Australian FHBs go on strike!

TKline posted under at least two other names .. on separate threads. It only takes a glance at his current posts to see he's doing almost exactly the same thing on this account.

Talking about housing busts … how the ratio of australian house prices mean that our properties are the most expensive in the world … and extra doom and gloom.

He's pretended to be different ages .. and be different people .. but his story is very much the same .. and he represents the same stuff. Last time he was actively countered .. he went back .. and deleted all his posts.

Its not going to help responding to him. Ignore him and he'll just go away.

T Kline  Yes it is a load of crock You can buy houses in australia for under  i50k even under 50k, they are cheaper and better buying than some df the houses  people are buying overseas in the places you mention   and with trhe FHB you can buy houses cheaper than you can oversereas   Yes you can buy houses for less than one years average wage    Even in places that have  all services and facilities you can get anywhere,  for 2or 3 times the averge wage.      It is like  saying  you cant afford a car  becausethe mercedes benz  you want  is  too dear.

I have to say it sounds like a smart and sneaky investor ploy to push some out so that they can move in and reap the benefits… before too long prices go up again and people realise that it was wrong. I for one hope this stagnates prices for the next 3-6months as I am on the verge of buying another property and would hate to see prices jump just before I buy!! :p

Anything that hold prices back for the short term will only cause a mini boom/sudden spike in prices once a correction catches up in time anyway,..

Good point. Availability of credit is very important. I'm no economist, but basic knowledge tells me that a tightening of credit would cause house prices to take a fall. However at the same time it reduces the amount anybody can borrow to buy a house. Tightening credit would not help a FHB as such.

Opportunity cost: it's great, no doubt…to be putting money into a mortgage. However as we have seen, being able to own our own home is an important issue for many. What exactly is the price we put on owning our own home? A book I read made an interesting point: humans are by nature, a territorial creature. We'd rather take an empty double seat on the bus than share with another. We also have our own private space which when invaded, makes us uncomfortable. This happens whether we're walking on the street or driving on the road.

It is this territorial nature that in part explains the reason why people need their own home, and preferably with a good sized backyard, because everyone wants their own personal space which they may even choose to personalise and decorate based on their own tastes.

As such, without adding more complexity to an already complex issue, home ownership is an interesting thing to consider, with many variables in the picture, tangible or otherwise. As such, whether the opportunity cost is really too hard to bear depends on other factors, including emotional factors, which as we know are sometimes responsible for people's actions.

Most banks will give a choice of a loan term of up to 30 years, and this is what more cash-strapped buyers should be looking at. It would be better to have a 30 year loan term and an associated 100% offset account. This way, if things get tight, it's easier to manage the repayments, but when times are good, more money goes into the offset account, which reduces interest on the balance of the loan and effectively reduces the loan term.

On that note, repayments of $40K per annum on a $500K house on a 30-year loan term equates to an 8% interest rate on a loan of $450K, which is 90% of the value of the home (ie. 90% LVR), or a 7% interest rate (closer to the rate today) on a loan of $500K, which is 100% LVR. Alternatively, most buyers are recommended to have a 20% deposit and borrow 80% (80% LVR) of the value of the home, hence avoiding mortgage insurance.

So even at an interest rate of 8% (currently you can get less than 7% variable interest rates and 5-year fixed rates are still less than 8%) on a loan of $400K, we're looking at less than $36K pa, not the $40K pa we were originally considering, but certainly close enough. Just doing some figures for the benefit of those who might be reading/ looking to learn a little more.

Consider also that if you choose to pay weekly rather than monthly, you will save even more on interest and shave more time off the loan.

Perhaps I am misunderstanding your statement. But let's also consider that the said renter has to put this $20K pa into renting a house. That means the $20K is not available for investing. So in tying in with the above statement, the choice is between renting and having $16K pa left over to invest or otherwise paying $36K pa over 30 years to own the house (at 8% IR on a $400K loan), assuming rents and interest rates don't change, but rents generally do increase in line with inflation, if not more.

