Is home ownership a sound strategy?

kincella · 30 March 2009

to answer the question..posed....is home ownership a sound strategy....
a simple answer is....
say you are finally leaving home at 30....then you can look forward to another 60 years of needing a roof over your head....
or if you were like myself..I started nesting at 20...so in my case 70 years
now even if you left the loan for 30 years...you then still have another 30 years of free housing costs.

as for the sheep....I happen to like sheep...
:sheep::sheep::sheep::sheep::sheep:

Judd · 30 March 2009

jpldavis said:
.........
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...

....................

Can you see my dilemma?

Yes, I can. Seems that you have a cash flow problem and a conflict between wants and needs, ie want a holiday but need a home.

Forget about holidays, forget about a new car or even a second car, trash the Foxtel and any other item which you may want but is not actually necessary. Cancel the credit card, if you have one, and pay off the balance over time.

Sit down, take 20 deep breaths use Excel or Open office or one of the budget planners readily available on the ASIC site or other places and start planning. You don't seem to have done so to date, so now is a good time to do so.

It is a pity about holidays but a lot of home owners (in the purchasing phase) had to do without them for many years - in our case it was 8 years. As for the decent school, place them in public school until year 6 and beforehand think about whether the private school is worthwhile - depends on what your view of "decent" actually is.

Reduce your expectations if you wish to retain the house in which you currently live. Otherwise, sell up - even at a loss - and get something you and your wife can afford.

Above all, nothing, I repeat, NOTHING comes before family. So keep that at the forefront when you discuss all things with your wife, who is, or at least should be, your most valued partner in life.

weird · 30 March 2009

Have found this thread incredibly thought provoking, while originally directed at an individuals circumstances, and hope he has found some helpful information for future direction.

In terms of any financial discussion, individual circumstances certainly need to be considered, now and in the future (which could also be affected by ones actions starting now).

Personally while 100% focused towards trading (and only renting), I don't wish to rule out future investments in property.

I believe the Jan Somers's books have been helpful to others.

Anyhow look forward to future discussion.

son of baglimit · 30 March 2009

tech/a said:
The alternative is No home ownership.

So look back 60 yrs at when your parents/grandparents were coming out of of a depression.
Given the choice do you REALLY think their answer would be a resounding---dont do it!

The only thing that ever holds back first time home buyers is FEAR.

Wont ever change.

Thats why 90% of the population didnt buy 5 IP's in the late 90s---FEAR.

yeah - fear of tenants !!!!!!!!!!!!

Julia · 30 March 2009

kincella said:
THE MAJOR banks are aggressively repricing their deposit books ahead of next week's expected rate cut by the Reserve Bank.

With the political pressure mounting on all banks to pass on the full benefit of further easings of monetary policy, two of the major banks have taken drastic steps to protect their funding margins by slashing deposit rates.

From this morning, National Australia Bank will slash the rate it pays on three month fixed term deposits from 4.2 per cent to 2.1 per cent.

But what you don't say in your alarmist statement is that NAB is offering 3.4% for four months.

The NAB move comes after more aggressive repricing by Commonwealth Bank in recent weeks in which it slashed its three month fixed term deposit rate from 4.2 per cent to 1.5 per cent.

I was this afternoon quoted 3.7% for four months.

Suncorp still offering 6% for three years.

nomore4s · 30 March 2009

Julia said:
But what you don't say in your alarmist statement is that NAB is offering 3.4% for four months.

I was this afternoon quoted 3.7% for four months.

Suncorp still offering 6% for three years.

I was also offered 3.7% for 4 months today as my term deposit rolls over next week. But I think my Netbank saver account is still paying 3% with full access and interest paid monthly - this could change at anytime though.

TIO up here are also offering 4.5% for 25-36 months.

singlefished · 31 March 2009

kincella said:
....but what about hyperinflation....which wipes out the debt on the homes...and makes housing even more unaffordable...

Assuming that household income rises at the same rate as inflation that is... and if current interest rates remained unchanged, well, sign me up right now before the :fan

That won't happen though, interest rates will have to rise somewhat to combat the scenario and not many companies would be able to provide their employees with a counter inflationary pay rise on the first Wednesday of every month (except January).

