Rent or Buy -Justine Davis

A few weeks ago (okay, well a couple of months ago) the question I was asked for column was whether renting or buying is a better property strategy. It is – as I said in the column – a tricky question to answer because there are pros and cons to both renting and buying. In fact there are far more pros and cons than could possibly be covered in a short column, so this week - and given that the the RBA has lowered interest rates again today - I thought we’d discuss the issue in a bit more depth.
Note that the question isn’t whether or not residential property is a good investment – that’s a totally different thing. Just as carefully selected, good quality shares are and continue to be a good way to increase your wealth over the long term, so too do good quality and carefully selected residential properties continue to be a good long-term investment. Provided you’re not looking for a quick buck, anyway.
Instead we’re talking about the place where you live and while yes, it should ideally be viewed also as an investment if you buy it, the reality is that many of us choose where to live based on emotion. And quite frankly, given that it may well be the biggest purchase that you ever make, I think that some people put waaaay too little thought into the whole thing. Anyway - whether to buy or rent our own little slice of domestic bliss is the question.
There are plenty of advantages to renting. For one thing it frees up some of your cashflow. An average ballpark for rental cost is around 5 - 6% of the value of the home. (So for a house worth $300,000, rent would probably be around $320 per week). That cost covers you for the roof over your head, plus any repairs and maintenance to the property. Compare that to paying a mortgage, at an average interest rate of around 7%, plus rates, plus repairs, plus ongoing maintenance and costs. Freeing up some cashflow leaves you more money to invest elsewhere, or to fund additional study, or simply to live on.
Another advantage of renting is that it doesn’t cost anywhere near as much to move. I mean yes, you might end up moving more often – but all you have to pay is removal costs and maybe the cost of a cleaner. Compare that to the cost of advertising your property for sale, agent’s fees and stamp duty.
Renting also gives you a lot more flexibility about where you live. You can change cities for work (or pleasure), you can move into an area to be in the catchment for a fantastic school, and you can easily upsize/downsize your house according to the number and age of people living in it. You can still have that flexibility by buying and selling frequently, but the costs of doing that make it impractical.
One advantage of a mortgage though is that it’s a form of enforced savings. Because while yes you can potentially be wealthier by renting and investing the difference, that strategy also requires a lot of self-discipline (ie you have to actually investment the difference, every month). Most of us don’t have that discipline – thus a mortgage, which forces you to make regular repayments, is a form of enforced saving. And hopefully your property will increase in value sufficiently in time to compensate for the interest that you’ve paid!
Owning your own home also gives you certainty about where you’re going to live. Long-term leases aren’t common in Australia, so renters can find themselves moving every year or two. And in a competitive rental market that can be a/ stressful and b/ really inconvenient. It’s one of the reasons why I’m an enthusiastic owner.
There’s also just the pure happiness factor: whether it makes good economic sense or not, we simply like the idea of owning our own little castles. We can landscape them, we can paint the walls, we can spend our weekends trawling the “open for inspections” in our neighbourhood, to reassure ourselves yet again that we got a good deal back then. Home ownership guarantees solid viewing numbers for those DIY shows on TV. Home ownership makes us happy.
Well, some of us, anyway. Others might describe being financially tied down to a property as a living hell. So where do you stand on the issue? Do you prefer to rent, or buy?
And one quick addition: please note that all comments on this topic - whether mine or anyone else’s - are general opinion only. Whatever you do, get professional, independent advice before making any major financial decisions

Home prices continue to fall

New data shows that home prices are still trending down. Simon Johanson reports.

Home values fell the most in at least six years in May defying Reserve Bank efforts to spark a recovery in the nation's lacklustre housing market with interest rate cuts. Melbourne led declines.
Residential property values slid 1.4 per cent across all capital cities in May, and are now down by more than 5 per cent from a year earlier, according to property analysts RP Data. The monthly fall was the biggest since the series began in June 2006, Bloomberg analytics show.
Melbourne has struggled more than most on the home front, falling another 2.7 per cent last month.

