So if someone who was considering buying a house in Sydney (well, an apartment) in the next year or so - because it seems prices just go up and up and up and up and they feel like it will just be completely unaffordable if they don't lock something in soon - what's the bottom line? Should they not buy until after this correction? Any informed HNers want to tell this hypothetical person what to do, since they're only just beginning to seriously start looking into it? ;)
As a general rule, buying something because prices just go up and up and up is a good way to get thoroughly shafted.
At the very least consider the following:
a) What is your rent currently compared to your mortgage repayments? If you're going to be paying more, just rent and invest the difference in something else.
b) Do you have ambitions of quitting your job and starting a company? If so, having a large mortgage is only going to hinder that goal (it's far easier to make the plunge when you don't have to worry about servicing a large debt, and it's much less painful to downsize between apartments when you're leasing.)
c) Consider whether you're going to want to do the place up, which can be a huge black hole as far as money is concerned.
d) Finally, if you're living with a partner, consider whether you're willing to have the added financial entanglements that owning a house together will entail.
(I personally rule house ownership out for reasons a), b) and d))
Regarding point a): something to bear in mind is that rent payments are more or less guaranteed to keep going up, all things being equal. Mortgage payments are not.
You also get some equity out of mortgage payments, whereas you don't out of rent. OTOH, getting money out of a house is more expensive and time-consuming that most kinds of investment I'm aware of.
I don't entirely disagree with the reasoning, mind you, but I think that direct comparisons between renting and buying are problematic.
True, but if you're investing the difference in index funds dividends will generally keep going up over time (somewhat in line with the capital appreciation).
>> I don't entirely disagree with the reasoning, mind you, but I think that direct comparisons between renting and buying are problematic.
It's a fair point but as you have to pick one or the other the only thing you can really do is crunch the numbers and account for the intangibles and then make the best decision you can.
Rent is quite a bit less than mortgage payments would be, but at least with mortgage payments you're paying off your loan, not someone else's! I'm not too worried about (b) because I'd be trying to start something in my spare time, then only quitting the day job if it was actually paying enough for me to do so. Part c - well, I'd be looking for a fairly new place .. and as for (d), it's much too late for that ..
I think that what I'm taking from this article is that I have to identify a lot of "unknown unknowns". I admit that I was naively assuming housing prices around here would just go up forever; this article raises the question that they might not and I need to sit down, learn about this stuff and make an informed decision...
On the topic of "paying off your loan": be a little careful with that, because for the first several years of a mortgage (at least as usually structured in the US, but I think this is typical elsewhere too) you're not paying off the principal by very much; and if you rent rather than buy, you are not responsible for building upkeep and the little surprises that an owned home always seems to throw at you at inconvenient times.
>> but at least with mortgage payments you're paying off your loan, not someone else's!
As an example, if you're looking in the Sydney CBD you could easily be borrowing ~$400K (or more). At interest rates of 6% a year initially you'd be paying $24K/year or approximately $460/week to the bank.
At least for the first few years you'll be paying almost the equivalent of rent to the bank just to service the loan, in addition to the repayments off the principal.
I can't answer your question but interesting things I have learned reading around this subject :
- Since WWII in most of the west house prices have risen in real terms (meaning as a percentage of average wages, compared the food bills etc, so not just inflation.
So many people think that's the way it works, but data on the price of housing going back to the 1600s says this isn't
the normal state of things, house prices stay constant in real terms.
- Check whether you are relying on the 'bigger fool' principle. If you could rent a nicer place for less (don't forget maintenance and taxes) but are only buying because you think someone else will be willing to pay even more, even though they could rent somewhere nicer. Question whether that's sustainable.
> data on the price of housing going back to the 1600s
Care to share a link to this data (or at least a pointer to where is comes from)? I'd be interested to know where this came from because my first reaction is to distrust the accuracy/validity of such data.
That being said, how valid is data going that far back (in relation to now)? Isn't the political as well as economic landscape completely different now? I'm not saying you're necessarily wrong, just that I'm not really sure if you can apply that data as a proof.
It's interesting data if you have this conversation :
"Buy property it always goes up"
"It always goes up due to inflation"
"no over the long term it always goes up in real terms, if you pay A x average yearly income for a property then in 10 years you can sell it for A + B x average yearly income!"
"Well here is a graph that shows B is hovering around 0 from 1628 to 1945 and has risen dramatically since then".
It certainly is a different way to look at things.
> "Well here is a graph that shows B is hovering around 0 from 1628 to 1945 and has risen dramatically since then"
Ah. That also answers my other questions. Talking about data from the 1600's doesn't really inspire confidence that it has any relevance to today, but talking about a trend that held from the 1600's through to just recently (for varying levels of 'just recently') has more weight behind it.
As someone who, like you, is trying to figure out the right thing to do in Melbourne, it's hard to say isn't it. On the one hand things seem so ridiculous in terms of debt. On the other hand we have strong population growth and demand here it seems. Although, I have no idea what our growing population is doing for jobs.
Because, things are very centralized here, the options for buying are getting further and further out and the public transport systems doesn't look like it's going to be upgraded to match any time soon.
Inner city apartments are currently pretty small and expensive too, which hopefully changes with some more supply.
Wish I had a crystal ball on this one. All that said, Melbourne still rocks :)
I assume the situation in Melbourne is similar. Here is just crazy. The two bedroom apartment I rented a few years ago for $450/w is now $700/w. A one bedroom apartment in any decent location is now minimum $400/w and probably more like $500.
Rent has gone up 50% in the last 3 or 4 years and seems like it's going to keep going. To comfortably rent a decent 1-bedroom apartment, ie to keep your rent around 30% of net income, you now need to earn $100k. Will it be $150k in 3 years? I'm not sure I will be making that much!
Maybe I should move to Brisbane, which is like Sydney 5 years ago ..