The debt would grow considerably if your income wasn't keeping up ofcourse, remember the masses crying poor when mortgage rates crept up to about 9% only a few short months ago? and that was with inflation running at about only 5%.

Can't say I'm looking forward to $5 for a loaf of bread and $12 for a stubbie

Iceland central banks just cut their rates to 17% from 18% last week now their currency has somewhat stabilised. I don't think that the hyperinflation route is a path anybody wants to take.

Here's a good link that shows how fast things went bad (from the Central Bank of Iceland) and how fast they predict it will take to get back to their target rate of 2.5%
http://www.sedlabanki.is/?PageID=202

Here's another link showing what their house prices have been doing through this same volatile inflationary environment. Doesn't look like they've dropped much according to the index (inflation adjusted I assume?)
http://www.globalpropertyguide.com/real-estate-house-prices/I

Edit: sorry - inflation adjusted down 16.24% (from the same site - different page)
http://www.globalpropertyguide.com/house-prices-indices/House-price-changes-year-to-end-Q4-2008

kincella · 31 March 2009

singlefished....in all fairness....Iceland has a population of about 300,000 or about 1/10th of the city of Melbourne...or equivalent to a couple of outer suburbs...with very different culture, and needs...heavily reliant on the UK banks that pulled the plug on them....
I just refuse to even consider anything is comparable between the two...let alone Australia versus Iceland...
:sheep:

kincella · 31 March 2009

Julia....believe my alarmist statement came direct from the news article....
extract
'According to market research firm, Infochoice, CBA has also crunched its one year fixed rate offer to 1.5 per cent from 3.5 per cent. '

and you can all provide different examples of better rates...but I note in the comparison table that the big 4...have very similar pricing..they are the ones that have the lowest cost of the govt guarantee....
anyway believe its just a hint of things to come....
you may be surprised how many people use the 3 month terms, rather than a 4 month or longer
friend who lives off term deposit only...last year I advised her to lock into the big rates for the best price for the longest term....she had been living on 3 month terms....she actually took my advice and locked in for a year at 8.5...within 2 weeks those rates dropped to below 6...its a difference of 25,000 pa to her
:sheep: see comparisons below
http://www.canstar.com.au/interest-rate-comparison/compare-100k-term-deposit-rates.html

Julia · 31 March 2009

kincella said:
Julia....believe my alarmist statement came direct from the news article....
extract
'According to market research firm, Infochoice, CBA has also crunched its one year fixed rate offer to 1.5 per cent from 3.5 per cent. '

Following is copied from the CBA's website this morning. 1 Year rate is not even quoted at all:'

Interest rates

Rates vary depending on the term of your deposit. You can also find competitive rates for other terms of investment at any branch or by phoning 13 2221, 24 hours a day, 7 days a week. For interest rates on a Term Deposit balance of $500,000 and over, please visit any branch.
Term Deposit Headline Rates.

Interest rates displayed below under the terms 4 months, 7 months, 11 months and 36-47 months are based on interest paid at the end of the investment term, (referred to as interest paid at maturity below).

Term of 4 months (Interest paid at maturity)

Balance

Interest Rate

$10,000 to less than $500,000
3.70% per annum

Term of 7 months (Interest paid at maturity)

Balance

Interest Rate

$10,000 to less than $500,000
3.50% per annum

Term of 11 months (Interest paid at maturity)

Balance

Interest Rate

$10,000 to less than $500,000
3.40% per annum

Term of 36-47 months (Interest paid at maturity)

Balance

Interest Rate

$10,000 to less than $500,000
4.50% per annum

No mention of 1.5% anywhere.

ryang57 · 31 March 2009

jpldavis said:
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!

yes yes home ownership is basically just a dream thing and a convenience of being in charge of what you do to the house blah blah

other than that it simply inflates because people have a dumb idea that they are also good investments due to the previous inflation haha - so it becomes a vicious circle until credit deflates.

