Hi everyone
Once again I am after some of your much needed advice and opinion. I have 4 +ve IP’s in NZ, of which I have purchased 2 recently. One has needed some renovating, and because of this has used up the small amount of cashflow that we had. We are currenly renting in Melbourne, but absolutely hate where we are and are looking to move. My question is do we rent again or do we take of advantage of the fast disappearing FHOL? Realising of course that we dont have a deposit, but on the other hand, we have absolutely no debt here either.Hi Freedom,
It would be important to know where (which State) you want to purchase to know how much benefit you could receive as you said you hated Melbourne. I will assume you meant the house you are in and not the city so you intend staying in VIC.
The First Home Owners Grant (FHOG) is $7,000 as most people know. In VIC, the First Home Owners Bonus is an additional $5,000 but you have to enter into a contract before June 30 2005 to be eligible. That does not leave much time. You may also get stamp duty concessions if you have a family or hold a concession card.
More information about the FHOG is available at…
http://www.mortgagepackaging.com.au/index_files/first_home_owners.htm
No-one can really answer your question whether to rent or buy except yourself or maybe your accountant. Many people will rent to take advantage of tax benefits by paying less to live in a house than it would cost them to pay off a mortgage. Others do it because they cannot afford their own home.
If you can afford to buy your own home, and with the added incentive of the FHOG bonuses in VIC, it might be better to buy something to live in instead of rent.
I would probably look for something that would also be a decent investment property in case I changed my mind about buying a property to live in and decide I want to rent again. After 6 months, you could move out and not lose your FHOG entitlements. You could also rent the property for just under a year before moving into it for at least 6 months.
Basically, I would probably buy something if I was in your situation with all positive cashflow investment properties and if I had the income to support from my employment.
Robert Bou-Hamdan
Mortgage Adviseryes, we would be staying in melbourne, but probably changing suburbs. We having been looking at building for a while, but are unsure as to wether or not to take the plunge. Obviously we need to get our acts togeter and do something quickly either way. But one things for sure, we will definitely be moving from this house.
Thanks your your advise.
I work in Real Estate in NSW and the market is still slowing. What is the market doing in your local suburb. If market still slow and going backwards then renting may save you some money. All depends on the area that you are going to reside in. I am about to sell my home and rent for 12 months as in my area the market is still not flash.
Chubby
Why would you sell in a flat market and rent when it is a fantastic buyer’s market? Renting only “saves” money when there is an investment property costing more than the rent in repayments and deductions make it more profitable or it helps increase cash flow.
Robert Bou-Hamdan
Mortgage AdviserDepends what you believe the market will do over the next 12 months. I think my local market has not finished the correction and may drop further over the next 12 months. As I am upgrading to a more expensive house it makes sence to delay the purchase. Interest after tax on my money covers rent and adds money to bank balance. At worst if the market stays the same I have lost nothing. If something unexpected causes a spike in values then I am able to buy straight away.
That does not explain why you are selling your home especially if you believe the market will still decrease over the next 12 months.
Robert Bou-Hamdan
Mortgage AdviserI forgot to mention that my current home is too small and I need to upgrade no matter what. Lets say my home is worth $400,000 and the market corrects another 5% ($20,000) making it about 20% correction over the last 18 months in my area. The dearer property also drops 5%(purchase price $500,000 drops $25,000).By selling now and buying when market bottoms out I am ahead on $25000.00. It will cover all of my change over costs.
In a downward market your equity/money is better off in the bank earning 6% which covers the rental costs.I think the market has bottomed out already in areas where there is not an oversupply of units. I think interest rates are steady and would be very surprised to see an increase in the next 3 months.
You will want to be pretty confident that the market will head the way you need it to.
Robert Bou-Hamdan
Mortgage AdviserIf the market is ‘flat’ ie house prices are not increasing, not decreasing, yet renting is far cheaper than buying, how does it not make sense to sell? By selling, you crystalise your profits and can invest elsewhere rather than letting inflation erode the gains of recent years. Many people would find that if they sold to rent, the bank interest on their profits from sale will more than cover the cost of renting.
In contrast to general opinion, falling house prices are good for PPOR owners. Trading up during a boom is a mug’s game. Sure your PPOR may have risen in value, but the larger, more expensive house you desire will have risen even more. The dollar difference between what you have and what you want is greater than before the boom. The opposite is true as house prices fall. The gap narrows – even as your PPOR loses worth, your goal becomes nearer. Of course, selling to rent is the best option…
In contrast to Rob’s belief that the market has ‘bottomed out’, I believe houses are still 30-45% overvalued throughout Australia, and will revert to historic trends in relation to rents, wages and inflation.