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Home values are on the decline. Photo: Nicolas Walker

Over the year to May, Melbourne home values have fallen by more than 8 per cent. The only other city where they fell further, was Hobart.
Sydney, too, posted falls after defying national trends for some time. In May, home values in the harbour city were down 1.2 per cent, resulting in a 3.6 per cent fall over the year.
The sombre statistics follow news of a national slowdown in home building. Construction of new homes tumbled in April, with building approvals slumping 8.7 per cent after being revised upwards to 6 per cent rise in March, according to figures out yesterday.
The RBA slashed interest rates by 50 basis points on May 1, and Westpac says borrowers should expect another 100 basis points cut by the end of the year as the central bank battles to reignite growth in the economy.
Until recently Brisbane's values were falling most but last month they slid only 0.3 per cent.
Perth had a decline of 1.7 per cent, Darwin 2.4, Canberra 1.5 and Hobart 1.2 in May.
Adelaide's values rose 1.2 per cent.
Much of the weakness in real estate values was in detached housing rather than apartments, RP Data's research director Tim Lawless said.
Approvals dive
“The broad national trend decline in dwelling approvals over the past year is clear, and should be of increasing concern to policy makers,” said ANZ head of Australian property research Paul Braddick.
By state, they collapsed 46.7 per cent in Western Australia and 27.8 per cent in South Australia in the month. In New South Wales they fell 15.3 per cent, while in Victoria they rose 13 per cent for the month, ahead of the state government's scrapping of the first home buyers grant.
“The collapse in Western Australia appears particularly strange and is at least partially attributable to the Building Act 2011 (approvals process reform), which came into effect in Western Australia on the April 2,” said Mr Braddick.
Over the year to April, approvals have fallen 24.1 per cent,

Rent Vs. Buy Myths That Ruined the Housing Market

Myth #1: Renting is Like Throwing Your Money Away
Buyers throw their money away for the first five years they own a home, because they simply give money to the bank for the privilege of borrowing money. Renters, on the other hand, pay for one thing every month: shelter. They don't pay interest to the bank, property taxes or maintenance fees. They pay rent.
Smart renters also take the money they save by renting and invest it somewhere else. Since the average renter saves hundreds of dollars every month, they can afford to invest in stocks, bonds and other vehicles that have a better rate of return.

 Myth #2: It Doesn't Cost Any More to Buy Than It Does to Rent

People can usually rent a home by paying first month's rent, last month's rent and possibly a security deposit. All the money that is paid initially actually goes towards monthly payment obligations, with the exception of the security deposit, which is nearly always returned to the renter in the end.
When a person buys a home, the money that is paid upfront is more significant and may or may not be seen again. For example, a buyer must pay closing costs (typically five percent of the loan amount) and real estate agent commission (typically six percent of the loan amount) before being called a homeowner. This 11 percent 'investment' ensures that the home must appreciate by at least 11 percent before the buyer can hope to break even.
Initial costs aside, there are also other costs a buyer is responsible for that a renter is not, such as mortgage interest, property taxes, insurance and maintenance. These costs can add up and may even increase significantly over the years.

Myth #3: Buyers Have Assets, Renters Do Not

At best, buyers have depreciating assets. Home prices are falling in nearly every area of the country. An estimated 50 percent of the buyers whose loans were originated after 2002 now owe more than their homes are worth.
Homeowners who have been paying on their homes for ten years or more are seeing their equity disappear. This means that the 'investment' they made through mortgage payments is gone--dried up virtually overnight through no fault of their own.
Renters may not co-own a home with a lender, but this doesn't mean that they don't have assets. Many renters have a large and prosperous portfolio, Star Wars collectibles (just an example) and other assets that can be sold IMMEDIATELY for cash. The reason they own these things is because they haven't been paying a lender to 'rent' money so that they could pretend like they own an asset.

Myth #4: Houses are a Good Investment

During the housing boom, everyone thought that housing was a great investment. Many people bought under the assumption that home prices go up, not down. The result of this madness is the biggest foreclosure crisis in the history of the United States.The reality is that housing is not an investment. It's shelter. That is all housing has ever been.

Productivity critical now the good old days are gone: RBA

RESERVE Bank governor Glenn Stevens has urged the federal government to confront the nation's dismal rate of productivity growth, saying that the mining boom has masked a dramatic downshift in consumer spending.

In a landmark speech, Mr Stevens said Australia was unlikely to return to the era of the 1990s to mid 2000s when large mortgages and rising house prices helped fund a consumer spending binge, saying those "good old days" were unlikely to return.
He said there was a "new conservatism" among Australian households and hinted that the country would be in the middle of a housing market crash like that witnessed in the US and parts of Europe had it not been for the huge rise in Australian income driven by a once-in-a-century mining investment cycle.
He highlighted the structural changes in the economy, which included the high Australian dollar and spending habits turning to lower, historical trends, savaging the profits of the nation's retailers accustomed to higher growth. If not for the rise in national income and terms of trade -- the difference between the price Australia gets for its export and pays for its imports -- this would have led to a "considerably more difficult period of adjustment". The growth in borrowing against homes from 1995 to 2005 was unusual, he said, and "it was bound to end".

