy born more from sentiment than financial rigor?

Cheers for any comments!

 

[Julia]

.......a strategy born more from sentiment than financial rigor?

Don't underestimate the validity of such a sentiment. Life isn't just about financial rewards. Pride of ownership, sense of security and simply really enjoying one's home environment is to some of us more important than flipping over properties purely for financial gain.

And don't neglect the discomfort of being subject to landlord's whims when renting, not feeling it's worth doing stuff to improve the place to add to your enjoyment etc etc.

I think both owning and having IP's are valid strategies. For completely different reasons.

 

[son of baglimit]

to find some answers, maybe if someone is out there who has seen no financial sense in owning their home, sold it, gone to the market with a fistful of cash and then LOST IT.

who do they feel ? not is respect of the loss of money, but more loss of somewhere they call home, somewhere they can do as they please, somewhere they can change to their own liking, without having to seek permission. as julia points out, owning a home is not the most financially sound thing to ever do, but is schooling, is relationships, is raising children ?

something to consider.

 

[Gordon Gekko]

A friend of mine had a good plan back when we were 18.

He was the kid that if you threw pennies at him he would laugh at you and pick them up. I never threw pennies I'm originally a scot, but you always new this guy would be rich. He was a complete miser, if you owed him a dollar he would remind you every 15 minutes.

Anyway when he was 18 he bought a house for 90K and then rented out 2 sometimes 3 other rooms. It was some of the best memories I've had, growing up I guess.

Point is he rarely paid any of his own money to pay the mortgage and he ran it that way for at least 8 years all the while putting his own money safely in the bank.

If you check a mortgage calculator and see what you would pay in interest for a house I don't blame you for being worried. In canada house prices are not as crazy as they are here, mind you wages are lower and beer is more expensive so at the end of the day it's all the same.

Sorry to ramble Ive had a drink or two but to end the story the guy I mentioned who I thought was so smart cheated on his wife and she took him to the cleaner. now she has the house and the kid and he lives in a make shift room over a garage.

Hope this helps mate.

Best Regards,

G

 

[weird]

I live in Sydney, only 36, and owning a home is just not a priority ... I have chosen to rent, and 'trade'.

I was speaking with a friend, who told me her long time boyfriend, was heavily invested in shares, and decided to margin lend, just before the crash ... and lost big time, my comment was he was still young, and plenty of time to recover, her comment was he was 39, not young (I disagreeded but anyhow) ... they were thinking of marrying, having kids, and she would like to buy to 'settle down' ... so rebuilding is not want she wanted to do ... I think Sydney is a pretty stressful place , particularly when talking about property .... most capital cities are these days ... Adelaide looks more reasonable, and also outside of capitals, in terms of deposit vs loan amount, except for beach towns.

Problem is for those wanting to do down the old path of couple with kids, and a place with enough rooms (2 or more and abit of land at the back) and perhaps a small study, and living somewhere that takes around 45 mins to get to work .... it's not that easy to find anymore, particularly in Sydney.

Anyhow ... not easy, I have read reports compared to income, Australia has become one of the most expensive countries. If you can afford to own your own home, and as Julia said there are many other benefits, then yes, it is a sound strategy.

 

[saiter]

I live in Sydney, only 36, and owning a home is just not a priority ... I have chosen to rent, and 'trade'.

I was speaking with a friend, who told me her long time boyfriend, was heavily invested in shares, and decided to margin lend, just before the crash ... and lost big time, my comment was he was still young, and plenty of time to recover, her comment was he was 39, not young (I disagreeded but anyhow) ... they were thinking of marrying, having kids, and she would like to buy to 'settle down' ... so rebuilding is not want she wanted to do ... I think Sydney is a pretty stressful place , particularly when talking about property .... most capital cities are these days ... Adelaide looks more reasonable, and also outside of capitals, in terms of deposit vs loan amount, except for beach towns.

Problem is for those wanting to do down the old path of couple with kids, and a place with enough rooms (2 or more and abit of land at the back) and perhaps a small study, and living somewhere that takes around 45 mins to get to work .... it's not that easy to find anymore, particularly in Sydney.

Anyhow ... not easy, I have read reports compared to income, Australia has become one of the most expensive countries. If you can afford to own your own home, and as Julia said there are many other benefits, then yes, it is a sound strategy.

Wow, did she desert him when he needed her most?

