The future of Australian property prices

[againsthegrain]

Those figures are wrong, 320k does not get $450 rent per week so the whole equation does not balance.

Rent is DEAD money is a myth created by property developers such as Metricon who are in big debt

Supreme Komendant

 

[Mofra]

Please explain? How does this work? Rent is DEAD money and pays off investment mortgages for people like me. You keep on renting and pay off my mortgage for me. Thanks.

If I sell my PPOR there is no capital gains tax. The equity in my PPOR allows me to leverage against it to buy other "stuff".

$450 per week x 52 weeks = $23,400 per annum or $1950 per month. RENT

$322,500 x 7.25% Interest Only = $1950 per month. HOME OWNERSHIP

So you are happy to get rid of $2000 per month of DEAD money instead of investing into the lowest taxable form of investment available in Australia?

Rent is dead money? Wow, people still use those sort of 80s catchcries

If rent is dead money, so is non-deductable bank interest (which is generally higher than rent anyway).

In any case, lets look at the renter who buys investment property vs the homeowner. Lets assume that the investor buys only one property.

Lets look at a $500k property that would be earning earning $450k pw rent on a 90% lend with other fees covered by deposit.

$450k mortgage at 7% over 30 years ~ $3,000 pm repayments, rates $1.5k pa, $500 other charges (water, sewerage, etc) and 0.5% and insurance & maintenance = $2.5k pa. All of these charges are non-deductable.
$40,500 pa in after tax income is being used on the property, or ~$58k pa in pre-tax income.

Lets take the renter in the same scenario.
$3,000 repayments (as per the above), $450pw rent paid, $450pw rent earned with, say $20pw in management fees deducted. Other maintenance costs the same.

Outgoings are $1,040 higher so $41,540. Of this, ~$31k interest is deductable as is $4.5k in maintenance as is $1,040 in management fees.
That's a $36,540 deduction that the investor obtains that the O/O purchaser doesn't - again at the 30% tax rate, that's $10,962 back in my pocket over the O/O purchaser.

The only advantage the O/O purchaser over the renter & inv. purchaser has is CGT exemption, which is less important for someone who intends to hold the property indefinately as a source of income/available credit. Given the extra cash in pocket on an annual basis, it makes it easier to service the seond property when the time comes too

Bear in mind these are simple numbers crunched on the back of an envelope - worth paying your accountant/adviser his hourly rate to crunch the numbers properly in a spreadsheet which makes the picture much clearer.

 

[KurwaJegoMac]

Those figures are wrong, 320k does not get $450 rent per week so the whole equation does not balance.

Rent is DEAD money is a myth created by property developers such as Metricon who are in big debt

Supreme Komendant

Depends on your definition of 'dead' money. Personally I see rent as dead money because you receive 0 return on that money. Same goes for most expenses. Anything that does not generate an income is 'dead' money (i.e. it's a liability and not an asset)

That being said, even though it's 'dead' money, it's not necessarily a bad thing - everyone needs somewhere to live and in certain economic environments you might be better off renting, but this is the exception rather than the norm. If you can generate more income from the 'savings' left over after renting, compared to buying a property, then you're better off renting obviously. But as I said before, this is the exception rather than the norm.

 

[KurwaJegoMac]

The only advantage the O/O purchaser over the renter & inv. purchaser has is CGT exemption, which is less important for someone who intends to hold the property indefinately as a source of income/available credit. Given the extra cash in pocket on an annual basis, it makes it easier to service the seond property when the time comes too

Quite right!

Funny thing is most people are led to believe that buying a PPOR is a good investment.

An inv. property is a good investment, PPORs are not exactly for those reasons you mentioned above.

Put simply - PPOR do not provide you with an income stream. What a wonderful 'investment'.

 

[Mofra]

Quite right!

Funny thing is most people are led to believe that buying a PPOR is a good investment.

An inv. property is a good investment, PPORs are not exactly for those reasons you mentioned above.

Put simply - PPOR do not provide you with an income stream. What a wonderful 'investment'.

The after-tax dollars required to service an O/O property go close to servicing two Inv. properties when median are taken into account, and if looking at a lower than median second pr third property (yields are often slightly higher as well) the financial argument makes sense.

Yes, I am fully aware the bears will be upset that this does rely on government deductions to be true

 

[wayneL]

Rent is dead money? Wow, people still use those sort of 80s catchcries

Yep. They work on the financially illiterate a treat.

