Is This Right Time to Buy First Home?

Lusman6062 on 12/10/2014 - 23:42

Hi there,
I am wondering since the home loan interest rate is low at the moment, Is it the right time to buy first home?
Some of my friends say it is best time to buy property and some says Australia has highest prices of homes at the moment.

I have savings(~$25K) Plus I am assuming that home loan will be granted as well. However, my intention is to buy a property, keep it for 5 years and then sell it with a better price?
So do you believe its right time to buy property to get maximum output or I should still wait?

This is my first post and I hope you get easy on me. In addition, I appreciate your response/feedback in advance.

Financial

Comments

  • pinchies on 13/10/2014 - 00:08
    +16

    If interest rates are considered low historically at the moment…
    … and the maximum you can lock in a fixed rate for is 5 years…
    … and a typical home loan takes 25+ years to pay off…
    … then the current interest rates are practically irrelevant to the long term question of whether to buy now or not.

    However, if you want to flip houses for a buck however, then the low current interest rate becomes a bit more significant. BUT… since the interest rates can go up, then you should be prepared for the case that they do go up and that you can still cover the repayments.

    Some of my friends say it is best time to buy property and some says Australia has highest prices of homes at the moment.

    Friends are not financial advisors. Neither am I! The first lot of friends can either be right or wrong in hindsight, whereas the second lot of friends are currently right on a factual basis right now, and I would follow the known facts to inform my decision. Of course, I think you might need to do your own due diligence on this one.

    • [Deactivated] on 14/10/2014 - 21:09
      +4

      Just a thing to keep a note of as well is that Financial advisors can also work for incentives hence their role of advising becomes like that of a salesman who is concerned more about selling his products than the best interest of the customer.

    • pinchies on 16/10/2014 - 23:23

      Just wanted to change my original statement after reading the comments below: the current interest rates are practically irrelevant to your own financial situation, but they are a valuable indicator of the state of the market:

      People buy property based on the loan repayments they can afford.

      Low interest rates influence house prices upwards, and vice versa. If interest rates were to increase, we would expect to see prices come down as well due to people being unable to afford more; a double whammy to anyone with a mortgage.

  • cannedhams on 13/10/2014 - 00:18
    +28

    Look at it like any other asset. Does it make financial sense for me to buy this or would I be better off paying rent?

    I pay 15k a year for a place close to the city, in rent. If I bought and moved out to the suburbs I would have 3k in rates and sewage to pay and another 3k in daily commutes for me and the wife, per year. Plus additional fuel, plus two hours of my day that I am sitting on a train. Add to that costs of servicing mortgage, and take away rental assistance and it doesnt make sense for me, but may for you.

    For what its worth, I think there is more downside than upside, but there are so many variables, its very hard to say.

    • UncommonName on 13/10/2014 - 06:22
      +5

      This guy knows his finance well.

    • blackfrancis75 on 13/10/2014 - 10:23
      +15

      I might be missing something, but isn't this argument ignoring:
      1. the value of accruing equity in a real asset!
      2. the possibility of capital gains

      • Malarkey on 13/10/2014 - 11:44
        +5

        Counter that with investing the difference between his rent and his possible loan repayments. Assuming he has the control not to blow the difference.

        • StewBalls on 13/10/2014 - 12:24
          +4

          Assuming that there is a difference to start with…most of the time market rent should be pretty close to parity with the interest component (read: lion's share) of the mortgage repayment anyway.

        • CheapandUsed on 13/10/2014 - 12:43
          +9

          @StewBalls:
          That's just comparing Rent to Rent though.

          If you aren't paying the principal down, your renting from the bank.

          I think in Sydney you will find that isn't the case, rent is much lower than the equivalent interest only loan to purchase the place at the current market price.

          @blackfrancis75
          equitymaaatttteee… Who needs to pay off the mortgage in your working life when you can just use the house as an ongoing ATM…

        • StewBalls on 13/10/2014 - 16:45
          +4

          @CheapandUsed:

          That's just comparing Rent to Rent though.

          That was entirely the point…as an owner, aside from the usual ongoing inescapable costs of ownership, you get to choose what you contribute above & beyond that.

          I think in Sydney you will find that isn't the case, rent is much lower than the equivalent interest only loan

          Much lower??? Not calling you a liar, but honestly, it doesn't sound right to me, it just doesn't really make sense to do that. Rents in Sydney still looked pretty outrageous to me last time I looked, but that was a while ago. I don't mind a good negative gear, but I wouldn't be subsidising tenants rentals too heavily.

        • arescarti42 on 13/10/2014 - 20:54
          +11

          @StewBalls:

          Rents are pretty outrageous in Sydney, but not as outrageous as house prices.

          As an example, take a house at around the median Sydney price of $800,000. Say you buy it with a 90% loan at the average discount variable rate of 5.1% (according to the RBA). Your interest payment each year on a $720,000 loan is $36,720

          Now according to SQMResearch, the gross rental yield for houses in Sydney is 3.6%. So that $800,000 house would rent for $28,800. So using the stats for a median Sydney house, it's just under $8,000 PA cheaper to rent a house, than pay just the interest on the loan.

          Throw in the opportunity cost of $80,000 deposit you'll need, and the annual costs that come with home ownership (insurance, rates, maintenance, etc.), and renting only gets cheaper.

          On the point of negative gearing, the average negatively geared landlord is subsidising their tenant to the tune of $11k PA (according to the ATO).