 

[weird]

Narh, would not been having the conversation after She is a top girl too, wouldn't expect anything less.

Although, I wouldn't be surprised to hear of many other similar stories, with all different outcomes too unfortunately

 

[theasxgorilla]

Essentially, I am struggling to come up with a sound financial reason to own a home.

If it's a PPOR, then when you sell it you pay NO tax. That's one whopping incentive for buying smart, improving smart and selling smart if I even knew one.

And if it's your first home the government will help cover your closing costs...that would be free money.

At the end of the day, its about getting as much money as you can as quickly as you can. I don't mean that in a glutinous sense, simply that the sooner you reach a certain level of financial well-being the sooner you can stop worrying about money, and that's the goal IMO.

Renting is good to save money because it's almost always cheaper than owning, and the breadth of liabilities you are exposed to is much smaller.

And the million dollar question: would I buy now?

Not in Australia. In the areas I'm interested in there is no sense of desperation or discounting...yet. With interest rates and unemployment where they are, is it any wonder?

In the long term I think it's a must to own quality property. The reason why it's as hard as weird describes is because so many people want a piece of the ideal...and that is due to demand outstripping supply.

 

[johenmo]

It's like shares. If you DYOR and select correctly then it's good. Having had 5 houses in 3 states and NZ (now in #5), 2 went well and 2 didn't. If you get the timing right or stay long enough you'll do OK. And for the majority it's the best investment they will make. Not necessarily the best overall, but the best they'll make.

First house doubled in 3 years - pretty good return I reckon. #4 doubled in 4 years. #2 area would have tripled had we stayed for 9 years - no so good but that's life.

And you can't put $ on the intangible benefits. So it's a sound strategy for the majority - esp with kids! Just don't overcommit in the first place (if you can).

Good thing I heard re housing - each generation wants to start where their parents ended up.

 

[kincella]

lets see...rent for 10 years at $20,000 pa = 200,000 theres the house half paid for...with low interest and prices going backwards....as some suggest
or as most cases...the house has doubled in value....
the most likely scenario....you are a renter...no ifs or buts....then you meet the girl...the lifelong partner....
problem...she wants to settle down and make a nest....
now you need to do the sums to buy the house...its double the cost of what it was 10 years ago....
but hopefully your career has taken off and now you can afford to pay the minimum 500,000 loan....but the girlfriend will need to contribute with a part time job...
it sounds flippant ..to disregard the money spent on renting for so long...when you are comparing rent versus buying
sounds like the renters might be increasing rather than decreasing....in the 1950's it was 50/50 renters/homeowners
now its 70 owners 30 renters
I dont mind as I need the renters to pay off my mortgages...
so its comforting to know the rental market is so strong.....
typical question asked by those under 34.....thats the average cut off date...when they stop renting or living with mum and dad
anyway...after that they all start the process of becoming home owners
see you in about 10 years
cheers

 

[Glen48]

Once the GFC started all the old rules went out the window and what we end up time will tell maybe even a new currency??/
As for kids you don't know how they will turn out until after Puberty as emotions and character are heredity and you could end up with a Child with a trait from your partners distant Axe murdering Uncle who has not been caught....every thing is a risk and luck.

 

[jpldavis]

Thanks for your comments everyone. It's an interesting question.

I currently am a home owner, but with approx. 50-60% of monthly monthly net income taken up by the house... AND we're only paying interest at the moment. We have a young child so my wife is only working part time.

So, essentially, I can focus on the house, pay it off maybe in 20 years if I really pile everything into it, but in the meantime we've had no decent holidays, I haven't been able to send my kids to a decent school etc...

So, we'll be 55, kids grown up, but without the start I would like to give them, and one asset which we can only realise by selling up.

While I certainly don't discount the benefits of home ownership as mentioned, and in an ideal world would certainly want to own my home, I would rather have a balanced portfolio of assets (shares, bonds, cash, investment property and owner-occupied property). Therefore, I would rather only have committed, say, 20% of my monthly income, into my owner-occupied home (paying principal and interest) with the rest of the wealth spead according.

Now, where I live in WA, I have absolutely no chance of buying a home for that price.

So, I'm trying to work out the best strategy... essentially focus on the portfolio of wealth and include owner-occupied housing if and when it requires a 'reasonable' amount of my available income, and hence be able to travel, put the kids through private school etc, or keep the home, focus on paying it off as quickly as I can (est. 20 years) and then start trying to amass wealth from there (but with probably 80-90% of my assets tied up in a single property). But bearing in mind, 20 years of hard graft and potentially no decent school for the kids in the meantime...