Of course this doesn't take into consideration other things such as costs to maintain the house (which an owner or landlord has to foot), and the fact that, if a renter decided to rent rather than put down the 20% deposit to buy his/ her own home at $500K, then he/ she has $100K in the bank from the get-go.

However if the 'owner' of the house is really a landlord, then he/ she in reality is out of pocket for a much smaller amount each year in order to control the property. Assume for this example an interest-only loan on $400K for this house, which works out to $32K interest per year (for simplicity's sake, excluding cost of repairs, maintenance, rates, insurance). Rent is $20K. Landlord is $12K out of pocket. Now, just getting out of my depth for a moment (as I'm not an accountant), a landlord on a marginal tax rate of 30% will hence be able to claim back 31.5% (30% tax plus 1.5% medicare levy) of this $12K in the form of a tax deduction, which is $3,780.

In reality, this landlord is out of pocket $8,220 pa to control this property. Naturally we have neglected to consider capital gains. Assuming he/ she has bought well, there is substantial money to be made (ignoring inflation again for a minute, which affects the returns of any investment regardless) which would subsidise his annual out of pocket costs, and more. And the landlord can choose to sell the property nearing the end of the 30 year loan term to pay out the loan and take profit. Or if he/ she is lucky enough to have two investment properties, to sell one, pay out the loan of the other.

Notice we're talking about negatively geared property here. Some folk buy into positively geared property and it makes money for them from day 1. For the landlord, this can become a substantial form of passive income.

The size of the tax deduction is dependent on the marginal tax rate of the landlord, hence it is NOT a 50% tax deduction across the board, and you can only claim a deduction on the interest portion of your repayments, not the principle portion.

There is an equation that I remember reading in Steve's book, which seems to more accurately quantify the values you'd be dealing with when working with an investment property. I would try to quote here (with some changes to the terminology) and digest, if I may (cash down meaning the deposit plus closing costs):

Net profit percentage = [(cash back + expected annual capital growth) / cash down] * 100

Let's assume again these figures:

House purchase price: $500K
Loan: $400K
Deposit: $100K
Closing costs (allow 6% of purchase price): $30K
Rent: $20K pa
Costs to control property (loan repayments on 8% IR on interest-only loan): $32K (assuming no benefit from tax deduction, or if negative gearing were 'abolished')
Expected annual capital growth (assume conservatively 6%): $30K

Therefore,

Net profit percentage = [($20,000 – $32,000 + $30,000) / ($100,000 + $30,000)] * 100 = 13.84%

That is, every $1 invested in this property yields $1.1384. The figures above are rather conservative however, but it is just an example to show that your returns are closer to 14% pa on this property, assuming rents and interest rates don't change. And higher interest rates usually bring higher rent.

Let's do another example, this time with figures I know we can achieve (because I've seen it done on average property):

House purchase price: $449,000
Loan: $359,200
Deposit: $89,800
Closing costs (allow 6% of purchase price): $26,940
Rent: $18,720 pa
Costs to control property (loan repayments on 7% IR on interest-only loan): $25,143.96
Out of pocket costs (after tax deduction): ($25,143.96 – $18,720) * 0.685 = $4,400
Capital growth this past year (using bank valuation): $51,000

Net profit percentage = [(-$4,400 + $51,000) / ($89,800 + $26,940)] * 100 = 39.92%

Of course we cannot assume this level of capital growth each year (which is only 11%, BTW, not the 20% that some suburbs have achieved in the past year), but just a real life example showing the numbers.

Feel free to correct me on any of the above figures if there's been a mistake.

I do not disagree that house prices are high, and neither do I disagree with the possibility of a correction. However some people are of the simple belief that the prices have to come down simply because they are high. They may be right, but I believe that unless it becomes very uncool to own your own home, or Australia becomes very unlivable (whether through war, natural disaster or economic chaos), or economic chaos elsewhere, house prices in Australia are not simply going to crash to the tune of 40-50%.

