Housing Affordability Australia – Renting Or Buying?

It’s a crazy idea to buy a house in Australia at the current prices.

 

  • By all measures of value, house prices in Australia are at or near the highest levels they have ever been.
  • A typical Sydney house costs $400-500 per week to rent, or $ 1200-1500 to own. Buying at the current prices, you would have to have real capital gains of $800-1000 per week (or around 5% of the purchase price per year) just to not lose money. It may well be worth paying something for the pride of home ownership, but three times the price of renting? You can buy an awful lot of nice decorations for your rental property with a small proportion of the cost difference between renting and owning. See the ongoing costs of living in typical houses in other areas of Australia here.
  • House prices have, can and will fall. There were large house price falls in the 1990s, 1930s, and 1890s, associated with less spectacular house price bubbles. The rise has been larger this time and the falls may well be larger this time. There have been enormous falls after enormous rises at other times in other places.
  • Speculatorsexternal link who think they are investors lose money on purpose buying houses they do not want or need, dreaming of easy profits. You do not have fulfil their fantasies by paying even sillier prices. You do not have to be their “greater fool”external link.
  • Home owners pay far more than they have to, to live in poorer accommodation than they could if they rented, believing they will profit by doing so. At today’s prices even home ownership has become a form of gambling.
  • Think it through. Even if house prices do not fall, rents have to at least triple for renting a normal house in an Australian city to cost the same as owning one. Half of renters already pay more than a third of their income in rent. Rents tripling simply cannot happen without large increases in wages, which implies high inflation and thus high interest rates over a prolonged period of time. Without their fantasy rent rises, or their fantasy price rises, long term ongoing losses will crush real estate speculators.
  • Without speculative demand for houses there has been significant excess building in Australia (OverbuildingByLocation ). When the speculative demand is gone, there will be an oversupply of houses for living in. The ” HousingShortage ” is a shortage of gambling chips, not of human living environments. (You can help us map the 830 000 empty houses here)
  • Large numbers of Australians have borrowed more than they can repay to pay more than their houses are worth to buy them. The supply of greater fools is rapidly dwindling. You are under no obligation to join them.

 

Who thinks it’s not a crazy idea?

  • Members of the 17% of Australian households that already speculate overtly in real estate. Two thirds of them individually and the sector as a whole declare a loss each year. They need you to offset their losses.
  • Heavily indebted recent home buyers who bought their houses at speculative prices. They also need you to justify the crazy prices they paid. Without you to pay even more for the house next door, their house is worth what it saves them in rent less the cost of owning it.
  • “Experts” who all agree that there is a shortage of housing. They agree that house prices are unlikely to fall far, and that rents are going to rise. Who are these experts?
    • real estate agents and their representatives
    • people who sell reports telling real estate agents and speculators what they want to hear
    • employees of newspapers that have become totally dependent on real estate advertising
    • economists who make press releases for banks that “secure” most of their loans against inflated land valuations.
  • Your relatives in the generations above you. They did well by buying a home when it was cheaper to own than to rent. They did well by spending less than they earned over a long period, and you will do well if you follow their wisdom and spend less than you earn, rather than mistakenly believing the house itself bought at any price magically made them well off. Some of them were even lucky enough to do well despite buying houses when it was a little dearer to own than rent in the lead up to the greatest house price bubble in history. Do you feel lucky enough to profit buying when prices are the highest they have ever been?

 

Why do they say you should buy a house at any price?

 

  • Prices always go up

This is nonsense. Prices have fallen significantly in Australia in the past eg 1890s, 1930s, 1990s and at other times in other places.

  • You’ll miss out on owning your own home forever if you don’t buy now.

Will you? So if every one like you will miss out in this gloomy future, who is going to buy the houses?

  • Renters are poor

Poor renters are poor. Paying more for their accommodation than they have to will only exacerbate that situation. Keeping your living expenses as low as possible will make you much better off, allowing you to both save more and spend more on other things if you chose to.

  • Rent money is dead money

All money is dead. Interest paid or foregone, maintenance expenses paid, insurance and stamp duty. All of these add up to far more dead money than the rent you would pay to live in an equivalent house.