kincella · 31 March 2009

Julia...there is usually a notice in the main papers..where all the banks show their new rates and date they are affective from...so I am not surprised its not on their website...maybe the new rate will be affective from 2.4.09...or a weeks notice 9.4.09
another poster may know...used to be in Thursdays AGE and AFR

when I was looking for confirmation of CBA mortgage rates....they do not change the website until the new rate becomes affective...
so in the news it may say cba cutting rates by 1%....but it may be in 2 weeks time...for mortgage rates...they delay the cut...but deposit rate

the cba rates you quote are at 30.3.09...but the cannex chart shows 2.5%

singlefished · 31 March 2009

kincella said:
singlefished....in all fairness....Iceland has a population of about 300,000 or about 1/10th of the city of Melbourne...or equivalent to a couple of outer suburbs...with very different culture, and needs...heavily reliant on the UK banks that pulled the plug on them....
I just refuse to even consider anything is comparable between the two...let alone Australia versus Iceland...
:sheep:

Well, I wasn't really comparing anything between the two countries, rather putting some beef on the hyperinflation scenario that you initially brought up.

So I can assume that you believe that in a short term hyperinflationary environment, house prices and wages are simply just going to rocket up whenever the central bank tries to stimulate the economy by adjusting interest rates?

I could have also quoted statistics from the Zimbabwe environment but the prospect of selling ones property to buy a loaf of bread is not likely to happen in Australia and somewhat unrealistic.

kincella · 31 March 2009

well I would never use zimbabwe as an example of what can happen either...
but there have been cases in history where hyperinflation has occurred..if only briefly...
now back to the current window of opportunity...the low interest rates....
with at least another .05% cut due next week..and I intend to lock in those low rates for 5 years

Farencue · 31 March 2009

Hello jlpdavis
Would you mind sharing how you came to be the owner of a $580k mortgage?
I am very interested in what made you take on such a large amount? eg: were you persuaded by someone, did you decide you "had to have" that particular house, did you think you could double your money or....? Also is it the first house you have bought?
I am not here to bash you or point out your mistakes if any, just very curious at how you ended up with such a large debt. I know every time I have bought a house (as my PPOR) I have been very conservative with how much debt I will take on. Admittedly this approach does not see me living in a palace
Cheers
farencue

Tysonboss1 · 31 March 2009

weird said:
I have chosen to rent, and 'trade'.

It puzzels me when people make coments like this, owning a property does not detract anything from other investments investments you choose to make.

If anything owning a property adds a massive about of value to the other areas of investment, whether they be shares or business.

By owning a property

-you have an ever growing amount of your wage to put towards other investments as you pay off the loan, where as you get pay raises year by year the rent will probally all so go up.

-you can access loans to invest at cheaper interest rates without the threat of margin call

-you have a greater stability in your net worth

I believe that when you have a good business producing excess cashflow, combined with owning a property (or two) and also a good share investment stratergy you will have fantastic growth.

Mcdonalds would not be the company they are today without property, If Mr Sonneborn who was CFO of mcdonalds from the 50's and 60's had not turned Mcdonalds into a Real estate business instead of a burger business, they would not have been able to grow like they did.

Mcdonalds is the Largest property owner in the world buy land value, and generates a massive amount of revenue buy charging franchises rent, owning this land in the early days is what allowed them to finance at affordable rates without threating loan agreement terms.

moXJO · 31 March 2009

Tysonboss1 said:
By owning a property

-you have an ever growing amount of your wage to put towards other investments as you pay off the loan, where as you get pay raises year by year the rent will probally all so go up.

-you can access loans to invest at cheaper interest rates without the threat of margin call

-you have a greater stability in your net worth

I believe that when you have a good business producing excess cashflow, combined with owning a property (or two) and also a good share investment stratergy you will have fantastic growth.

.

Do not agree with some of your points. My rent was the same for 7 years and has only just increased by $10.

Being lucky enough to get in near the ground floor of the bull market, I took a small amount of capital and turned it into a much larger sum. This combined with business and other assets; I could now buy a house outright.

Business cash flow imo is the cash cow if you time it right. And as someone else mentioned before, timing can make the difference between a good and bad investment.