Can you see my dilemma?

 

[kincella]

wow 50-60% taken up with the house...why is that ? it should be about 30% of household income...
have you accounted for growth in your wages and income for the future...and the loan should be reducing as the years go by...
you cannot sell up and buy a cheaper home further out ???

 

[Sean K]

Don't underestimate the validity of such a sentiment. Life isn't just about financial rewards.

110% behind this. Maybe 120%! How do you put a value on owning your own nest? It's not just a marketing ploy imo, but pure human psychology.

 

[prana]

balance mate. Owning a house isn't a financial decision. Unless you make it a financial interest, it's your home. Some people can live in a tent, some people need to have a bedroom with a view. I guess the word is excessive. Buy and live within your means, don't over do it.

 

[jpldavis]

wow 50-60% taken up with the house...why is that ? it should be about 30% of household income...
have you accounted for growth in your wages and income for the future...and the loan should be reducing as the years go by...
you cannot sell up and buy a cheaper home further out ???

It was about 30% of combined income until we started the family and dropped one income! And unfortunately we're pretty far out as it is!

I appreciate the point though!

 

[jpldavis]

balance mate. Owning a house isn't a financial decision. Unless you make it a financial interest, it's your home. Some people can live in a tent, some people need to have a bedroom with a view. I guess the word is excessive. Buy and live within your means, don't over do it.

This is the crux of my question... balance.

Is paying 50-60% of my net income, without reducing any principle may I add (that would take approx. 80%), for an asset than in 20 years will comprise over, say, 80% of my total weath, a good decision even when you factor in the completely valid points about it being a home, not a pure asset etc...

I have absolutely not problem with home ownership, and in an ideal world I would certainly like to have my cake and eat it (ie. a family home that costs and comprises approx. 20-30% of my total income/wealth). But nowadays, particularly in the capital cities, this is very hard to achieve.

I would love to own and live in a family home... I'm just not sure that the balance is right given current house prices in Oz, and my current level of income.

 

[pilots]

This is the crux of my question... balance.

Is paying 50-60% of my net income, without reducing any principle may I add (that would take approx. 80%), for an asset than in 20 years will comprise over, say, 80% of my total weath, a good decision even when you factor in the completely valid points about it being a home, not a pure asset etc...

I have absolutely not problem with home ownership, and in an ideal world I would certainly like to have my cake and eat it (ie. a family home that costs and comprises approx. 20-30% of my total income/wealth). But nowadays, particularly in the capital cities, this is very hard to achieve.

I would love to own and live in a family home... I'm just not sure that the balance is right given current house prices in Oz, and my current level of income.

Jpldavis, it is all in the long term when it comes to houses, we bought ten years ago in brown way Karrinyup $91,100. six months ago was worth 800kto900K to day only$750,000, the second place is in in Shepherd st Beaconsfield, this cost $146,000, six months ago 900K, to day it is back to800K. With real estate look long term and you will be a winner.

 

[metric]

first of all you gotta be healthy. that means happiness and lifestyle. you must love where you live geographically, and whom you live with domestically.

all other stuff is preasure. bank loans, work, etc. you must decide how much preasure you want, and think to the best way forward, remembering happiness.

think of the geographical things that make you happy. what environment do you want to live before you commit to a mortgage. no use getting a mortgage in the city you work in if you really love the country. and vice versa. find the best value for money geographical area that suits your desires.

if you like cities, live and work in sydney, but cant afford to buy a home there, look to a regional city that you can afford.

BUT i wouldnt borrow a lot of money when interest rates are at historical lows. theyve only got one way to go. now is the time to pay off debt, and save some money for opportunities that may arise down the track.

 

[jpldavis]

Jpldavis, it is all in the long term when it comes to houses, we bought ten years ago in brown way Karrinyup $91,100. six months ago was worth 800kto900K to day only$750,000, the second place is in in Shepherd st Beaconsfield, this cost $146,000, six months ago 900K, to day it is back to800K. With real estate look long term and you will be a winner.

Point taken, but my belief is that the property market has had its run of significant growth for the foreseeable future, and hence, while I think it won't come down too much, I can't see growth much above inflation for the next 10 years or so. I'm assuming most of the growth you saw in Karrinyup was in the past 5 years, am I right?