  • Everybody needs a home

True. At the moment they can either rent the space to put it in from a speculator or buy it for three or more times the ongoing cost.

  • Your house can’t go to zero like a share or even a bank account

If you have a loan against your house, it can easily go to zero. It has become normal to borrow close to 100% of the purchase price which means if the price of the house falls at all, you owe the bank more than the house is worth. Even with a more traditional deposit when house prices become rational many people who bought at today’s prices will owe more than their houses are worth.

  • There is a shortage of housing

Between the last two censuses, the number of people in NSW rose by 3.8%, the number of dwellings rose by 6.1% and the number of empty dwellings rose by 13.3% to 9.5% of the total. Check the numbers for your area and list them here; OverbuildingByLocation . Once the speculative mania has waned, a significant oversupply will become apparent.

  • There is a shortage of land in Australia

House prices in Japan declined 70% over the last decade and a half. The population density in Japan is more than twenty times what it is here. Australia is one of the least densely populated nations on earth. Even if your imagination is good enough to believe that there is a shortage of land here, that will not stop the prices paid for it from becoming rational.

  • Rents are about to go through the roof

The number of empty houses has increased significantly. Rents have tracked inflation very well over the long term. Here are the numbers for each capital city according to the ABS between Sep72 and Jun07

CITY REAL RENT GROWTH FOR PERIOD COMPOUND ANNUAL REAL RENT GROWTH
Sydney 14.07% 0.53%
Melbourne -5.15% -0.21%
Brisbane -19.58% -0.88%
Adelaide -1.22% -0.05%
Perth -24.29% -1.12%
Hobart -30.16% -1.44%
Darwin *Sep80-Jun07 16.75 years -12.58% -0.80%
Canberra -2.92% -0.12%
Australia 1.01% 0.04%

After a decade of overbuilding, this is not suddenly going to change. Half of renters already pay more than 30% of their income as rent. Outside of the fantasy world of industry campaigns, rents cannot rise far.

  • It’s different here to other places

Kangaroos cannot save us from basic economics.

  • The economic cycle is dead – it’s a new paradigm!

It is not different this time. Every time people have claimed that it is different this time they have been proved disastrously wrong. The renowned economist Irving Fischer said in late 1929 that stock prices had reached a permanently high plateau. All agree that Australian house prices have reached a permanently high plateau. They have not.

  • The majority of rich people got rich through investment in residential real estate

Really? Who? It is true that at the moment there are more real estate paper millionaires than there were a decade ago. In 2000 there were more internet stock paper millionaires than there had been a decade before that. The existence of apparently rich people who spent ten times their net worth on the one asset a decade ago is a symptom of the bubble, not proof that it will go on forever.

  • You can be thrown out of a rental property, but no one can throw you out of your own home

You certainly can be thrown out of a mortgaged property. Your circumstances can change and you can need or want to move. The cost of moving if you own the house contains all the costs of a renter moving plus stamp duty which at today’s fantasy prices is more than a years rent, plus enormous transactions risk.

The possibility of having to move house at low expense a few times during the life of the bubble is more than compensated for by staggeringly much lower financial risk and living expenses.

  • A mad landlord can make your life hell

Sure, so can a mad neighbour. If you rent it will cost you one or two thousand to move away from the mad landlord or neighbour. If you own it will cost many tens of thousands.

  • House ownership is risk free

Until it’s not. While the bubble was inflating it certainly appeared to be risk free. If you could not afford to pay your mortgage you could always sell your house for more than the outstanding mortgage. It is not different this time, it will not go on forever. You do not have to be among the last to join the mania.

Calculate the risk yourself. If you live in an equivalent house to the one you could buy and save the difference between the rent and and the interest and maintenance, how much extra money would you have in the bank to cope with a period without income? If you could not make those savings then you could not afford the mortgage anyway.

  • You are not a part of your community until you own a house in your community

I can find nothing about the financing of your home in the rules of sporting groups, schools, community or religious groups. You can join in your community if you rent and you can stay inside if you own. Unless you are proud enough that you want to tell people of your financial prudence, nobody has to know anything about your financial affairs.

  • You cannot decorate a rental house the way you would like to

You may not be able to rip out those horrible kitchen cupboards, but if a small fraction of the difference in cost between renting and owning is spent on furnishings that you like, you will have a very nice home indeed.