        • Sira on 13/10/2014 - 22:38
          +3

          @arescarti42:

          Good example, at 90% though you are also going to need to flick some LMI on top of that, and that can easily stretch in to the $10k's for a loan of that size. Which makes the argument stronger again for renting.

          BUT

          This needs to be linked back to a variable that noboday can accurately predict. Future house prices and therefore the possibility of decent capital gains. I'm not trying to suggest that current prices will continue at their current rate but YTD Sydney house prices have done something like a 14% increase,in one year! Right there you have just made owning a house far more attractive even if you are in the highest tax bracket.

        • arescarti42 on 14/10/2014 - 14:30
          +2

          @Sira:

          Some good points.

          Obviously if you expect strong price growth then you probably don't care about your short term losses. The fact that a majority of investors are negatively geared (i.e. they're hoping the capital gain on sale makes up for all the losses they incurred in the mean time) suggests that strong price growth is what they expect.

          FWIW, I think people tend to overestimate potential capital gains. Look at Sydney, which increased 17% in the year to August 2014, and 10% the year prior. Even including that massive gain over the last 2 years, over the last 10 years growth in Sydney only averaged 4.4% PA, barely above inflation.

        • StewBalls on 15/10/2014 - 08:40
          -4

          @arescarti42: So, just to be brief, based your figures:

          $800,000 house…it's just under $8,000 PA cheaper to rent a house, than pay just the interest on the loan.

          …without considering the aforementioned principal reduction & ownership costs, the difference between living in your own house (which will only increase in equity & value) and renting from someone else (dead money unless subsidised or tax deductible) is effectively 1% of the purchase price of the home…that's a no brainer IMHO.

          Yeah, it might be a little bit harder for the first couple of years, but by the time you add in some principal reduction, renovations/improvements & even a modest capital gain you'll be far better off! Let me tell you, there's nothing better than living in your own home, no more kowtowing to landlords & agents, you'll be king of your own castle! :)

          On the point of negative gearing, the average negatively geared landlord is subsidising their tenant to the tune of $11k PA (according to the ATO).

          ATO is probably not the best source for the context of this discussion…I'll say no more on this topic, others will understand the implication. ;)

        • Brianqpr on 15/10/2014 - 13:35
          +3

          "which will only increase in equity and value". Long term probably right but over 5 years far from certain, especially as the current housing bubble is largely driven by low interest rates which can almost be guaranteed to rise over 5 years.

          People buy property based on the loan repayments they can afford. These in turn are dependent on interest rates which are at HISTORICALLY LOW LEVELS. Just like the sharemarket was historically high before the collapse. Most buyers don't think about what rising rates might do to their repayments.

          Only around 5 or so years ago variable rates were over 9%. This would vastly reduce the borrowing power of would be buyers if it happened again and house prices would fall. I would say it is quite likely variable rates could be around 7% in 5 years but these things are almost impossible to predict with any accuracy. One thing stands out though, when something is historically low the only way, usually, is up. Affordability is at its limits based on 5% rates, where does it go once they rise?

          Timing any market is difficult. Long term thinking is safer. Despite the peddled nonsense that residential property never goes down this is simply not true and I would say it is now in a period where the risks of short to medium term capital loss are greater than they have been for a very long time.

        • StewBalls on 15/10/2014 - 13:50

          @Brianqpr:

          "which will only increase in equity and value". Long term probably right…

          Property investment is a long term proposition, period. I don't know of anyone naive enough to think otherwise. CGT & Stamp Duties have essentially made flipping houses a thing of the past.

          Despite the peddled nonsense that residential property never goes down this is simply not true…

          When did you last see residential property prices go down long term? Me, never…

        • cannedhams on 16/10/2014 - 12:53
          +1

          @Brianqpr: the other thing that they're not doing is factoring in risk. Lose your job and suddenly that mortgage looks like a right old s*** sandwich.

        • AuSlade on 16/10/2014 - 22:20
          +1

          @arescarti42:
          You forgot Lenders Mortgage Insurance. I doubt you'll find a (reputable) lender willing to do a 90% LVR without LMI involved. Based on your $800k loan with a 10% deposit (which doesn't include legal costs, stamp duty, etc), you're looking at more than $16k in LMI.

          Damnit, I just read Sira's comment, and realised I've echoed the same thing.

        • YTW on 17/10/2014 - 09:36
          +1

          @StewBalls: I've seen plenty of property prices go down in long (>5yrs) periods during the last 30 years.

          Think units, Queensland.

    • StewBalls on 13/10/2014 - 10:45
      +4

      and take away rental assistance…

      What is this rental assistance, how much & where do you get it?

      Whenever I've paid rent in the past, nobody has chipped in to help me out…

      • SirFlibbled on 13/10/2014 - 10:49

        You get it when you receive certain centrelink payments.

        • StewBalls on 13/10/2014 - 10:52

          another 3k in daily commutes for me and the wife, per year.

          Hmmm, given that statement, I was under the impression that paizuri & his wife were both working…I would've thought that would preclude any centerlink benefit with RA???

        • SirFlibbled on 13/10/2014 - 11:14
          +3

          @StewBalls: No idea. Maybe they study. shrug Only instance I could think of where you'd get rent assistance. Unless of course your work asks you to relocate and they pay for your rent as a cherry on top.

        • tomleonhart on 13/10/2014 - 11:20

          @StewBalls: ^this. Unless both of them work, have a kid and still somehow receive Family Tax Benefit A ?

        • StewBalls on 13/10/2014 - 12:04

          @tomleonhart: But do you get rent assistance with FTBA? I honestly don't know; I only know that I'm not eligible; and my centrelink funded clients are pretty much all on the DSP, so no point asking them.