I know I’ve posted it before, but THIS ARTICLE is a must-read for anybody who thinks my ideas are off the wall and The author clearly backs steel30’s plan.
Cheers, F. [cowboy2]
Renting is usually always cheaper than buying unless outside a city or regional area assuming an 80% LVR is used.
You said that by selling you crystallise profits. By selling now, you also lose the 20% odd correction that occurred in the last 18 months. You must also pay tax on your bank interest and inflation will also eat into these funds. At 6% per annum in the bank, you will be lucky to return 1% after tax and inflation. To earn more would usually require more risk where you could end up losing your “profits”.
Why don’t you try and source a solution where you keep your current property and get another?
Regarding a 30-45% correction on top of what has already been seen around Australia, I can’t see this ever happening.
Posting the same article over and over again to prove a point does not help you. The article does not support your claims. Try finding an Australian article to support you.
Robert Bou-Hamdan
Mortgage AdviserI’ve already linked over a dozen Australian articles Robert, but that one is fresh and does in fact clearly support a reversion to the historic house price – household income trend.
How would 1% after inflation and tax from a bank deposit be worse than 0% before inflation and holding costs for real estate?
Can’t say I follow your logic.If you believe that there has been a ‘20% odd correction’, what makes you think that the bottom has been reached? What caused the correction? Why would there not be further falls following the last interest rate rise? If your outlook for the economy is rosy, why will IRs not continue to rise? You can’t have it both ways.
Cheers, F.[cowboy2]
If the Australian economy has demonstrated anything since the early 90s, it is that it is extremely resilient. It does not follow world trends with nearly as much impact. I believe this is as a result of good economic management and consumer confidence, amongst other things.
I have not seen your links to over a dozen Australian articles but would love for you to direct me to them.
Your thinking indicates that house prices will drop more than they have ever dropped before. I can’t see this happening in a world economy of consumers being far more educated and learning more each day we move forward. These consumers are now becoming ‘investors’ as well.
The old days of mum and dad buying one house and paying it off as quick as they can and buying no more are gone. Now mum and dad want a family home and a few more for the kids. Australia is unlike any other country in that demand for the ‘Australian Dream’ is extremely high. As long as prices remain affordable, and I believe they are at their current levels, Australians will continue to buy property.
With their newly gained knowledge of tools and tactics enabling them to buy more, and with the proliferation of intermediaries to assist them, you might find that prices have gone up regarding property but ways of buying them has kept it affordable.
You said you couldn’t follow my logic but you are forgetting about the whack you are taking following the 20% correction I already believe has occurred. Houses are not like shares to be sold at a ‘stop-loss’. Our beliefs differ in that I don’t think HOUSES will decline in value much more. On the other hand, your strategy regarding units, especially in the CBD, I would support.
In answer to your questions, what make you think that the bottom has not been reached (regarding house prices)? I believe the correction was caused by prices running out of control. It was clearly not sustainable so had to slow down. Also, various not property related factors contributed to this decision. I don’t believe more falls will follow after the last rise because I was the opinion that this came as a result of non property related factors to decrease spending even further in other sectors. As for my rosy outlook, I think Australians have started to understand what it means to see a couple of rate rises and have reacted sufficiently to prevent any further ‘major’ rate rises.
Do me a favour and take a look at how the various western economies reacted following the problems after the Asia Crisis and 9/11. Australia was nowhere near as severly impacted. This demonstrates good resiliency and supports my ‘rosy economy’ theory. I am also very happy with the Federal Government’s surplus positions of late.
Robert Bou-Hamdan
Mortgage Adviser‘Australian Dream’I think you’ll find that the ‘great American dream’ is quite similar as is the UK’s. The thing is that due to a wider gap between the rich and the poor in those countries, less are actually able to achieve the dream. The result is a far greater (almost unlimited) demand pool.
Regarding the state of the economy, if the outlook is rosy, why did the RBA hold interest rates?
Do me a favour and take a look at how the various western economies reacted following the problems after the Asia Crisis and 9/11. Australia was nowhere near as severly impacted. This demonstrates good resiliency and supports my ‘rosy economy’ theory.I don’t dispute that Australia was in a strong position during the collapse of various asian economies, but can see little difference between Australia and other western countries since 2000.
