Does Buying A House Make Sense?

BrickMortarThe rise in official interest rates from the Reserve Bank might be enough to give some aspiring home buyers pause. But is buying a house such an essential element of modern Australian financial planning anyway?

Picture by mythoto

The decision today to lift official interest rates to 3.25% (from 3%) will likely to lead to a lot of handwringing amongst potential homebuyers, though even with that change rates are still at low levels. But amongst that discussion, a bigger question can be asked: is buying a house, long touted as the great Australian dream, an essential element of your financial plan?

In a column written for Yahoo!7 Finance before the rate rise, Peter Boehm argues that buying a house doesn't necessarily make sense for everyone:

While a home is an attractive investment, if you don't think you can afford one there are plenty of alternatives - from superannuation to shares and assets such as stamps and art. There's no reason that a house has to be the be all and end all of your nest egg.

So what's your take? Is buying a house still the centrepiece of your financial plan, or are you happy to rent and invest your money elsewhere? Tell us in the comments.

[Yahoo!7 Finance]


    If you're renting, there's not a significant amount of money left over to invest anyway... rent's not that much cheaper than buying in case you haven't noticed. And it sucks for people that would like to buy or are borderline because high rental prices don't allow for saving for a deposit.

      It depends where you buy also though. I rent a 1 bedroom apartment in the middle of Melbourne for $350 a week. An equivilent to buy would perhaps be around $350,000. If I was to finance a 25 year loan, I'd be paying approx $2200 a month vs $1517 a month now. At the moment, it's far better for me to rent as I'd be saving around $700 a month. I know the age old "you're paying off someone else mortgage" arguement, but at face value, $700 a month is quite a saving. More than enough to use towards an investment portfolio if wanted.

      Unfortunately this is the scenario I find myself in. I am lucky enough to have dragged myself out of all debts but due to the high amount of rent I need to pay (Brisbane rental prices have not been diminished one bit by the financial dip) saving sufficient money for the purchase of a house is difficult, especially if you want to retain some semblance of a social life.

      Main reasons I want my own place are:

      a) It's under my control, no dealing with estate agents or landlords to get simple things done - eg the 19 year old hot water system in my apartment is threatening to detonate but owners appear in no hurry to replace it.

      b) I want to keep pets - most rentals in Brisbane seem adverse to pets and I can understand why. The ones that do allow it are prohibitively far from my place of employment.

    the price of buying doesnt stop after you move in. when something breaks in my rented house, i call the landlord. simple.

    It's affordable so long as you buy a house you can afford.

    Sounds obvious, but the majority of people that whine to me about 'housing unaffordability' are usually under 25, blowing their wage on socialising and wanting to live in a 3-bed place in a good part of town.

    A year or so ago we found that our mortgage was unaffordable and so we sold our house and moved to a smaller house in a cheaper suburb. At the same time, interest rates plummeted and suddenly we went from struggling to pay to overpaying.

    By buying the 'worst house in the best street' and carefully planning improvements, we've not only provided a roof over our heads but have also seen our equity grow by thousands of dollars per year.

    Investing in your own house is (in Australia at least) tax-efficient and proven to offer a good long-term return.

    I occasionally invest in shares, but for me at least my house has proven to be the best investment yet.

    Well, if your not paying off your own Mortgage, your paying off somebody elses. Everybody has to live somewhere, so you got to pay either way, but with a mortgage you are investing the difference between renting for your future. Come retirement time, downsize, sell the house & you got a nice comfy retirement.

    Kinda agree with you there Steve however it is possible to save renting. Considering that you aren't paying for land tax, rates, extensions, renovations, plumbers, electrians etc... as a renter, you can siphon your money elsewhere. Also buying a house means you are locked into a location for years to come.

    I prefer the freedom that renting offers me. I don't lose everything if i lose my job! [which happened recently, had i been paying off a mortgage things would of been a lot worse]

    My strategy is to invest small and then work my way up to the big one in a few years.

      "I prefer the freedom that renting offers me."

      I'd be interested to see the demographics for those who agree with this statement, and those who disagree.