        • tomleonhart on 13/10/2014 - 14:44

          @StewBalls: I think FTBA includes rent assistance according to the online estimator. Any other than that, I have no idea.

        • modsec802 on 13/10/2014 - 15:10
          +2

          @tomleonhart: if you get family tax A and rent you're eligible for rent assistance. If you rent the income limits for family tax benefit are much higher. For example, currently if you have three kids and rent you can still receive FTA (plus supplements) and rent assistance whilst earning $145k per year.

        • StewBalls on 13/10/2014 - 16:47
          +2

          @juicedpixels: Cheers for that.

          Damn, gotta love middle-class welfare! :/

        • cannedhams on 14/10/2014 - 00:53
          -6

          @juicedpixels: This is correct. Bear in mind that people who pay rent create a revenue stream and therefore taxable income whereas people who live in their own house do not. The only way to counter this unfairness would be to tax owner-occupiers on their "imputed rent" or to pay renters a rebate, ie rental assistance.

        • cannedhams on 16/10/2014 - 12:53
          -4

          @paizuri: yeah great negs there. Gutless wonders all of you.

    • cisco on 17/10/2014 - 06:20

      @paizuri what if you bought an investment property and rented it out? I'm in almost the same situation as you but I'm considering buying an investment property and renting it out for let say next 5 yrs.

      • cannedhams on 22/10/2014 - 12:39

        From my POV, it wouldnt work for me. I would get better returns on the share market. The only upside would be potential capital gains but if I was investing for that reason I would prefer to live in the place and utilise the CGT exemption for PPR.

        If I was to use a negative gearing strategy, I would probably be inclined to have a negatively geared share portfolio rather than property.

        • leiiv on 22/10/2014 - 22:16

          How do you do a negatively geared share portfolio?

        • cannedhams on 23/10/2014 - 21:31

          @leiiv: Leiiv - generally by accessing margin lending. Note that I am not recommending that you do - unless you can secure the loan the interest will be unattractive for a start BUT if you were to give me a choice of the two I would rather negatively gear shares rather than property.

          http://www.propertyobserver.com.au/financing/tax-and-legal/1…

    • congo on 18/10/2014 - 09:56

      You are looking at the short term plus and minus.
      In the long term, with rent, you are still paying rent and will not have any assets.
      With mortgage, you could sell your house and be in the same position, except you would have made some capital gains when you sold.
      You should buy depending on how much capital gain that you predict to make…

      • JohnHowardsEyebrows on 18/10/2014 - 17:12

        You're viewing rent as money that could be paying down capital. When the net returns (i.e. rent less rates, water, body corporate) are about 3%, you have to ask yourself whether you should be paying 6-7% rent on the money you need to buy the house, or pay about 4% of the value, getting the ancillary costs thrown in for nothing.

        You have to believe houses will rise in price faster than your other investment options to justify buying now. Hard to see that being a wise decision given where we are right now (25 years of uninterrupted growth, low unemployment, very low interest rates, and a deluded culture of property speculation.

        • congo on 19/10/2014 - 00:03

          Well I have made substantial amount through property. So its working for me. My comments are just MY opinion, and I really don't care if you agree or disagree. Its just my opinion which the Op has asked for.

          Properties in Tokyo, Paris, London, New York etc are very expensive, so I still believe that Australian prices have a LONG way to go.

        • JohnHowardsEyebrows on 19/10/2014 - 01:42
          +1

          @congngo: Harbourside Sydney is the only property which can compare to those cities you've mentioned (i.e. a world famous place to buy property, with demand not reflecting the domestic realities, and prices never really plunging, even in bad times). Plenty of people have made money through property. But the economics of it aren't as easy as this silly 'property doubles every 8 years' factoid.

        • congo on 22/10/2014 - 13:22
          +1

          @JohnHowardsEyebrows:
          Harbourside Sydney is where I have been buying my properties :-)

  • tunzafun001 on 13/10/2014 - 00:42
    +8

    Is it the right time to buy" - Depends where you are buying? (Do your research, check with your bank, they may offer free property reports, is RP data).

    Interest rates, never been lower.

    Your $25k, what else can you do with it. If 5 years ago:
    you put it in a savings account at 0-4% vs inflation+ tax you probably havent gained much, but u can access it relatively easy.

    You put it in banking Shares. Roughly doubled/ tripled your money + picked up dividends more than bank interest - tax. (However, if you invested 3 weeks ago, you would be down a few thousand, or 7 years ago you may have lost the lot).

    You put it in a decent property you may have gained 50%, but there is tax/ capital gains, stamp duty, valuations, legal fees, search fees plus 6% interest each year payable. Plus, if u needed cash in that time you can't access it.

    I have done up a property and tripled my money in that time frame, I have done it again and the property was worth $40k less than when I started. I have done well with shares, and I lost a lot in the collapse of Babcock & Brown (when research said they were still a strong buy at $45 per share).

    In summary, if you can afford to lose the $25k without major repercussion then do it (with the right research). Are you going to be content if your house has gained nothing , or lost thousands after 5 years. Doing nothing will make u nothing. But only invest what you can afford to lose.

    P.S. consider holding & renting after 5 years, using your "possible" capital gain to go again.

    • Cluster on 13/10/2014 - 15:39
      +2

      "You put it in banking Shares. Roughly doubled/ tripled your money + picked up dividends more than bank interest - tax. (However, if you invested 3 weeks ago, you would be down a few thousand, or 7 years ago you may have lost the lot)."