A quote from last night:
Here’s a quick rundown of our current situation as I see it.
The US is in strife, and they are under great pressure to support their dollar at any price. This is done by raising interest rates (note that this is less damaging to US homeowners due to the prevalence of 25+ year fixed interest loans and PPOR interest being tax deductible). Rising US rates reduce the IR differential between US and AU, making the $AU and AU investments less attractive and causing the AUD to fall unless the reserve bank raises the overnight cash rate.
Should the AUD fall, exporters will benefit, but inflation will rise as consumer goods and oil become more expensive. This will force the RBA to hike interest rates if their sole purpose remains to control inflation.So how will the domestic economy handle higher interest rates? How will home owners and investors handle higher interest rates*? How much higher will they go*?
First it is helpful to understand where the inflationary pressures (both local and global) have come from. The simple answer is debt. Interest rates were lowered worldwide after the Tech bubble burst in 2000, then again after S11 2001 in an attempt to prevent recessions by encouraging consumers to continue… well, consuming. What the reserve banks either failed to notice, or hid from the public and politicians was that rather than look around and say “Hey, things aren’t as dire as we thought, business as usual!”, those consumers took the opportunity to encumber themselves with unprecedented levels of debt. Why not? After all, debt was cheap, and house prices were rising. Any additional debt could be repaid out of future increases in house prices, after all they rise at a faster rate than interest.
Here’s the crunch – every dollar borrowed brings a new dollar into circulation. Every dollar added to the total money supply reduces the purchasing power of every other existing dollar. This is inflation in it’s genesis. Here in Australia, the total monetary supply has increased by something in the order of 50% in the last 4 years. In contrast the CPI measure of inflation has increased by around 15% over the same period (I should clarify that these figures are very approximate and scraped from the back of my mind as best estimates). So why have consumer prices not risen 50% in line with the creation of all this extra money? People sure aren’t saving it – household saving rates have fallen to below zero, so they must be spending it. If people are spending 50% more money, the added demand should drive up the prices of the consumed goods.
There are a few simple answers. Firstly, obviously and simply the majority of this extra money has been spent on houses. House prices are not included in the official CPI measure of inflation. Oddly, they are ignored.
Secondly, changes in consumer behaviour generally take 18-24 months to fully reveal themselves. For example, when interest rates are hiked, consumers have less to spend on other items. The producers of such items face reduced demand and reduced profits, so they may downsize, and will also order less of the components of their products from their suppliers. The suppliers are similarly effected. All this takes time, but eventually it shows up at the other end as falling GDP, falling employment and smaller budgets for the government.
Finally, many imported items have remained cheap or gotten cheaper due to China’s policy of pegging their currency to the US dollar and the US dollar falling about 30%. Remember when the $AUD was around fifty US cents? This has offset rises in other costs.The bank economists, housing lobby groups and government are all urging the RBA tonight to hold interest rates, claiming the economy and house prices cannot handle a rise and is already slowing. At the same time, the US Fed Reserve have made it very clear that their recent string of rate rises is just the beginning. Now what is the RBA to do? Act in the interests of the government, banks and REIs or do the job they were instated to do – to keep inflation within it’s target range?
We will see.*Ok, so I didn’t answer either of these questions. So sue me..
I wonder how many people are familiar with the term stagflation?
Cheers, F.[cowboy2]
“Regarding the state of the economy, if the outlook is rosy, why did the RBA hold interest rates?”
fair crack F – if they raised rates every month the economy was looking good they would be at 100% by now.
The chain of events you have predicted above has an incredible amount of ‘ifs’ in it. Any piece of that could easily come unstuck e.g. change in trading currency for oil, attack on North Korea, continuing growth in productivity, significant change to immigration, collapse in commodities, boom in commodities. Interestingly, when the AUD was last in the doldrums there seemed to be a total discoonect between interest rates and the value of the dollar. The conclusion at the time was that the AUD is a lifestyle currency and is driven more by sentiment than real currency demand.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Further to the rosy outlook, these from News.com.au and AAP:
JP Morgan chief economist Stephen Walters said the market had largely expected the on-hold decision.
“We suspect the RBA has left policy unchanged for the past two months because there is mounting evidence the economy has hit an air pocket,” Mr Walters said.National Australia Bank head of research Peter Jolly said the RBA was acknowledging the emerging signs of a slowing economy.Commonwealth Bank of Australia chief economist Michael Blythe said the market now had the perception that the economy was shifting down several gears.Shaw Stockbroking analyst Brent Mitchell said the interest rate rise in March, the cooling in the residential property market and general concerns about the economy were behind the jittery market reaction to a fairly benign announcement from Mirvac.The narrowing gap between US and Australian interest rates has weighted on the dollar.