 

[Uncle Festivus]

As of about 4 months ago ie 'The Top', buying your own home became 'dead money' as well - buying a depreciating 'asset' AND paying for all the rest of the outgoings with no return?

So now the predictions are for a 40% drop in Chinese (& Indian?) student numbers - frees up a lot of rental space? So investors can't keep increasing rents now but still have to pay higher interest rates? A perfect storm brewing?

http://www.universityworldnews.com/article.php?story=20101103144018462

 

[Mofra]

So now the predictions are for a 40% drop in Chinese (& Indian?) student numbers - frees up a lot of rental space? So investors can't keep increasing rents now but still have to pay higher interest rates? A perfect storm brewing?

http://www.universityworldnews.com/article.php?story=20101103144018462

The indirect effects of a 40% drop will be more more prevalent than the direct effect on the rental market. We are talking about a massive drop in earnings in Australia's third largest income producing activity (after exports of coal & iron ore).

Not good news at all.

 

[cutz]

Overleverage starting to bite back ??

Rates returning to normal levels pi$$ing you off ??

Here's a solution http://www.news.com.au/money/proper...llar-a-week-rent/story-e6frfmd0-1225947501042

 

[matty77]

QLD is doing well.

http://www.news.com.au/money/money-...aults-hit-record/story-e6frfmd9-1225948145480

THE number of homes and businesses repossessed by banks has reached an all-time high in Queensland as record numbers of owners default on mortgage repayments.

Justice Department figures show lenders lodged 193 claims to repossess homes and businesses in the state's courts during August.

It is the highest monthly total since records began about 1992, surpassing the previous record set in April last year by 17 claims



Read more: http://www.news.com.au/money/money-...rd/story-e6frfmd9-1225948145480#ixzz14N8SNr2y

 

[trainspotter]

Rent is dead money? Wow, people still use those sort of 80s catchcries

If rent is dead money, so is non-deductable bank interest (which is generally higher than rent anyway).

In any case, lets look at the renter who buys investment property vs the homeowner. Lets assume that the investor buys only one property.

Lets look at a $500k property that would be earning earning $450k pw rent on a 90% lend with other fees covered by deposit.

$450k mortgage at 7% over 30 years ~ $3,000 pm repayments, rates $1.5k pa, $500 other charges (water, sewerage, etc) and 0.5% and insurance & maintenance = $2.5k pa. All of these charges are non-deductable.
$40,500 pa in after tax income is being used on the property, or ~$58k pa in pre-tax income.

Lets take the renter in the same scenario.
$3,000 repayments (as per the above), $450pw rent paid, $450pw rent earned with, say $20pw in management fees deducted. Other maintenance costs the same.

Outgoings are $1,040 higher so $41,540. Of this, ~$31k interest is deductable as is $4.5k in maintenance as is $1,040 in management fees.
That's a $36,540 deduction that the investor obtains that the O/O purchaser doesn't - again at the 30% tax rate, that's $10,962 back in my pocket over the O/O purchaser.

The only advantage the O/O purchaser over the renter & inv. purchaser has is CGT exemption, which is less important for someone who intends to hold the property indefinately as a source of income/available credit. Given the extra cash in pocket on an annual basis, it makes it easier to service the seond property when the time comes too

Bear in mind these are simple numbers crunched on the back of an envelope - worth paying your accountant/adviser his hourly rate to crunch the numbers properly in a spreadsheet which makes the picture much clearer.

GREAT STUFF Mofra !!! Now when you walk cap in hand to the bank manager and ask for money what is the first words out of his/her mouth?

"Do you own your own home?" ........ all downhill after that. The lending system is geared to loan money on the PPOR. Period. Rightly or wrongly it is a fact of life. The banks look for stability. This is the model that they use. Not my rules. THEIRS.

Now this is not to say there is nothing wrong with renting. It depends on the individuals circumstances. It is very expensive in certain areas to buy property and it also a commitment or contract to provide you with "notional rent”. For people looking to get in to the home market, home ownership may represent a poor alternative for their scarce financial resources. They are better off staying renting and investing in shares or their career path which may require flexibility in choices or just blowing the lot on having a good time.

Borrowing to purchase a home is a form of forced saving. Money that might otherwise have been totally allocated to consumption, with nothing to show for it twenty years later, was used to repay mortgage debt.

You could win lotto or you could be hit by a bus.