However agree with your points regarding loans and greater stability in your net worth. And these can make the difference between making a little and leveraging out to make a lot. I have no problem with buying property in the future.

jpldavis · 31 March 2009

Farencue said:
Hello jlpdavis
Would you mind sharing how you came to be the owner of a $580k mortgage?
I am very interested in what made you take on such a large amount? eg: were you persuaded by someone, did you decide you "had to have" that particular house, did you think you could double your money or....? Also is it the first house you have bought?
I am not here to bash you or point out your mistakes if any, just very curious at how you ended up with such a large debt. I know every time I have bought a house (as my PPOR) I have been very conservative with how much debt I will take on. Admittedly this approach does not see me living in a palace
Cheers
farencue

A combination of circumstance and stupidity mate. Our house is beautiful... basically got hooked as soon as we saw it, and ended up paying $125K over our budget... then factor in fees, stamp duty etc, and we ended up $180K over budget. Then my wife became pregnant, and ultimately finished work... learnt my lesson... now just trying to solve the problem.

Current solution we are considering, pending advise from accountants, is to rent our house out, and rent somewhere to live, then take the tax benefits we would receive to maximise our money, and concentrate on paying off over 10 years at a fixed rate.

Has anyone got any opinions on the above?

spaceman666 · 31 March 2009

If you have ever had a Realestate agent Humiliate you because your renting
you would never rent a home again. They have total power over you
I would rather live in a slum I owned than to rent a mantion that I had to
pay rent to a moron nasty realestate agent ! I had the worst experiance of my life renting a house from a rude nasty woman that went out of her way to make my life a misery. long story but a true one I am one of the easyest guys to get along with and my wife has Muscular Distrophy . This woman was so bad it was unberable ! It all started when the gas heater broke down and it took 4 months to get it fixed up. It was a very cold winter . I tried to be easy to get along with when they said it would be fixed next week then the week after ect ect In the end I got angry and she got even a renter has no power at all !
This woman was a liyer and a disgrace what more can I say but get a house you can afford and hang on to it ! ;-] thats my story mate and this is my first post. GOOD LUCK AND DO LOTS OF RESEARCH ! ASK EVERYONE YOU CAN ABOUT EVERYTHING YOU CAN ! Research Research Research and have fun Theres allways a bargan when you look at a hundred houses you onley need one of them allso just keep making cash offers you onley need one person to take your offer ! sometimes people will take anything on the day.

Tysonboss1 · 31 March 2009

moXJO said:
Do not agree with some of your points. My rent was the same for 7 years and has only just increased by $10.

I would think that not having an increase in 7 years would be the exception rather than the rule, and it's somthing you shouldn't count on.

I am glad to hear you have been putting money aside while you have been renting, But the main point I was trying to get to is that you don't have to choose one or the other,

I think that developing a portfoilio of Property, Paper assets ( shares etc.) and bussiness is the key, I am not saying you have to get it all at once but having a goal to aquire all three over say 15 years is a good plan, that way you can pick the best times to enter each one and dedicate time to understanding each class as you go,

I myself having been investing since I was 14 I am now 27, I have put together a portfoilio of assets that all compliment each other.

Property - I have a positively geared portfoilio worth over a $1M, It's paying itself off slowly and allows better borrowing for other areas.

Business - I have built a business that provides excess cash flow because I can live of less than 20% of it's earnings, Not to mention other benefits such as controling the tax I pay, having control over the business cashflow that allows me to recycle debt on my credit cards through stock purchases so I basically have a rolling $30,000 Interest free credit that I can earn interest on, or offset against other loans + many other benfits that help increase my investments.

Shares - And now I am in the share investment phase, Having sold most of my shares in 2006 to grow my business and clear debt against property all my excess cashflow is being pumped into the market as I believe it is a good time as I am a long term investor.

Is home ownership a sound strategy?

kincella

Judd

weird

son of baglimit

Julia

In Memoriam

nomore4s

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singlefished

kincella

kincella

Julia

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ryang57

kincella

singlefished

kincella

Farencue

Tysonboss1

moXJO

menace to society

jpldavis

spaceman666

Tysonboss1

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