"Had we really found a powerful, hitherto unknown route to genuine wealth? Or was this period unusual? Looking back, it appears the latter was the case," he said.

Mr Stevens said the global financial crisis and ensuing credit crunch ensured the "financial source of upward pressure on housing values will abate", in effect warning the era of stellar rises in home prices was over.
While the consumer binge until about 2005 would not return, he noted that consumer mood could lift noticeably when the raft of uncertainties in the international environment lift, "so I don't think we need to be totally gloomy".
Europe is in the middle of the sovereign debt crisis while in the US President Barack Obama is warning of "financial armageddon" if Washington cannot find a resolution to its own debt crisis by next Tuesday, when congress has to approve an increase in the country's $US14.3 trillion ($13 trillion) debt limit or start defaulting on its obligations.
Mr Stevens said in the era of renewed consumer restraint and a peak in the terms of trade growth rate, the Australian economy's future rested on productivity improvements.

"As everyone in this room would know, there is only one source of ongoing higher rates of growth of real per capita incomes, and that is higher rates of growth of productivity. Everyone here also knows that it is now just about impossible to avoid the conclusion that productivity growth performance has been quite poor since at least the mid 2000s," he said.
Australia learned to produce more with less through the 1990s, supported by Hawke, Keating and Howard government reforms that included the floating of the dollar, banking industry deregulation, tariff cuts and the the GST.
But productivity growth has dropped back sharply since then, despite Julia Gillard's vow to embrace Labor's reformist legacy. Discontent over Canberra's policymaking has now spread to some of the nation's most respected business leaders.
Mr Stevens said periods of easy affluence had distracted attention from productivity in the past but said the issue was "quite critical", especially in the retail, tourism and manufacturing trouble spots of the economy. "You've got product prices under downward pressure, costs under upward pressure. How are you going to square the circle? Well, productivity's really the only answer to that question," he said.
The RBA governor identified labour market regulation and imposition of new occupational health and safety and governance standards as areas for reform.
Wayne Swan last night told a small business conference in Sydney the sector should expect to share in a $1.9 billion boost to the economy from surplus assistance to households as part of the carbon price package.
A spokesman for the Treasurer said Labor would not repeat the Howard government's "decade of neglect" of skills and infrastructure and was determined to address the long-term structural decline in productivity.

WA property activity remains at historic lows

The 2010-2011 financial year has delivered the lowest levels of property activity in a decade.

Landgate Chief Executive Mike Bradford said the June activity levels were the lowest for fourteen years and 37% down on the boom years. This comes on the back of the May figures which were the worst for sixteen years.

Overall the figures for 2010–2011 are 35% down on the peak of 2005-2006.

“In total the 2010-2011 financial year has had the lowest level of activity since 2000-2001. That was the year that saw the introduction of the GST and a slowdown in property market activity due to a decline in residential construction,” Mr Bradford said.

Although there was a slight increase in activity during June this was expected and followed a typical trend for the end of the financial year.

The Agency’s Business Activity figures released today show an 11% increase in the documents lodged in June compared to lodgement figures for May.

The Business Activity Profile covers all property related documents lodged with Landgate and is a key indicator to the state of the property market in Western Australia.

Mr Bradford said that the current low levels of activity look to continue for the time being with none of Landgate’s key business activity indicators showing a notable increase.

Housing tipped for price implosion

AUSTRALIA is in the midst of an unsustainable housing bubble that could burst at any time, warns the man who predicted the global credit bust of 2007.

Edward Chancellor, of US investment management firm GMO, says the Australian economy is yet to emerge from the global financial crisis, despite the widespread belief it has escaped the worst of it ahead of the rest of the world.
Mr Chancellor, whose Crunch Time for Credit? was published in 2005, estimates Australian house prices are more than 50 per cent above their fair value -- a once in 40-year event. " If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably," he told The Australian.
He said prices would have to fall by more than a third to reach fair value -- although some of this fall would be cushioned by income growth.

He described Australia's banking system as a "cartel" and said luck rather than skill had allowed the Australian economy to fare better in the global financial crisis than other developed economies.

