Why owning a house is financial suicide

Read the article, it's based entirely on the US which is a completely different market to Australia. The US is much more pro business in the first place which makes investing down that path a much more reasonable and achievable option.

They also don't have nearly the same mentality towards property. Was reading an interesting article from the RBA the other day and in the US household income and house prices have stayed pretty much steady at about a 1.5-2:1 ratio for the last 35 years, compare that with Australia where it's gone from roughly 2:1 to 6-7:1 and you can see the massive difference in housing price changes compared to basically everything else.

Basically the US doesn't have the speculative housing market of Australia, in the US if you invest in property it's just as likely for the yield as for capital growth and because of the size of the market they have a lot of other options for generating yield.

In short... the article is about a completely different market with completely different market forces.

The rent/buy question, especially on the PPOR, in Australia is a very interesting discussion and I actually think that part of the article is just about the only part really relevant to the Australian market (the investment/growth parts are just too different), well that and all the general enjoy life aspects.

Very weird to see it posted on Australian news sites, it seems the media are trying to drive a crash right now, not sure why, can only assume it's on higher orders as usual and perhaps because we need it a bit but it's weird to see the only positive articles on property being penned by REIWA and their types right now.

 

Totally agree with this,
The sense of growth and satisfaction in doing up your own home, at least for me, outweighs any potential cashflow gained by renting. That, and the money/time I invest should also help improve the asset with my name against it (as opposed to a landlord's asset). - However I have never actually rented, so maybe there are benefits I am not savvy to.

 

Agree.

In pure investment terms; renting and investing the diff between the rent and what a comparable house mortgage would be is financially smarter.

But, the renter (and I currently am one) is never in their own "home". It's a bit of an empty feeling.

 

Here’s a *** packet calculation based on my IP….

Bought in 2013 for $380k ($400,000 borrowed 100% including all costs etc)
Rented then for $380 per week.

The assumptions:-

Inflation 2.5%
Stay in the house 30 years
Mortgage rate average 8% over the 30 years
Allowance of $6000 per year for rates, insurance and maintenance and also a 2.5% per year inflation.

At the end of 30 years, if I had rented that house I would have paid $889,205 based on a 2.5% per year increase but I would have zero asset, I still need to keep renting

At the end of 30 years, if I had paid a P&I mortgage I would have paid out $1,056,622 PLUS another $270k in maintenance = $1.326m

So, it has cost me $529k MORE to buy my house than rent it, but assuming the same 2.5% inflation rate I have a house at the end of the 30 years that’s worth $797k, If I sell up (no CGT as it was PPOR) and call it 2% selling fees, I’d come out with $780k, so it’s cost me $1.326 minus $780k = $546k which is $343k LESS than it cost the renters for the same period.

If I don’t sell though, from year 31 it gets interesting as Mr. & Mrs. Renter are now paying an inflation adjusted $42,484 per year in rent for this house whereas I no longer have a mortgage, so I’m only paying the tax, insurance & maintenance at an inflation adjusted $12,900 per year – so now I have about $30k a year more in my pocket than the renters, plus I still have the house, paid off and appreciating.

It’s about here that my spreadsheet went awry and the work I should have been doing this afternoon caught up with me! Suffice to say, I’d rather be the homeowner than renter.

Looking at year 40, Mr. Renter is now paying $53k per year in rent plus has no home as an asset, my house was paid off 10 years ago and my running costs are only 16k per year, so now I’ve got 37k per year extra in my pocket…oh, and my house is now worth just over $1m (and currently wouldn’t stop me getting a full pension on top).

In the 10 years since I paid my house off, the renters have paid a further $476k in rent whereas I’ve only paid $144k in running costs so I’m better off cash flow wise to the tune of $332k. My total outlay to year 40 has been $1.47m whereas the renters outlay has now been $1.33, but my house is worth $1m, so I could sell up at year 40 and be ahead by $860k

Got too much on to do any more messing about, or to re-check my figures again for that matter, but I wanted to see at what point the break-even was. I’d guess around year 20? From thereon, the house wins and gets better year on year.