  • Rich immigrants are driving our high house prices

Rich immigrants are able to calculate whether it is cheaper to rent or buy the box they live in too. You are under no obligation to outbid those who can’t.

  • The resources boom is driving our high house prices

The resources sector accounts for a few percent of the wages in our economy. The boom is keeping our exchange rate high which is killing what little is left of our manufacturing sector. (and making our houses even more expensive for those rich immigrants.)

  • Families have dual incomes now so they can pay more

So why have rents not risen as well? This explanation does nothing to explain why people are suddenly willing to pay more for home ownership than to rent the same thing.

  • Australians love their homes more than other nationalities

This is silly. Ring a random American and ask them if they love their home. Of course they do. Their house prices are far lower than ours in relation to incomes and rents, and falling fast.

  • You need to own a house to provide stability for your family

You need to provide love and education for your children and spend time with them. If you commit to paying three times as much as you have to for your accommodation forever, then you will have to work more taking time from your family and yourself. Every unnecessary dollar you spend on housing is a dollar you can’t spend on education and fun for your kids or invest for your family’s financial future.

  • Houses are worth those prices, because people are paying them

Only if you cannot tell the difference between price and value. Internet stocks were worth those prices because people were paying them. Was it a good idea to buy them?

  • People can afford to buy houses at today’s prices, because lots of people are still doing it

You are not obliged to outbid people who cannot tell the difference between price and value.

  • You need a mortgage to force you to save.

Locking yourself into higher living expenses is not forced saving, it is forced spending. A mortgage commits you to decades of spending a large amount of money on interest in return for the right to spend right now a gigantic amount of someone else’s money that you must one day repay. How does that help you save?

These are the days of debt consolidation, mortgage refinancing, mortgage equity lines of credit, and reverse mortgages. Borrowers can easily spend far more than they earn for years, all the while pretending to themselves that the rising prices of things they claim they will never sell are making them richer.

  • Prices have risen by x% per year since 1980, so you can expect to earn x% capital gain per year on your house.

Today’s prices are set by you, the buyer. Why not pay twice as much? Three times? Then the returns will have been far greater since 1980, so you can expect to make even more. Extrapolating recent house price inflation into the future forever leads to the conclusion that you can pay any price for a house, in fact the more you pay the better.

  • Those higher living expenses, higher risks and poorer accommodation are worth it for the profit you will make when you eventually sell your house.

This is not the thinking of a home owner or even an investor, but a speculator (who buys assets without regard for ongoing returns, focused solely on capital gain). The bets come in a wider range of more convenient sizes at the racecourse and the futures exchange and you do not have to pay into them for decades before you learn the outcome.

  • When your mortgage is paid off, then you live rent free.

True, and interest and dividend free and you have to maintain the house. At current prices the money saved by outright home ownership (ie. the difference between rent you are not paying and the maintenance you are) is less than a third of the amount of interest and dividends you could earn with the same size investment.

  • Even if prices are too high, they might rise even further, and you’ll miss out on the increase.

That is true. They might, or not. Even if they do, the long term outlook for something as overpriced as Australian housing is clear, and a house is a long term investment.

Many people who did not buy internet stocks in 1998 felt like they had missed out in 1999. By 2002 they had remembered how they cleverly resisted the temptation to do what everyone else was telling them to.

If you can understand that you do not have to buy at today’s silly prices, you should have no trouble resisting if prices get even sillier.

More here; HousingMyths

 

So does anybody agree that it’s a crazy idea?


The surprising answer for those who get their information from newspapers and television is that there is a body of opinion that you cannot simply pay any price for a house

  • Associate Professor Steve Keenexternal link of UWS

Prof. Keen has been trying to get people interested in the debt bubble for years. He is also a supporter of our efforts here at bubblepedia.

  • Gerard Minack, chief market strategist of Morgan Stanley Australia

A good outline of his thinking can be seen in this recent article “Why I’m a Housing Bear” published by the Eureka Reportexternal link

  • The value investment information service The Intelligent Investorexternal link

they recently gave a great explanation of why current renters will be rich in this report “What’s your house really worth?”external link