      I suspect that more Gen-Ys (including myself) would lean towards this position than, say, boomers or Xers who aspire to the quintessential Aussie dream of owning their own home in the middle of whoop-whoop, knowing that it'll pay off in the end.

      I have no desire to invest in property. I invest in a lifestyle. Catching a train and bus into the city every day is NOT an option for me. I'd prefer to fork out more to rent a place that's within walking distance of the city. What's the point of owning your own home only to be unhappy inside it because you're so far away from everything?

    @steve. Rental prices are ridiculously high at the moment. Landlords just refuse to drop their rental prices.

    However, By the time you've paid land rates, interest rates, inflated prices for a house (by the amount of the new home-buyers grant), maintained the house, repaired the house, done the gardening, paid capital gains tax, real estate agents, insurance, etc. It adds up to be quite a bit.

    In fact, I've been advised that borrowing to invest in shares works out to be financially better off for quite a few people. And it's a good way to make the money your saving for a deposit work for you to get there quicker.

    What does everybody else think?

    You have to compare it to other opportunities that you could use that money for. Could you buy shares or gold or a business?

    Which one will out perform over the time frame that you are looking at?

    I used to think that buying a house was way to expensive and that I would be saving money by renting, but when you actually sit down and do the maths, you realise that buying a house is a much wiser decision financially. Granted for the first couple of years you are down on the deal, but after 10 years you will be 100s of 1000s of dollars ahead with a house.
    Some might say that they are better of investing in stock, shares etc. and that may be true although I see *very* few people actually following through on their words. The fact is that having your own block of land is much more rewarding. Plus even if you luck out and house prices fall dramatically, the house still has value that goes beyond its dollar worth.

    When comparing the cost of a mortgage with rent, people usually forget that over time the cost of a mortgage goes down in relation to your income whereas rent will usually stay the same or rise.

    I have a 10 year old mortgage and am already paying dollar for dollar much less than the rent would be for an equivalent property, and in addition our household income has increased.

    Unfortunately renting attracts a significant social stigma in Australian culture. I've been a life long serial renter, here and overseas, and I'm fairly worn-out of the typically Australian turn-up-your-nose attitude towards renters: from real estate agents (who survive on us renters), to landlords and sometimes even my peers. The law offers some protection when there's a serious problem but it's the ongoing little prejudices that wear you down, and make buying look like a holy grail; a ticket to respectability.

    There are built-in provisions within the Australian tax system that make buying a house (the one that you are living in) attractive. No capital gains tax!

    I would disagree with the statement "a home is an attractive investment", a home (that you live in rather than rent out) should really be seen as a liability rather than an asset, as it costs you money rather than generating income. Although your home will appreciate over time, generally this appreciation will occur in line with the rest of the market (boom areas excepting). Judging your wealth by your ballooning equity in the home you live in doesn't make sense as if you were to sell your home you would still need to buy a similar home to continue living in. A second house that is to be rented out can conversely be classed as an asset rather than a liability as it can be sold without leaving you homeless and generate a profit on an appreciation.

    It's a small point but one that is commonly misunderstood.

    It's true that Australia is extremely snobbish about renting. That's reflected in the poorest regime for tenants rights anywhere outside of the US.
    Ivan: plenty have done the calcs, and it turns out that renting+investments VS house ownership work out about the same over the long term.

    If Steve Keen's right, then house prices in Australia will drop 40% over the next few years, so now would be a really bad time to buy. Corporate economists laugh this off; but then they also laughed off his prediction of the GFC. Btw, he put his money where his mouth is and sold his property and chose to rent instead.

    bottom line, renting is not a huge disadvantage over buying a home -- however, with the escalating shortfall in rental stock, buying is rapidly becoming the ONLY option. the main advantage I see with buying over renting is: you can change the property in any way you desire (ok, doesn't really apply to apartments) and you don't have to put up with the shitty (insect/vermin-infested/etc) conditions that your landlord deems adequate.