House prices in Singapore are stratospheric, and there have been 20+% falls in prices, particularly during the GFC just past, but it is another case in point: prices don't just drop by massive amounts because they are high. Big drops are caused by events that occur at an international level, and even so, not by 40-50%.

This is a good point, and the movement of the baby boomers will causes changes to the property market. However it begs the following question:

How many of these retirees actually have negatively-geared property? This is a figure that is not easy to work out, unless there is a census somewhere that gives us the figure. Bear in mind also that these baby boomers may have bought their investment properties many years ago, and they are now already positively geared. If the income is substantial, they have little reason to sell. IMO, even a retiree needs a good amount of passive income to support their lifestyle. Relying on savings alone, unless you have huge amounts, is risky.

When the baby boomers move, there is a potential for a reduction in prices in some of the inner and middle suburbs, as John Lindeman alluded to in his book. But we also need to consider the underlying demand from people who are waiting to buy into these desirable suburbs. Is it then possible that the demand for such properties will continue to hold prices up?

Also, if the baby boomers move out of their inner and middle-ring suburb homes, they WILL have to move somewhere else. And where would they move? John Lindeman suggests some locations in his book, for example, the Mornington and Bellarine Peninsulas in Victoria.

Essentially, the change of lifestyle for these baby boomers will have an effect on property prices for sure. But in essence, the early signs are already telling us where to buy.

Ultimately, in this world, it's 'Yer pays yer money, and yer takes yer chances.'

Each should do what they think is right. But ultimately, in instances of polarized opinions, someone will be wrong, and the losses will be great, actual or opportunity cost otherwise.

This is why I think the doom and gloomers have it easy: no investment of time or money, yet the chance of a spiteful gain if they are right in their predictions. While people who work to earn their right to their own home unfortunately have a lot to lose if this is the case. Of course things could very well go the other way, and homeowners will be well-rewarded for their efforts, and justly so, and the naysayers will be left with nothing but hindsight for their children and grandchildren. Such is just the reality of things.

Then it would seem that you are a minority. The vocal amongst the Gen Y sometimes paint a completely different picture. Anyway, I'm a Gen Y also.

Perhaps I should clarify. A 30 yr loan is not a better option than a 25 yr loan per se. Of course, a dedicated home owner who can pay off their loan sooner will save more interest. Therefore someone paying off their loan in 25 years makes greater repayments but overall pays less interest than someone paying it off over 30 years.

Again, another thing I should clarify. Some people advocate buying a house on an interest only loan, but having an attached 100% offset account. By having your paychecks deposited into this account, and using this account to hold all your savings, you can effectively make 'principle and interest' payments even though your loan is interest-only.

The difference is that the money in your offset account can be accessed as you would from a normal savings account. This is very important of course, because in an emergency, you could access all the savings in your offset account at a moment's notice. However, if you were paying a principle and interest loan, you cannot easily draw out the 'principle' you have paid in the last few months or years.

Consider this example:

If you have a loan of $450K with an attached 100% offset account with $50K of savings brings your effective loan down to $400K. You are paying interest only on that $400K.

If you then get lucky and get an inheritance, you can put a full $450K into your offset account, which reduces your effective loan to $0, and you pay no interest whatsoever.

In essence then, money in your offset account (if it's 100% offset) earns interest at the same rate as your mortgage rate, and tax free. This money is always accessible like it were cash in a savings account. This is an excellent thing to take advantage of.

Hence, someone could choose to have a 30 yr loan, interest-only but with a 100% offset account attached. The more money they save in that offset account, the less interest they have to pay on their loan. This is an important motivator, because the home owner can then see the true effect of them saving even a few dollars each week.

Not sure if I stated this clearly enough. As you can tell, I'm not a mortgage broker, but I sorta get the gist of it.