The local currency opened lower at $US0.7737-42, down from yesterday’s close of $US0.7774-79. At noon, the dollar was quoted at $US0.7769-75, slightly down from yesterday’s close of 0.7774-79.Indications of an economic downturn accompanied by higher inflation have led some to fret that the US economy could be returning to 1970s-style “stagflation”, although this is not the consensus view.
“The Fed is more worried about inflation but very aware of the moderation in growth,” commented Joel Naroff at Naroff Economic Advisers, noting the committee’s continued attachment to the words “accommodative” and “measured.”I wasn’t suggesting that IRs should be hiked to combat economic growth, rather that the reason rates have been held for the last 2 months is the faltering economy. Even Howard and Costello have been heard to urge IR restraint in light of the economic outlook.
Anyhoo, F.[cowboy2]
Stagflation is merely a situation where an economy slows and prices rise. May I ask what evidence of this you have seen?
Who is advocating a further 45% drop in property prices??? Certainly not me!
The US is certainly heading for stagflation in my opinion.
Robert Bou-Hamdan
Mortgage AdviserStagflation is merely a situation where an economy slows and prices rise.Merely? Rising consumer prices but an economy that cannot sustain wage inflation while redundancies increase?[blink] Far from rosey IMO.
May I ask what evidence of this you have seen?Current inflationary pressures are being masked by falling consumption & confidence, but the reserve bank is aware that they exist and has stated so. Further inflationary pressure will be added as the interest rate differential between the US & AU narrows, depressing the Aussie dollar.
As I previously pointed out, the RBA has 3 choices – tighten their bias to combat inflation but risk tipping the economy into recession; loosen it to prevent stagnation thus compounding their past errors; or try to balance the two with stagflation the likely result.
Who is advocating a further 45% drop in property prices??? Certainly not me!I don’t recall stating that you did. I stated that I believe property prices will return to historic trends in relation to rents, household income and inflation. This will require 30-45% falls in real terms around the country, with some regional variation.
Anyway we will no doubt continue to disagree. Only time will tell*. Back on the topic of Renting vs Buying – I say renting is [specool] and [thumbsupanim].
Cheers, F.[cowboy2]
*
Originally posted by foundation:Stagflation is merely a situation where an economy slows and prices rise.Merely? Rising consumer prices but an economy that cannot sustain wage inflation while redundancies increase?[blink] Far from rosey IMO.
My use of ‘merely’ refers to the definition of the word, not the effect.
As I previously pointed out, the RBA has 3 choices – tighten their bias to combat inflation but risk tipping the economy into recession; loosen it to prevent stagnation thus compounding their past errors; or try to balance the two with stagflation the likely result.Stagflation is not a risk to the Australian economy in my opinion. It is a much more likely risk in the US.
Who is advocating a further 45% drop in property prices??? Certainly not me!I don’t recall stating that you did. I stated that I believe property prices will return to historic trends in relation to rents, household income and inflation. This will require 30-45% falls in real terms around the country, with some regional variation.
Actually, the wording was as follows…
Originally posted by foundation:In contrast to Rob’s belief that the market has ‘bottomed out’, I believe houses are still 30-45% overvalued throughout Australia, and will revert to historic trends in relation to rents, wages and inflation.
Cheers, F. [cowboy2]
If you believe that prices are overvalued by 30-45%, does that not mean you expect them to reduce by this amount if you expect some sort of “bubble burst”?
Anyway we will no doubt continue to disagree. Only time will tell*. Back on the topic of Renting vs Buying – I say renting is [specool] and [thumbsupanim].Economic opinion never has a right or wrong answer. That is why the field is so good. You can always find evidence to support every economic possibility. Regarding renting, if you want to buy and can afford to, now is a fantastic buyers market and there are some great deals out there.
Robert Bou-Hamdan
Mortgage Adviserso what is the likely trend in the near future ? will we see a likelyhood of price correction or it will stay flat ? i know this is a very hard question since it is determined by a lot of factor that we coudn’t tell or predict.
in that relations, will it still be better off renting now, rather than buying and save up more deposit ? since we can see that it has more signs of slowing down and price stays flat, let’s say for the next 1-2 years ? and save up in interest payment ?
any opinions will be appreciated.
cheers
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