      No Australian bank's share value collapsed to zero during the GFC.

      • nikey2k27 on 13/10/2014 - 23:17

        My $29 CBA share where good buy 7years ago.

  • adrock on 13/10/2014 - 01:12

    "However, my intention is to buy a property, keep it for 5 years and then sell it with a better price?"

    The RBA seems to think historic growth rates will not continue, and with stamp duty and selling costs, you'd have to do pretty well with growth (perhaps betting against the RBA) to come away with great performance after 5 years. Although individual circumstances, negative gearing, avoided CGT etc you may make it work.

    That being said, with investment, you need to be thinking about your opportunity costs. Property might beat a cash savings account, or an investment in star wars figurines.

    I suggest you see a financial planner.

    • goingDHfast on 14/10/2014 - 20:07
      +5

      The RBA has run out of real tools to influence the economy and so it is relying on the power of its words to have a large effect.

  • [Deactivated] on 13/10/2014 - 01:21
    +26

    Good luck buying a home with $25k savings. In Melbourne or Sydney you need 10 times that.

    • Sira on 13/10/2014 - 22:42

      You can do it, especially below the median price… Just expect them to ammortorise tens of thousands into the principal for lenders mortgage insuarnce. Also expect to be looking at second tier lenders with higher rates.

  • srhardy on 13/10/2014 - 07:18
    +1

    its all about shopping around, if you shop around and bargin like mad you can score good value anywhere, anytime but few do. sometimes its because fo the good realestate sales person, other times its the 'feeling' you will miss out if you dont act. both are emotions that will get you into trouble… walk away from everyting - until and then check and double check and check again.

    better not to make 1 misstake and then plan to pay it off quick as you can or else its the bank that makes all the profit if you ever sell. your never ahead until you own it, the bank is!

  • StewBalls on 13/10/2014 - 08:06
    +1

    You need to get some figures on the possible loan, then look at your income; is your job secure & do you earn enough to service the mortgage for at least the next 5 years?

  • tomleonhart on 13/10/2014 - 08:14
    +1

    Are you planning to buy to live in or as a "renting out property" ?

  • CyberMurning on 13/10/2014 - 08:52
    +3

    comeback in 5 years after you have more saving :)

  • Cheeper on 13/10/2014 - 09:25
    +19

    Don't buy a home that will need a mortgage you cant afford. There is more to it then meeting the monthly repayments.

    You usually do not profit from your own home/residence even though the value goes up. When you sell your home you will need to buy another one to live in!! With the next home there will be no FHG etc so just the fees (agent & stamp duty) can total $30,000 to $50,000 or more.

    These days 25k is nowhere near enough to even start thinking about it. Need nearly 10 times that amount to start.

    Is this the right time to buy? In my almost 70 yrs I have never seen real estate go backwards.
    Houses will never be cheaper than they are today, and you can say that everyday.

    • UncommonName on 13/10/2014 - 09:57
      +24

      Are you OZB's grandpa?

    • Evil-Elmo on 13/10/2014 - 11:09
      +6

      Is this the right time to buy? In my almost 70 yrs I have never seen real estate go backwards.
      Houses will never be cheaper than they are today, and you can say that everyday.

      This might hold true in Australia (to date), but is most certainly not the case everywhere. Just look at GFC US.

      • StewBalls on 13/10/2014 - 12:27
        +2

        Meh, good thing we aren't in the US then! ;)

        • hahaboy on 13/10/2014 - 22:28
          +8

          we're getting there.

        • ThadtheChad on 14/10/2014 - 15:20
          +8

          @hahaboy:

          Absolutely. Real estate in most of the major cities in Australia is no longer commensurate with median earning potential of the workforce. There is quite a bubble in the real estate market, especially due to unrestricted foreign direct investment in this space. Moreover, there appears to be a relative cartelisation among real estate agents to artificially inflate prices in most suburbs in Sydney & Melbourne (I'm assuming this is the case in other cities as well).

          According to some Investment advisors I've spoken to, they feel that these prices are not sustainable. Moreover, this is the first time in Australian history where vast swathes of the workforce may never buy a house and stay as "lifelong renters". If there is a legislation passed to control the unchecked direct investment in real estate, that will have an immediate effect on the prices.

          Real estate trends have gone backwards in quite a few places in Australia. Off the top of my head, I can recollect Fremantle (in Perth) and Gold Coast. The percentage decrease amounted to almost 20-30% IIRC post-bubble.

        • StewBalls on 15/10/2014 - 08:57
          +3

          @omgwtfbbq:

          There is quite a bubble in the real estate market, especially due to unrestricted foreign direct investment in this space.

          Spot on, the government should be held criminally accountable for allowing unfettered access for cashed-up foreign investors to flood the markets in Australia. Unfortunately, until this is remedied, we will only see the trend continue.

          Moreover, there appears to be a relative cartelisation among real estate agents to artificially inflate prices in most suburbs in Sydney & Melbourne (I'm assuming this is the case in other cities as well).

          Sadly, got to agree there too, almost every week now there's some editorial or newsbite with some scumbag real estate advocate telling people to expect outlandish hikes in property prices based on, umm the cost of wookies on Endor or something…what astounds me is that nobody sees through this???

          According to some Investment advisors I've spoken to, they feel that these prices are not sustainable.

          Unfortunately, the ones I've spoken to feel that whilst the artificial growth is most certainly not sustainable; unlike other markets (like the US) more susceptible to boom & bust cycles, prices will not be coming down in the foreseeable future…once again, we can all thank the gubbermint for that!