Let's say house prices increase by 10 percent over the next five years. Using a median national house price of $558,540, it would be worth $614,394. You would have paid $119,460 in mortgage repayments compared to if you were renting you would have spent $91,200 if rents don't rise (using the above national scenario). That means you would have made about $28,000 in five years by choosing a mortgage over renting.

(Figures above are representative of interest rates being stable, no outgoings applicable, a rubber chicken was used and your rent did not go up etc)

Average rent for a house: $380 per week ($1520 per month)
Average mortgage: $280,420. Repayments: $1991 per month
Difference: $471 cheaper to rent per month

The Australian house price index rose 0.1 per cent in the September quarter, the Australian Bureau of Statistics said. That's right peoples ...... upward trending pattern. LOLOL ..... try stagnant.

http://www.abs.gov.au/AUSSTATS/abs@.nsf/MF/6416.0

 

[KurwaJegoMac]

GREAT STUFF Mofra !!! Now when you walk cap in hand to the bank manager and ask for money what is the first words out of his/her mouth?

"Do you own your own home?" ........ all downhill after that. The lending system is geared to loan money on the PPOR. Period. Rightly or wrongly it is a fact of life. The banks look for stability. This is the model that they use. Not my rules. THEIRS.

Agree with the rest of your post but this part isn't true. I do not own a PPOR, yet have had no issues getting a loan for an investment property - offerred up to 95% LVR from a Big4 bank, they didn't even bat an eyelid when I mentioned I didn't own my PPOR.

The investment property itself is the security for the loan, you don't need a PPOR to act as a security.

 

[trainspotter]

Agree with the rest of your post but this part isn't true. I do not own a PPOR, yet have had no issues getting a loan for an investment property - offerred up to 95% LVR from a Big4 bank, they didn't even bat an eyelid when I mentioned I didn't own my PPOR.

The investment property itself is the security for the loan, you don't need a PPOR to act as a security.

Care to name the bank KJM ?? I find this one hard to fathom. Associate of mine is a mortgage originator and I have had 15 years as a finance broker experience. NEVER have I heard of a Big 4 going 95% LVR on a IP. 10% has always been the rule for the Big 4 and then you have to get past LMI. Servicability was another issue as well as saving history as well as job longevity and debt servicability ratios and other credit facilities and CRAA and blah blah blah ad infinitum.

 

[Julia]

Personally I have a very good relationship with my landlord so pay well below market rates, but happily do the small maintenance around the house and keep the place in order.

Even if I was paying market rates of ~$400 to $450pw I would still be better off (after tax) renting and owning investment property than I would trying to pay off my own home.

So Mofra, you don't count the 'emotional investment' in having your own home?
i.e. the security of knowing no landlord can toss you out, the capacity to make what improvements you think you'd enjoy, just the sense of coming home to somewhere that's actually yours?

None of that matters to you?

 

[medicowallet]

So Mofra, you don't count the 'emotional investment' in having your own home?
i.e. the security of knowing no landlord can toss you out, the capacity to make what improvements you think you'd enjoy, just the sense of coming home to somewhere that's actually yours?

None of that matters to you?

This is an excellent point.

The problem is that the "good will" has grown substantially, and I think that there is a large room for correction, now that building approvals have come to a halt and developers and builders will need to cut margins to keep their employees happy. The AUD is helping with decreased prices too.

Now, let us see if it actually feeds through to the naive consumer.

 

[againsthegrain]

the security of knowing no landlord can toss you out

Technically you don't own the house until it is paid off, so the moment you miss a few repayments the bank will toss you out, all it takes is losing your job for a month, getting downgraded to part time or waiting until you find a new position.

The same can happen with renting, your loan will not get renewed or you lose your job or a earthquake will strike. Life is unpredictable and too many people are motivated by fear. (find a cheaper rental no loses)

It is a great selling point for developers,
1. own your own do as you please
2. rent money is dead money

If I was a developer id definately use the above as selling points, the reality is you won't be taking your property or the extra non council approved hush hush bedroom which is paid off when you are 65 with you to your grave.

At the moment there is plenty or rental opportunities around with many more to be soon available, the housing shortage is a bit of a myth.

Each to their own, some people need the illusion on paper to say they own a piece of land that has been there before we came and will be there after we leave.

I was raised in several east european countries, when I was young and back 20 years ago over there was no such thing as owning a house, I have rented so far all my life while being able to save, invest, travel and live my life. I have big plans ahead of me and plan to buy a property by my mid 30s (I am 27 now) with at least 70 - 80 % deposit.

