tag:blogger.com,1999:blog-7582484240805759271.post4460960407488264678..comments2023-11-05T04:13:05.059-05:00Comments on Financial Follies: Rent vs Buy -- (Updated with new figures)Financial Follieshttp://www.blogger.com/profile/18074060737860512595noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-7582484240805759271.post-32564079583920169792011-01-14T21:37:07.211-05:002011-01-14T21:37:07.211-05:00Anon -- Thanks for the comment. As you point out, ...Anon -- Thanks for the comment. As you point out, the NY Times calculator is a bit simplistic. I used it mainly because it produces a nice graph of the rent vs buy scenario over time. In any case, there are many ways to look at the rent vs buy calculation but most of them seem to point in the same direction, as you've shown for Canberra. <br /><br />CheersFinancial Follieshttps://www.blogger.com/profile/18074060737860512595noreply@blogger.comtag:blogger.com,1999:blog-7582484240805759271.post-37233698273356772312011-01-13T00:54:22.681-05:002011-01-13T00:54:22.681-05:00Dear FF
I'm finding this blog very interestin...Dear FF<br /><br />I'm finding this blog very interesting, and having been going back through the older posts. I've come to this one a bit late, some I'm not sure anyone will notice the comment. <br /><br />I have one problem with the above discussion, and for that matter the NY Times Calculator. As far as I can tell anyway it assumes the only options are buy now or never buy. The reality is that there are heaps of options along the lines of rent for x years then buy.<br /><br />Taking an example from Canberra, house prices are around 1000 times weekly rent. So if you rent a house for $400 you could buy it for $400,000.<br /><br />Say you have a 20% deposit, so $80,000 and you can afford interest repayments at a round 8% pa or 0.00148% per week. But no principle. Then the amount you can afford is around $600 per week.<br /><br />If you instead rent and save that $200 per week by the end of the year you have around $90,000, or a 12.5% increase in your deposit for the next year. So for the loan to value ratio to stay the same the property would have needed to also go up 12.5%.<br /><br />Now even the bullish commentators don't claim that much, and the less you have to start with the larger the change (more than linear). So if you only had 10% deposit the house price would need to go up more than 25% before the LVR stayed the same. AND this ignores holding costs on the house.<br /><br />And so after one year your LVR would improve even with massive house price inflation. and the better your LVR the more you pay down the principal at each step since the interest repayment will be less of the weekly repayments.<br /><br />Thus as I see it anyway, atleast in Canberra (which is meant to be a very tight rental market) you are better of renting even if house prices continue to go up at 10% YoY up until you have saved something approaching 40% deposit, when the interest will about match rent.<br /><br />Personally I don't think they will stay at that rate, but by my above working it is almost never better to buy than rent at the current rates, regardless of the holding costs, risk of market down turn etc etc.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7582484240805759271.post-9031112715785881232010-12-28T07:18:00.731-05:002010-12-28T07:18:00.731-05:00Demographix -- You're right, and it also allow...Demographix -- You're right, and it also allows for the deductability of mortgage interest payments under the US tax system. To correct for both of these differences you need to change the marginal tax rate input to zero under the Advanced Settings. Dealing with the difference in CGT in Australia and USA is a bit more tricky. <br /><br />In any case, this is just intended to be a very rough reality check. Like I said it's very sensitive to the assumptions you make about capital appreciation, interest rates, rental increases, etc, and you may have different assumptions than I do.Financial Follieshttps://www.blogger.com/profile/18074060737860512595noreply@blogger.comtag:blogger.com,1999:blog-7582484240805759271.post-2284801024818813882010-12-28T01:02:10.397-05:002010-12-28T01:02:10.397-05:00The model also has the selling costs as tax deduct...The model also has the selling costs as tax deductible, as it is in the USA, but not in Oz.Paukhttps://www.blogger.com/profile/06588958150049413500noreply@blogger.comtag:blogger.com,1999:blog-7582484240805759271.post-78850892838667361212010-12-24T08:08:38.815-05:002010-12-24T08:08:38.815-05:00Rising Sun -- Thanks for reading. The model takes ...Rising Sun -- Thanks for reading. The model takes into account closing costs on the purchase as well as annual maintenance, utilities and renovation costs (which are adjusted annually for inflation). Check the link to the NY Times page and you can change these inputs yourself if you click on the "Advance Settings" tab.Financial Follieshttps://www.blogger.com/profile/18074060737860512595noreply@blogger.comtag:blogger.com,1999:blog-7582484240805759271.post-63508306349332726032010-12-24T02:21:18.528-05:002010-12-24T02:21:18.528-05:00This model doesn't take into account rates, wa...This model doesn't take into account rates, water bills, repairs and maintenance etc, which as a buyer you'll have to pay over those 25 years and a renter you don't. I estimate a buyer pays at least an extra third of the cost of the mortgage in the first year (because they paint, fix the garden, repair the leaky gutters, etc), and an increasing percentage after that (because mortgage payments don't go up with inflation). Also, stamp duty and other buying costs would add to the purchase price and to the mortgage. Having rented for a few years and then buying a unit and then upgrading to a house, a mortgage is so much more expensive than rent - and your capital growth is only good for buying another house, a place in a retirement home, a way of leveraging an equity loan or passing on to your kids when you die. The money you save renting you can use when you like - or just save and invest. <br /><br />Anyway, I actually like owning my own house and we're only leveraged about 45% (up to 85% if Steve Keen is right), but I think the above example is taking way too few extra costs into account.Rising Sunhttps://www.blogger.com/profile/02338420968173299450noreply@blogger.com