        • ThadtheChad on 15/10/2014 - 15:24
          +3

          @StewBalls:

          It's going be quite a challenge for a single income "household" to buy a house (that is not a sh1tbox 150kms away from the CBD). Even with dual income "household" of approx 150k, you'd look at over 30% of your take-home being spent on mortgage.

          I cannot comprehend how a person making <100k will be able to buy a house (and pay the 20% deposit) without any form of external help.

      • congo on 19/10/2014 - 00:04

        The US banks are not as regulated as the banks here…

    • Cluster on 13/10/2014 - 13:38
      +3

      Housing never goes backwards in price. Except in epic bubble countries Spain, Ireland, Japan (no recovery after 25 years), USA.

      I'm not sure about the 'need 10 times $25k' deposit to start. My entire brand new house on a 330m2 block of land cost $310k, and I don't live 100km from the CBD.

    • JohnHowardsEyebrows on 16/10/2014 - 16:33
      +1

      Respectfully disagree. Houses are already unaffordable for most, with such low interest rates and relatively low unemployment. All it takes is a recession and a fair chunk of mortgage holders (including 'investors'/speculators) will start to falter. Prices can only increase along with people's abilities to pay more. I don't think we'll ever be able to pay more than we can now.

  • mmecholet on 13/10/2014 - 10:39

    I think it's the right time to buy - but not for me; I'm retired as from this year and liquidating to SKI. Am I permitted to send private message to usman6062 re probably cheapest freestanding property in Qld which I'll be putting on market soon? (Former rail fettler's cottage at Bloomsbury 4799 if that's geographically feasible).
    If so can someone explain the machinations of private messaging?

  • SirFlibbled on 13/10/2014 - 10:51
    +1

    I recently bought my first place (once it's finished being built as it's off the plan).

    I'm paying rent which will be about the same as my mortgage. So for me it's a no brainer. I get to network out my house and do what I want with it and the money is going towards my own equity not someone else's.

    I will need to pay rates/water/sewerage etc but worth it. By the time interest rates increase I'll be on more money anyhow so I'm not too concerned.

  • malkakas on 13/10/2014 - 13:03
    +6

    it all depends on where you plan to buy and where you work.with only 25K you'll need a mortgage insurance to buy even a smallest unit in a capital city in Mainland.
    Return on investment depends on the market.
    I live in Adelaide and did some research on ABS statistics on median House prices.
    If we look at past 10 years;
    in Jun 2004 median price was 257.5K
    in Jun 2009 median Price was 363K
    in Jun 2014 median Price was 415K

    the 10yr (2004-2014) average annual growth of house prices is 6.11% (100(415-257.5)/257.5/10).
    the 5yr (2009-2014) average annual growth of house prices is 0.24% (100    (415-363)/363/5).

    The people who bought a house in Adelaide in 2009 has gained next to nothing in terms of investment.

    But if we apply the same formula to Melbourne or Sydney, then the story is different.
    in Sydney from 2009 to 2014, the annual House price growth is ~13% which is really good.
    in Melbourne from 2009 to 2014, the annual House price growth is 10.6% still it is really good return.

    The above scenario is an example only.

    ABS house price Data can be accessed here http://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/6416.0Ju…

    • navarch on 13/10/2014 - 18:11
      +1

      Its not 0.24% its 2.87% annual growth from 2009-2014 from your figures

      • malkakas on 13/10/2014 - 18:23
        +1

        Thanks for the Correction.
        I have used the June 2010 value (which was $410K) in my excel sheet instead of June 2009 value ($363K).
        =100x(415-410)/410/5

        Still 2.87% is a relatively low return for an investment.

        • c0balt on 13/10/2014 - 18:39
          +1

          Do many consider a PPOR a true investment? I think that if you want to consider it a true investment rather than a psuedo investment/asset then you should also rent it out and take the ~6% PA yield on top of that 2.8% for a pretty healthy 8.9%.

          Damn if only I was born 10 years earlier I could have made a killing!

        • malkakas on 14/10/2014 - 09:49
          +2

          @c0balt: I'd say you are very lucky to find a investment property with ~6% return. Most I've seen are around 4% to 5% return in rent. plus there are expenses such as Council rates, maintenance etc….

          But in Adelaide the properties bought before 2004 are like gold mines.
          (Mar 2002 median price was 166K).

          So yes, if you were born 10yrs earlier, you'd have paid off your mortgage by now(or very close to that) and own multiple investment properties(probably with positive cash flow) as well.

        • c0balt on 14/10/2014 - 10:51
          +1

          @malkakas:

          You are right - I did cherry pick that return, 6% is higher than most places. I was using metro Melbourne as an example (where I have my PPOR and would consider an investment property in the future depending). I could rent out my PPOR at 6.5% easily as I got a better than market price on a large 1 bedroom apartment on the CBD edge, and those places have quite a bit of competition in the rental market from young professionals who's family homes are far from their place of work.

          As you picked up I was trying to elude that I could have borrowed at 5% and rented it out to pay off half the place and reduce the principal before selling in todays market, the whole time not doing much but getting to negative gear my salary on top.

          I could have sat on my arse and had real estate agents, conveyancers and accountants take care of everything and still make a killing. I know that's hindsight + crystal ball hot air, but for the level of risk it would have been the most financially prudent thing for anyone to invest in.

          It still probably is considering population growth in metro areas.

        • congo on 18/10/2014 - 10:02

          @c0balt:
          I totally agree.
          Buy city areas!!