About 2 years ago I nearly bought a house, lost a small deposit but did not go through with it and everyday I am thankful that it did not go through.
I still see my alternate self paying off this 400k modern pile of rubbish that would cave in after 5- 10 years while the developer goes bust.

I would be travelling to work 1 hr + have bags under my eyes, lost all my savings, and investment power in the deposit became a wife beater and be locked into a 30 year loan.

Right now I live within 15 kms to the cbd vs 50 kms, pay alot less rent then mortgage and able to save quiet a bit, invest and enjoy life before hitting 30

Supreme komendant

 

[trainspotter]

About 2 years ago I nearly bought a house, lost a small deposit but did not go through with it and everyday I am thankful that it did not go through.
I still see my alternate self paying off this 400k modern pile of rubbish that would cave in after 5- 10 years while the developer goes bust.

I would be travelling to work 1 hr + have bags under my eyes, lost all my savings, and investment power in the deposit became a wife beater and be locked into a 30 year loan.

Right now I live within 15 kms to the cbd vs 50 kms, pay alot less rent then mortgage and able to save quiet a bit, invest and enjoy life before hitting 30

Supreme komendant

WTF ??????????? Buying a house makes you a wife beater?

Go and buy some shares ..... it can evaporate just as quickly if not quicker in most cases. YOU make the decisions. Do the research. Locked into a 30 year loan???? WTF ??????? Ummmmmmmm ..... so if you buy a home you are not allowed to sell or go travelling or save money or have a good time beacuse you are a slave to a mortgage?? HUH ?????

Stay renting dude. Home ownership is not your cup of tea from what I can make out.

 

[KurwaJegoMac]

Care to name the bank KJM ?? I find this one hard to fathom. Associate of mine is a mortgage originator and I have had 15 years as a finance broker experience. NEVER have I heard of a Big 4 going 95% LVR on a IP. 10% has always been the rule for the Big 4 and then you have to get past LMI. Servicability was another issue as well as saving history as well as job longevity and debt servicability ratios and other credit facilities and CRAA and blah blah blah ad infinitum.

Happy to. It was ANZ, with a 95% LVR and LMI (amounted to about 3k).

Perhaps my case was an exception for some of the reasons you mentioned - i had a demonstrated savings history, with a 20% deposit saved up. No debts (save for HECS) and demonstrated a relatively stable employment history. I also earn above median wage and am in my mid 20s - so perhaps they see me as lower risk? *shrugs*

I know my parents struggled to get an IP loan in their 40s, and they almost fully owned their PPOR.

Anyway thats my experience, and perhaps my case was an exception given my circumstances.

 

[trainspotter]

Happy to. It was ANZ, with a 95% LVR and LMI (amounted to about 3k).

Perhaps my case was an exception for some of the reasons you mentioned - i had a demonstrated savings history, with a 20% deposit saved up. No debts (save for HECS) and demonstrated a relatively stable employment history. I also earn above median wage and am in my mid 20s - so perhaps they see me as lower risk? *shrugs*

I know my parents struggled to get an IP loan in their 40s, and they almost fully owned their PPOR.

Anyway thats my experience, and perhaps my case was an exception given my circumstances.

Very peculiar for ANZ to offer 95% LVR for an IP ?????? Never heard of it before. Exceptional circumstances it must have been.

ANZ has lifted its LVR to 95% for its existing customers who have a strong credit history in an attempt to claw back some of the market share it lost to CBA and Westpac last year. (PPOR only)

“We have a strong risk profile in our mortgage portfolio, having chosen to sit out much of the first-home buyers' market in 2009,” a spokesperson to Broker News.

ANZ was the first Australian bank to tighten credit policies in response to the GFC, and has maintained the most conservative position on LVRs now for 16 months.

“With the improved economic outlook, we have taken a decision allow mortgage lending up to 95% LVR for some existing customers where they have a strong credit history,” the spokesperson said. “All applications that are above 90% LVR will require a full valuation.”

LMI is included in the 95% LVR cap and the spokesperson said the bank is conscious of loan serviceability in an environment of rising interest rates. The bank uses an interest sensitivity buffer and has also recently raised its default living expenses in the credit assessment process.

http://www.brokernews.com.au/news/anz-lifts-lvr-to-95/41346

 

[againsthegrain]

Stay renting dude. Home ownership is not your cup of tea from what I can make out.

Yes, for now it is not. - I like to think outside the square "block" we live in lol you should try it