Below is a email sent out by Scott Pape (Barefoot Investor & Channel 7 Finance commentator)
Makes some interesting points about Renting V's Buying, but also an interesting observation about how anyone who is critical of buying housing is attacked by Spruikers......
I copped a bit of hate mail
I got on the telly and talked about a new report that suggested it was better
to rent than buy.
Cue the crazies: there’s a lot of emotion when it comes to buying
property. I think of it as a slightly less bogan version of the rivalry between
Holden and Ford (or Kim and Kanye) and this week I managed to get both
sides’ back up.
However, I was trumped by the normally poker-faced boffins at the Reserve Bank
of Australia (RBA). They rarely speculate on where house prices are going
— they don’t have to, they influence prices by setting interest
Yet this week the RBA released research that found that over the past 60 years
there wasn’t much of a difference between renting and owning.
Okay, go back and read that last sentence again, just so you take it in. It
sounds like bulldust, right?
After all, we’ve just lived through the mother of all housing booms
— in which your parents bought their home 30 years ago for the cost of a
Kia Rio and it’s now worth the same as a Rolls-Royce Phantom.
Well, it all comes down to the costs of home ownership, which I’ll
tackle in a moment (send your hate mail to firstname.lastname@example.org). Yet the
most intriguing part of the study was the RBA researchers suggesting that if
property prices slow, “the average homebuyer would be financially better
Reading between the lines, that’s a warning shot. The boffins are
telling first home buyers to curb their expectations about the future riches
they should expect from buying a bunch of bricks.
But let’s get back to the hate mail.
Renting Your Way to Riches
On the telly I interviewed one of Australia’s most respected and
successful economists, Phil Ruthven, founder and chief of IBISWorld.
Ruthven’s a man of extraordinary intellect and insight, but what makes
him especially interesting is that he made a conscious decision to rent his
Years ago he crunched the numbers and worked out he’d be streets ahead
by selling his home and renting instead.
And here’s the kicker: Ruthven isn’t a doom and gloom merchant on
property. (In fact, Ruthven is more optimistic about the future of property
prices than I am.)
The reason Ruthven believes home ownership is a dud deal is because of the
significant costs. He argues that rent money may well be dead money, but so too
Let’s say Phil saves up a $50,000 deposit and buys a $550,000 home. He
takes out a $500,000 home-loan over 25 years and pays a (long-term average) 7
per cent interest rate.
Over the next 25 years he’ll end up paying more money in interest to the
bank than he’ll pay to actually buy the home: the total repayments will
be $1.06 million, including a whopping $563,000 in non-tax-deductible interest.
And it gets worse. That figure doesn’t factor in the significant
out-of-pocket costs homeowners pay. It begins with stamp duty and legal fees,
continues with the wear and tear on the property (which works out long term to
be around 5 per cent of the value of the property each year) and ends with the
On Ruthven’s calculations, if you were to buy an average home for
$550,000, fifteen years later you could expect to sell it for a $350,000 profit
-- after stripping away your many start-up, ongoing and selling costs. However,
if you rented a similar home and invested the same amount in the share market,
you’d come out with a $1.25 million profit over the same period.
Now before you get too carried away and rush out to sell your house, consider
this: in all my time of being Barefoot I know only one person who has actually
done this — Phil Ruthven.
For the rest of us, buying a home isn’t just a financial decision,
it’s an emotional one. After all, it’s a place where you raise your
family. It’s your castle. Personally, buying my first little apartment
was one of the proudest moments of my life — and it beat the pants off
any win I’ve ever had in the share market.
Kicking the Buckets
Let’s be honest: all forecasts on future prices are a guess —
no-one has a crystal ball — but everyone has an opinion. Here’s
As a (relatively) young person buying into one of the most expensive property
markets on the planet, I went in with my eyes wide open: the last 20 years of
boom-time gains are unlikely to match those of the next 20.
That’s because there was a significant structural shift that caused
prices to boom: the banks were deregulated in the mid-80s, which led in part to
the biggest borrowing binge in history. That ‘Get Out of Jail Free’
card has already been played by the Baby Boomers and I’m on the wrong
side of the boom.
Either way, I’m a strong believer in home ownership, for all the reasons
I’ve already listed. But here’s the real point: I’m wary of
having all my eggs in the one basket — or bucket.
That’s why my wealth-building strategy focuses on dividing my income
into three separate wealth buckets: a Blow Bucket (for daily expenses and
mortgage repayments), a Mojo Bucket (for emergencies) and a Grow Bucket (for
wealth-building through the share market).
Phil might argue that I’m getting a dud deal, but I see it as the best
of both worlds.
Tread Your Own Path!
HOUSING is less affordable in Australia than in any other country except Belgium, the International Monetary Fund says, warning that rising prices might point to an unsustainable boom.The IMF is stepping up its analysis of housing markets around the world, having concluded that property booms and busts were implicated in two-thirds of the past 50 banking crises. “The era of benign neglect of housing booms is over,” deputy managing director Min Zhu said.
House prices, rents and incomes should, in theory, all move in tandem.
On this basis, the Australian real estate market is one of the most exposed in the world.
The ratio of prices to individual incomes is one-third more than its long-term average, the IMF estimates.
Canadian house prices are similarly inflated, while prices in Belgium are almost 50 per cent higher, relative to incomes, than average.
“In the long run, the price of houses cannot stray too far from people’s ability to afford them,” the IMF says.
If ratios between house prices and rent get too far out of line, people will switch between buying and renting, eventually bringing the two into balance, it notes.
Presently, the ratio between house prices and rents is 50 per cent more than the long-term average in Australia.
Such indicators provide only a broad indication of housing market valuations, with issues such as credit growth, household indebtedness and the nature of housing finance in a country also having an effect.
The fund says there is no single indicator for when a housing market is set for a fall but if a range of indicators, such as credit growth and housing affordability, are all pointing to an overheated market, authorities should take action.
The IMF argues for regulatory intervention to slow house price booms, such as demanding that banks hold more capital against any housing loans, or imposing limits on how much people can borrow against the value of their house or their income.
The Reserve Bank has been sceptical about these strategies, arguing that regulation has limited effectiveness. If interest rates are too low, people will find ways to borrow excessively.