  • goosegog on 13/10/2014 - 13:57
    +2

    NOW is always the best time to buy - you have to get onto the property buying ladder or watch as prices continue to rise whilst your savings are frittered away in paying out rent. Purchasing your first home will always be a traumatic experience but the benefit of having done so will show in future years as you sell, then buy again a larger property & so on until you reach the level you want to achieve. Talking from experience here - not just trying to give general advise.We paid $140.000 20years ago for our ( what was then a pretty cottage )- after much work it is now worth $2,000,000
    However 2 important things to always think about when buying real estate are the old adages ( which you probably have heard but do hold true )
    1 * Location, Location, Location ( even if it means stretching yourself a little more )
    2 * Buy the worst property in the best street ( so what if it needs maintenance & refurbishing - time & work can sort that out - most important point is that YOU WILL OWN IT.

    • LaProblematique on 13/10/2014 - 14:06
      +9

      Pretty sure everybody had it easy back then, grandma.

        • c0balt on 14/10/2014 - 11:55
          +4

          You chose the worst time in the market to buy and then even worse to sell. You bought it just to flip it?

          Had you held onto that place for another few years (the financially prudent thing to do any which way during the period after a crash) then you would be singing the opposite tune.

        • [Deactivated] on 15/10/2014 - 10:15
          +1

          @c0balt: I did not choose the worse time to buy - it was a BUYERS MARKET!!! I did not CHOOSE to sell it, I was forced to sell it as I had lost my job. I did not buy it to flip it! I certainly could not afford to lose $17K in that situation and it took many years to repay the debt.

          You have completely MISSED THE POINT of my post:
          Buying to flip in a short time can be very dangerous as interest and entry/exit fees can be enormous. Even if you sell the house for what you paid for it, you won't break even.

          And I still stick with what I said: Grandma never had it so F'good as she does right now. So if you want to buy a home - go for it! If you want to gamble on flipping a house, make sure you can survive a worst case scenario because you know what Murphy's Law says….

      • goosegog on 14/10/2014 - 12:53
        -1

        Time will tell - child. Just trying to show our experiences which have certainly paid off & give general advice. RustyStainless is correct that when we first purchased our property mortgage rates went through the roof ( pun - if you know the meaning of that word ) to 18% but we weathered that situation. Any financial advisor will tell you re the peaks & troughs in market trends which will obviously always happen. In addition, not old enough to be your "grandma" thank goodness - nor would want to be.

        • c0balt on 14/10/2014 - 13:25
          +6

          I would rather 18% on the principal when you bought, than 5% today. Affordability compared to wages makes a few years of 18% in the early 90's a lot cheaper than to buy today at 5%, even if it was to stay at 5% rather than go up which is what all predictions are showing. The first link of the two below will show this in an easy to understand manner.

          Negative gearing was just introduced before the crash and subsequent interest rate rise. Plus the rise was followed by a sharp drop a few years later, so ~4x years of 'hardship' that isn't even close to how hard it is to buy today due to affordability compared to median wage, not interest rates. You also had first dibs at gearing designed to make rich a small subset of the Australian population and make it harder for most others. If you took that advantage isn't our business, but it was there for you and people in your situation at the time to take early on.

          Two graphs that will help explain:
          http://upload.wikimedia.org/wikipedia/commons/0/00/Real_Melb…
          http://www.macrobusiness.com.au/wp-content/uploads/2013/02/S…

          How much negative gearing is killing young people's chances of entering the market:
          "Negative gearing by property investors reduced personal income tax revenue in Australia by $600 million in the 2001-02 tax year, $3.9 billion in 2004-05 and $13.2 billion in 2010-11."
          http://en.wikipedia.org/wiki/Negative_gearing_(Australia)

        • [Deactivated] on 15/10/2014 - 10:36
          -3

          @c0balt: The OP is talking about buying a home and getting the first home owners grant. Negative gearing will not be relevant in this situation.

        • c0balt on 15/10/2014 - 11:31

          @RustyStainless:

          You misread why I brought up negative gearing and as to why it is relevant.

          I brought it up as a reason as to why things have got so expensive, not as a suggestion to the OP.

          You should have replied to me replying to your generational augment of "woe is me, I had to live through 18% interest rates and you guys have 5% so we had it 3 times harder than you" malarky.

        • [Deactivated] on 15/10/2014 - 12:26
          +1

          @c0balt: Whilst negative gearing was attractive to those in a high tax bracket purchasing an investment property, it was of no value to those buying their own home. That is, it had no bearing on the purchase I made in the 1990s as I was not an investor. Also, we did not have any first home owners grant. (This came back to bite me when I bought a house in 2006 and I was not eligible for the FHO Grant). The FHO grant, easier access to money and lower interest rates has been the great influence on house prices in recent years. So the ENTRY into the house market was much tougher in those days.

          Looking at the graphs you provided, here's an example, lets take 1990 when interest rates were bumping 18%, but houses were half the price in terms of income:
          $500K house, 30 year loan, 5.5%, $2621 monthly repayment.
          $250K house, 30 year loan, 18%, $3767.71 monthly repayment. The repayment to annual income ratio was 1.5 times as tough then as it is now.

          FHO grant now.
          No FHO grant then.

          Loans available on a 5% deposit now.
          Loans available on a 20% deposit then. So the deposit to annual income ratio was 2 times as tough relatively, but again no FHO grant to assist.

          So with less buyers (demand) in the market in the 1990s, houses were worth less. Now, with easy access to the market, demand has increased and houses are worth more.