    I'm 18 and just purchased my first house, i have been working full time for a year and a half. im in country victoria so atm im paying back 325 a week, thats on a 180k loan, i am able to manage the repayments fairly easily, i have a housemate paying me 90 a week which goes into a saving account, some weeks when i get several bills in im a bit tight but im seeming to cope.

      @Cameron Ford - sounds like you are on a good wicket with a cheaper house in country Vic and a housemate to help offset the cost. At a young age too.

      I'm a Gen Xer and I've happily rented my whole life and will do so for a while yet. As people have mentioned, running a house is a whole lot more than just the mortgage. If something breaks in my rental, I call the agent to get it fixed. At the moment I don't even pay for water.

      I also fail to understand how people are struggling at a quarter percent raise in interest rates to a very low 3.25%. Every house owner in Australia paying a mortgage should have a plan for interest rates rising up to 7 or 8%. Things may get very tight but you need to know that it can be done without losing the property. If the latest increase breaks you financially then you couldn't afford a house to begin with.

        They are not struggling; it's just a media beat-up.

        However, struggling is on the way for many if/when house prices drop to their true value of 30%-40% below the current. The trouble is that the panicky feds are likely to spend vast amounts of public money in the attempt to prop prices up (which was the successful purpose of the 1st home-owner's grant). This can only work for so long. Perhaps fortunately (at least for renters who are at present paying for this), lower prices are on the way and can't be stopped.

    Buying only works because of the philosophy most home owners take on - to pay off the loan earlier than the term. It's all about making sacrifices. I have seen endless calculations showing the benefits of other investments but when people dont have the huge obligation of a home loan, they simply dont put the money aside and the investment fails. Human nature always wins.

      I dont exactly agree with the buying a house part where you buy because if you rent you are paying off the mortgage of the other party.

      House price $450,000
      interest on the house= $450,000 * 7.5% (average loan)
      = $33,750
      maintance + rates + body coperate fees around $5,000
      total outlay a year on interest only house = $36,500
      I know there will be arguments that interest would drop the more you pay into your mortgage but i believe i will not factor that in because my money would be earning interest in the bank if i didnt put it as the deposit of the house

      a $450,000 house in brisbane now rents for 450 a week.
      $450 * 52 = $23,400

      36,500 - 23,400 = $12, 900

      the house has to appreciate at a rate of 2.8% a year before you even make any money.

      if you think that is simple, my cousin bought a house in 2003 in brisbane for 355 and sold it recently in 2009 for 435.. sounds he made a profit yeah? The fact was that if he had rented all along, he would have saved $10,000 ( actually difference was $2,000 but he had to pay the agent $13,000 to sell the house).
      but we have to remember these were during "property BOOM times" where interest rates were booming upwards as well...

      If we take simple calculations:
      355 * 7.5% = $26,625 interest only
      body coperate and maintance and rates is about $5,000
      outlay $31,625*6 yrs=$189,750
      considered he paid rent to himself 355*52*6yrs = $110,760

      difference was 189,750 - 110,760= $78,990

      he sold the house for 435 - 355 = $80,000

      $78990+$13,000(agent fee) - 80,000 profit = -$10,000

      I would really like to buy a house but i find it very hard to do buy a house as it doesnt seem like there is a very high or guaranteed chance of earning money vs me putting money in term deposits getting 6-7%.

      Can someone please tell me my cousin is the "speical" one who didnt make money in property?

    "If your not paying off your own Mortgage, your paying off somebody elses" [sic] - bah. I'm in a bayside suburb of Melbourne paying less than $2k/mo rent on a property that is probably worth $900k. I'm barely making a dent in the owner's mortgage - despite interest rates just coming off historic lows. With gross rental yields like this, housing is an abysmal investment unless prices keep rising ad infinitum - and given the carnage in real estate asset prices in virtually every other developed country in the world, there's a huge downside risk.

    I just purchased my 3rd property a couple of months ago. The previous owners never cleaned or maintained it so got it for a bargain price. Spent 40k on reno's, now should be worth an extra 100k.
    Still plenty of bargains around if you take the time to look and analyse market prices.

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