He attributed Australia's "luck" to a comparative lack of competition among local banks, enabling them to avoid much of the reckless lending that occurred in the US, as well as the commodities recovery led by China.
"My view is Australia had a private sector credit boom just like the US and the UK and it had a real estate boom," he said.
"Those are the facts and you can't paper over them.
"In this environment, house prices rose last year and that seems to me to actually have exacerbated the problem.
"The problem is the bubble and that hasn't gone away."
A key area of concern for Mr Chancellor was first-home buyers. As interest rates rose, the ratio of their mortgage repayments to their income would rise to very high levels, he said.
"It's the rising interest rates, particularly with real estate bubbles, that tend to generate the collapse," he said.
Another potential trigger was China, particularly if the demand for iron ore, coal and liquefied natural gas were to collapse.
"We would see the Chinese demand for Australian commodities as being potentially vulnerable," Mr Chancellor said.
He said he expected the negative news in Australia to come from "the housing market falling under . . . the sheer weight of its overvaluation and lack of affordablity" and a "terms of trade shock".
Everyone referred to Australia as the lucky country, he said. "I think that's pretty apt."
However, "given the great growth in private sector credit and the vulnerability of the housing market . . . Australia is not out of the woods. It hasn't even entered the woods."

Home values down 7pc in Perth - RP Data -31/05/2011

PREMIUM property losses have dragged down Perth house values more than 7 per cent over the 12 months to April, the greatest fall nationwide according to RP Data.
Perth recorded the largest fall in home values of any capital city, down 7.1 per cent in the 12 months to end April, seasonally adjusted, according to the latest RP Data-Rismark Hedonic home value index.
Brisbane has suffered a similar fate to Perth with home values dropping 6.8 per cent, seasonally adjusted, while Australian capital city dwelling values were down 1.5 per cent, seasonally adjusted, in the same period.
Based on more than 85,000 home sales nationally this year, the home value index for the combined capital city dwelling markets declined by a seasonally adjusted 0.3 per cent in the month of April, while values fell 1.2 per cent in the three months to April.
RP Data research director, Tim Lawless reckons expensive suburbs have helped drag the overall market down.

According to Mr Lawless, the weak conditions seen in the Perth and Brisbane markets combined with the comparatively high capital gains recorded in Melbourne and Sydney has driven a widening housing cost gap.

“Perth dwelling prices are now 18 per cent lower than Sydney’s and 8 per cent lower than Melbourne’s,” Mr Lawless said.
“At its narrowest, the gap between Perth and Sydney prices was just 2.3 per cent.
“Brisbane’s median house price is now 24 per cent lower than Sydney’s and 14 per cent lower than Melbourne’s.
“Pre-GFC the gap between Brisbane and Sydney dwelling prices was as narrow as 6.4 per cent.
“The improved buying proposition in these cities should help support buyer sentiment, which has been very weak since the financial crisis.”
Mr Lawless told PerthNow that there was an important difference between median house prices and median house values in light of the RP Data-Rismark Hedonic home value index.
“It’s a value-based measurement and we use median prices to show some relativity on what prices are transacting in the market,” Mr Lawless said about the index.
According to the index, the median price for a house in Perth was now $468,250 after falling 3 per cent, seasonally adjusted, in the three months to April.
Last month’s RP Data-Rismark Hedonic home value index indicated the Perth median house price, based on settled sales over the period, was $465,000 after falling a seasonally adjusted 3.4 per cent for the three months to March.
However, Mr Lawless confirmed the median house value, not median price, in Perth is currently $509,228 while the median unit value is $405,000.
“When we see a property transact in the marketplace, 21 Smith Street for example, we know the market value of 21 Smith Street was what it transacted at,” he explained.
“But that same sale price will have a price or value effect on all surrounding properties depending on what their attributes are compared to that particular sale.
“If fist home buyers are prevalent, like they were in 2009, that will generally drag a median price down as they’re generally buying more affordable properties, but as we progressed in 2009 we saw more upgraders purchasing, and that pushed median prices upwards.”
He explained that if 100 properties were sold over a three month sales period, for example, then median prices would increase if there was a slight improvement in the types or quality of those 100 properties being transacted.
Real Estate Institute of WA recently predicted the Perth median house price will settle at around $485,000 while in the regions it remained unchanged at $375,000.
However property developer Nigel Satterley recently told PerthNow that the median price for the established market was $465,000 for the region stretching from Mandurah to Yanchep.
“But the median house price will bottom out at $440,000, which is about five per cent to go (down),” Mr Satterley said two weeks ago.