          That's why Grandma wishes she could get a home loan now, but she can't because the bank won't give long mortgages to old people nearing the end of their working life. So buy now if you are young!

        • malkakas on 15/10/2014 - 14:57
          +1

          @RustyStainless: You are comparing apples with oranges.
          in 1990;
          according to the graph in 1990 the median house price was $141,500 (in Melbourne) and annual wage was $31,200($2600 per month)
          If you've paid a 20% deposit then your mortgage would be $113,200.
          The repayment for this mortgage at 18% is $1706 per month (65% of monthly income).
          This over the roof 18% mortgage only lasted about a year.
          But after about an year interest rates came down so the repayments also came down. by end of 1991 the interest rate was only about 10% (refer to RBA interest data).
          So at 10% monthly mortgage repayment for above 113K mortgage was only $993 (38% monthly income).

          in 2010;
          Melbourne Median house price was $524,000, annual wage $67,116 ($5593 per month).
          After 20% deposit the mortgage amount is $419,200.
          The monthly repayment is $2380 (%42 annual income).

          The difference is on the interest rate, in 1990 it was the historically highest rate, so interest came down after its peak to a bearable amount.

          Now we are at Historically Lowest interest rates, If interest rate go up the monthly repayment will go up significantly.
          for example if interest go back to long term average of 8.5% the repayment go up to $3,223 (57% if monthly income).

          http://www.rba.gov.au/statistics/cash-rate/cash-rate-1990-19…
          http://www.nab.com.au/personal/loans/home-loans/loan-calcula…

        • [Deactivated] on 16/10/2014 - 01:45
          -2

          @malkakas: No, my post clearly said that ENTRY into the property market was tougher. That still stands. Money is easier to get these days. That's what drove up the house prices, particularly with the introduction of the FHO grant in 2000. The FHO grant was a stimulus measure designed to assist the construction industry, however it simply created a gold rush effect that was fueled by lowering the equity ration needed for a mortgage. Following 2008 till late 2009, the Fed Government lifted the FHO from $7K to $14K. The effects of these actions can be seen in the graph data: a lift from 5.1 in 1999 to 5.7 by the end of 2000 and up to 8.2 at the end of 2009. It dropped in 2010 to 7.8, which coincides with the lowering of the FHO grant.
          As they say, past performance is no indicator of future performance. I say that in regard to interest rates and the long-term average. In the foreseeable future, the long-term average will drop, simply because the RBA is acutely aware of the financial razors edge that mortgage market is sitting on. The RBA has three main functions: stabilise the currency, help with the maintenance of full employment, and help with the economic prosperity and welfare of the people of Australia. The stabilising of the currency role was introduced in 1993 after the disaster of the interest rate rises since the Fed Govt deregulated banking and floated the dollar in 1983.
          So RBA will have to keep interest rates low for a very long period because if they increase them it will have a major impact on their ability to meet their other 2 functions.
          The example in Japan is a classic, their interest rates have been at less than half a percent since 1996, after an explosive property boom in the early 1990s, and currently at zero percent. The UK has flat-lined at 0.5% since the GFC. The USA has flat-lined at 0.25% since the GFC.
          So actually we might see interest rates drop in future, bringing us in line with the USA, UK and Japan.

        • c0balt on 18/10/2014 - 12:45
          +3

          @RustyStainless:

          You just don't get it Rusty, or you get it but have some motive for trying to divert the attention away from the big issue - the ability to service a loan on today's median income.

          Why do you keep ignoring the elephant in the room that everyone keeps referring to? Why can't you acknowledge how much harder it is to service a loan with today's median income compared to how it was in the early 90's? It's black and white how much more a person today has to pay of their income.

          It's easier to get money today? Sure! But it's a lot harder and more expensive to pay it off relative to income, and that's something you just don't want to realise - and you clutch at these insignificant straws such as FHO and a banks wanting to lend money over the biggest issue which is income vs housing affordability.

          Don't bother with FHO and interest rates - they are but a fragment of the whole picture and one that you seem fixated on when they have no significant impact of being able to service a loan compared to actual affordability.

        • ThadtheChad on 18/10/2014 - 13:09
          +3

          @c0balt:
          +1 Nail on the head.The median wages in Sydney is approx 65k and the median house price is 700k. If a person earning these wages were to take out a mortgage (20% deposit and all) on 560k over 30 years, the monthly mortgage would be 75% of their take home income.

          Also what Rusty doesn't seem to get was that the house prices included FHO in their markup thereby nullifying the whole point of the FHO.

        • [Deactivated] on 19/10/2014 - 10:23

          @c0balt: No you don't get the point. Very simply, if you can't get a mortgage in the first place, you don't even have to worry about servicing the loan or whether you will be negative. No mortgage, no house, simple.

        • [Deactivated] on 19/10/2014 - 10:41
          -1

          @omgwtfbbq: You are not comparing apples with apples on that one. You need to be comparing the median price of houses vs the median income of the people who own homes and live in Sydney. The obvious problem with Sydney is that he median price figure is inflated by investors who live outside Sydney and outside this country. If the price of houses are too expensive in Sydney then you can always buy in a cheaper location.

        • [Deactivated] on 19/10/2014 - 11:57
          -2

          @RustyStainless: You don't seem to want to acknowledge, or understand, that you might not have even been in the game 20 yrs ago. Easy access to money drove up the value of homes - that's simple economics. So here's your choice: lower prices, less accessibility - higher prices, lower affordability.
          Yes today it costs more to service a loan in an expensive location because YOU ARE BUYING A MORE VALUABLE ASSET. Houses cost less then because THEY WERE NOT WORTH AS MUCH. So don't bitch about buying a an asset that now seems to be out of your price range. If you want a lower income to cost ratio, then buy in a cheaper suburb, and you will still only be paying 2.5% interest.