 

Assuming you only pay the minimum repayment on a monthly payment plan.

Change it to a weekly payment, and chuck another $50 on top of each payment and see what the figure becomes.

 

For sure, smash it down in 15-20 years and you'd be streets ahead, I didn't want to throw too many variables in though, tried to keep it as simple as possible.

 

I should probably add that the running cost allowance on my calculation is quite high and the interest rate conservative. In the 2 years we've owned the house used in the example the value of the house has gone up waaaaaaay more that 2.5% per year, as has the rent and we've spent nowhere near $6k per year on running costs. Yes, they may end up being the best 2 years out of the 30 but the point is my calcs above are pretty conservative, I'd take the ownership route anyday based on the example anyway, but add into that that it potentially could do a lot better in terms of CG over 30 years and could cost an awful lot less to run and it becomes a no brainer (for me).

 

This article only goes so far. Sure he has the advantage of moving around easily (possessions fit in a suitcase?) but he does not mention having a family. Constant school changes for children are expensive and disruptive.

All the comparisons of buying vs renting usually only cover a period of 20 or 30 years. It is what happens after that makes a huge difference.

We bought our PPOR in 1979, paid it off around 1990. Have been living rent free ever since. Different mind set then, no redraws or offsets - you basically got a loan and paid it off as quickly as you could.

Sure we pay the rates plus maintenance (minimal as house is brick and tile) and improvements (discretionary) but only a fraction of the cost of renting a similar property.

And for those reading another popular thread, no, we don't qualify for any pension and never have (and never will ) so no snide suggestions to downsize or being a drain on society, please.
Marg

 

It's a cool calculation and the winner/loser comes down to what the renter does with the money in the mean time which you've left out of your calculation.

For instance for me to buy the house I currently rent would cost me ~$380 extra a week in mortgage repayment compared to rent, lets say that Rates, Insurance, Body Corporate and Maintenance comes to 4k a year, so basically another $75 a week. Basically I have $450 a week extra in my pocket to invest for the next 30 years which is $700k in current dollars over that time period. If I could generate 5% return on investment on that I'd have something approaching $1.6m from renting instead of buying in that period as the asset to show for it.

Of course if I blow all that money on travel and toys and the like, well different story

 

@wogitalia that is a valid point and I think what the author touched on with regards to investing in yourself but with other asset classes you are missing one key ingredient known as leverage. Banks give you more for property, they don't give you money for much else.
Its 4.30 on Friday so I can't be bothered but if you work out 5% return on your money which starts at $450 versus 5% on leveraged money after say 5 years and I think you will see a big difference.

I also did not like the example he used of how simplistic it was to train yourself and then go do freelance for 5k a month. That would take a long time if at all and during that time u still need your regular job to pay your rent so now to earn more your working 9-5 and then coming home and staring at a computer learning word press to 2am. With a house you work 9-5 and whilst your sleeping it's getting equity.

 

$450 per week, 5% compounded (monthly) after 5 years you’d have $133,198 (over 10 years is $295k, 20 years = $775k)


$380k house, compounded 5% for 5 years = $484,987 = $104k ish so not that far behind (over 10 years is $239k "profit", 20 years = $620k)


Fast forward to year 30 when buyer now has an extra $30k per year more than the renter with which to invest, on top of their sitting asset too…


There’s also the human aspect, as you say, there’s no guarantee that the renter will do anything other than pee the extra money up the wall for the 30 years.


A big part of the point is, we could be talking over 65+ years. If you leave home at 25 and rent v’s buy, assuming you buy and live in the same house for 30 years and pay the minimum repayments, after 30 years you will own your house and only have some upkeep to pay for from the time you’re 55. If you live to aged 80 that’s 25 years of rent-free living. If you rented for those 30 years, you’ve got another 25+ years making landlords rich before you cark it plus no PPOR to sell off to fund your care home at the end of it.