        • ThadtheChad on 19/10/2014 - 13:18
          +1

          @RustyStainless:

          You need to be comparing the median price of houses vs the median income of the people who own homes and live in Sydney.

          Why in the blue blazes would I do that? What would it serve to illustrate? My comparison was to highlight affordability (or the lack of) of house prices when you consider normal wages.

          However, it's nice to see you acknowledge the fact that Sydney is riding this "hyper-markup" wave and is out of reach of most normal folk (median gives a better approximation than average).

          If the price of houses are too expensive in Sydney then you can always buy in a cheaper location.

          By Sydney, I also refer to suburbs that are within a reasonable commute (30-45min) to the CBD. We will buy a house in Sydney as our combined income is treble that of the median. That doesn't mean that I can't despair at the ridiculously inflated prices that will deter most of the people with normal financial wherewithal from being able to afford a property. Especially since it's not the usual dynamics of "demand/supply" at work here.

          To further illustrate the point I'm trying to make, Bella Vista, which is almost an hour of commute from the CBD has a median of 665K… for a unit. It's an 'okay' suburb at best.

        • [Deactivated] on 19/10/2014 - 22:21
          -2

          @omgwtfbbq: Sydney riding "hyper-markup" wave???? Its not really "riding a wave", THE HARBOUR IS DESIRABLE, ITS KNOWN ALL AROUND THE WORLD, RICH FOLK AROUND THE WORLD WANT A PIECE OF THE ACTION, THE PRICES ARE HERE TO STAY. There was an article in last weeks Brisbane paper saying that there are now over 3000 people living in Queensland and commuting to Sydney for work.

          Just to clear up your earlier figures and to put that in context with Brisbane, the 2014 Sydney median house hold income is $80500, median house price was $722K, whereas in Brisbane the figures for 2014 are $75,900 vs $442K house price. That's apples and oranges.

          http://www.macrobusiness.com.au/2014/01/2014-demographia-hou…

          My new point is (hehehe), GET THE HELL OUT OF SYDNEY, because in Brisbane, and mostly the rest of Australia, has better affordability. People cannot talk in a generalised way about Australia's house affordability, using the Sydney market as their example. And Ozbargain is an Australia-wide forum.

      • dontask on 15/10/2014 - 00:20

        There was a good documentary last night about housing in Australia in the postwar years.

        http://iview.abc.net.au/programs/making-of-modern-australia/…

        There were always booms and busts. Ie: When the Hawke/Keating govt got in they introduced financial reforms that led to a boom. But in the early 90s it went to a bust and interest rates got close to 20%

        Watch the documentary!

  • DarwinBoy on 13/10/2014 - 14:10
    +1

    My crystal ball is out of action so just go grab a coin and flip.
    You wont know if it was a good decision till the 5 years have passed. Yes you can research to help minimise your risk but that's all you will be doing, reducing but not taking away any risk. Asking this question will get you good arguments from both sides. So good luck and fingers crossed you make the right decision for you.
    Setting reminder now for 5 years so we can come back and look at this thread to see who was right.

  • [Deactivated] on 13/10/2014 - 14:42
    +3

    All depends on where
    If we talk averages - a lot of smart people including economists and the RBA see housing as overvalued overall
    As such - rent is likely to be cheaper on average then the interest on a homeloan and the other outgoings (note - this doesn't include paying off any principal - which you should exclude for a rent vs buy analysis)
    There is also avoided transaction costs

    That said - there are areas where i believe it makes sense. e.g. on the goldcoast, where i bought my first unit 2 months ago (burleigh heads), they have had negative growth over the last 5 years. housing here is relatively good value. a nice beachfront apartment here is about half of a beachfront property in sydney. still - for my unit i would have been ahead marginally renting - but i was happy to pay slightly more to not have to move out if the landlord decided to sell.

  • [Deactivated] on 13/10/2014 - 14:43
    +8

    I'd also add - you shouldn't buy with the assumption of a capital gain. the people i bought my unit off held for 7 years, rented it out at a loss (negatively geared), and sold it to me for the same price they bought it for.

    • Cluster on 13/10/2014 - 15:38

      Many Australian property investors seem to think they'll make money by buying something and renting it out cheaper than the actual costs to run the place. Make a loss on each unit but make it up in volume seems to be the mantra.

      • hayne on 18/10/2014 - 15:46

        Close - it's more like make a loss on each unit but make it up in capital appreciation. That's the whole approach behind negative gearing.

        If you make it up in volume then you just magnify your losses. The majority of property investors are at least savvy enough to understand that concept.

    • [Deactivated] on 13/10/2014 - 16:13
      +12

      If you were on the goldcoast in 2007, waiting a few years to buy could have saved you 50%.
      This line sounds like something a broker or RE agent would spout

      • [Deactivated] on 19/10/2014 - 22:36
        +2

        Funny, as I remember 2007, nobody was waiting for anything. Buy,buy,buy. Get properties revalued so you could borrow even more. Get margin loans and buy shares that you will be able to buy for 50% less in 2009. Hindsight is a wonderful thing and I'm just so impressed with the number of geniuses here on Ozbargain that seem to possess it.

        • PVA on 23/10/2014 - 22:13

          Yep, I know a few people that did exactly that.

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