There’s far, far, far too many variables to ever make a true comparison but the biggest argument for the pro-buy camp for me would be the timescale, once you push out passed 40-45 years. I bought my first PPOR at 23 and I fully intent to see my 100th birthday, imagine the compounding effects and rent inflation when worked out on a 77 year timescale instead of 30-40.

 

No doubt, was more just pointing out a pretty important aspect that was left out of the original scenario

On the property thing, there is actually nothing stopping the renter from investing in property though (I know it contradicts the article but we've all agreed the article is kind of stupid!). I can take that $450 a week extra and probably just about buy the property in the above scenario and rent it to someone else.

I just went with a 5% return for pure simplicity, as you said it's Friday, not going to try and make things more complicated than it need be.

Agreed on that freelance thing, it's going to take you way more than a 9-5 for several months before you'll be close to earning that as a free lancer, that's for sure. Even the successful free lance types are looking at 12 months to build that passive income.

The human aspect being a big part of it. Of course you've also got the freedom that renting does provide. I can move houses tomorrow if I get a job somewhere else and need to and it's easy, if I have a house I need to sell it becomes very difficult.

I think that's a big part for the current generation, the borders around the world are becoming less of an obstacle so the ability to move freely is becoming a bigger incentive as well. Having a house can be a bit of an anchor. This works both ways obviously.

This again ignores what the renter does with all that extra money. Using my previous example, say I have $1.6m at the end of the 30 year period, even at 5% return on that I've got 80k a year extra income over the guy with the house, you can make a case if I take advantage of it and end up in that position that I'll have an extra amount of money available compared to the buyer even after rent comes out of that.

I'm mostly playing devils advocate here, I think both are perfectly reasonable scenarios and outcomes, the house is a much better option for those with limited financial knowledge or poor discipline with money, renting is probably actually the better option for the flipside of that. Especially if you consider the renter can actually have the best of both worlds and buy the house, get the rental income and even get an added bonus of making all that interest into a tax deduction

Agree entirely that it's a particularly complicated calculation that changes with each individual circumstance and even analysing the money side of it completely ignores the positives/negatives of both situations that are completely unrelated to money. Such as the security of having a house for sure vs renting or the freedom of renting compared to a mortgage or being able to change the house to suit your needs or add value with a renovation or the lower stress that generally comes with renting.

It does make for a great debate, I disagree with the article completely, especially in Australia, that buying a house is any kind of financial suicide, I don't disagree with the idea that renting can often be a better option than buying your own home though, that theory absolutely has genuine merit

 

I'll also add... reading the article he makes it sound like he was divorced twice and that's why he lost the houses...

What I really took out of it is that divorce is financial suicide (i guess technically the marriage was the problem to begin with ) not buying a house!

 

Totally agree, plenty of arguments and merits both sides, but as you say @wogitalia it's far from the "Financial Suicide" the blogger makes out.

BTW, my post wasn't mean't to be a pro-purchase post, it was a bit of fun playing with excel. From a personal point of view, I'd always choose the purchase but more from the human aspect. I HATED renting on the occasions I've had to do it, and believe me, it is no fun when the house you're renting is sold from under you and you're the one putting up with the weekly inspections then given you're marching orders, that aspect of renting sucks.

 

Haha too true. It wasn't that fun renting in the middle of the boom when you'd be competing with 100 people for each house either

I don't think you're likely to go wrong with either plan if you commit to it!

 

Haha, yep, had that too! Fresh off the boat from the UK to Melbourne in November 2008, battling masses of people at every open to view houses you wouldn't let a dog live in! Talk about an eye opener. We submitted heaps of applications and never got a look in as we had zero Australian history in anything. We ended up moving to a suburb where no one wanted to live and took a vacant rental just so we could find somewhere, as time was running out on our temporary accommodation. That suburb then boomed 18 months later so the house went on the market and we had probably 20 people through every Saturday for about 5 weeks. We bailed out just before the actual auction. Horrible time.