In addition to the flexibility and other satisfactions associated with home ownership, the financial aspects of stepping up and buying a house are critically important.
After 20 years of renting, you have no housing assets at all. It is as simple as that. But after 20 years of owning and maintaining a mortgage, you have a valuable asset, even on the very conservative assumption that prices do not rise much over time. Certainly it is generally more expensive to buy a house than to rent (this is covered further in the pages ahead), but the benefits of having been forced to save to buy the house and then of 20 years of owning this asset are clear.
There is probably no ‘right’ or ‘wrong’ time to buy a house to live in, if you are doing it for the right reasons and are prudent in the financial commitment you make when deciding to buy. For every warning that house prices are set to fall, so hold off a while before buying, there are stories of missed opportunities as house prices unexpectedly but inexorably move higher. Holding off a house purchase on the expectation that prices will fall is fraught with financial danger.
If you are wrong and while you are waiting house prices actually increase even an extra 5 per cent on a $600 000 property, that attempt to be too clever by half and pick the market timing has cost you $30 000 of after-tax money. If, on the other hand, you had stepped up, bought the house and prices fell 5 per cent (often seen as a worst- case scenario), who cares! It is of little relevance given you are not about to sell it to lock in that loss. You are living in your house and enjoying it. Over the next 10 or 15 years or more, prices will probably move higher, and in that time you will have paid off some of the debt and no doubt undertaken improvements to your house and made it a nicer place to live. A one-off 5 per cent price fall will be swamped by these long-run influences.
And over, say, a 10-year period, house prices rarely fall. So a price dip here or there should not be an issue, even if you bought the house near the top of the market. You bought it to live in and you plan to stay there for many years. In other words, purchasing a house for you to live in should be—must be—a long-term commitment. Paying ‘too much’ now probably won’t matter much, if at all, even if annual house price gains over the next decade are moderate. Even annual house price gains of only 3 per cent, roughly half of the average price increases of the past three decades, will provide a financial benefit to you. It is difficult to imagine that anyone who bought an average house anywhere in Australia 10 or more years ago has lost money. They simply haven’t.
If you see a house you like and can afford it, just buy it and don’t hang around hoping for a price fall that probably will not happen.
There are lots of other issues often overlooked when weighing up whether to buy or to rent. The owner of a house has to pay local council rates and insurance, and cover the cost of repairs and maintenance for the hot-water system, carpets, painting, roof leaks, body corporate fees and the like. Most of these costs are part of the depreciation of the physical asset — the house — and are estimated to be around 2.5 to 3 per cent per year of the value of the house (excluding land). Even on a relatively inexpensive house this depreciation is around $5000 a year, and obviously it will be much higher for bigger and better houses. A house where the bricks, mortar, paint and fittings cost $400 000, for example, depreciates by around $10 000 a year, which cost is borne by the owner and not a renter.
Renters, while exposed to uncertainty about tenure, ‘dead money’ rent payments, the lack of picture hooks in the wall and living with that purple feature wall, at least do not have these costs to cover. They can also move house without the huge costs faced by a house owner, who must cough up the vast amounts required for stamp duty, real estate agent selling fees, advertising, legal fees and the like. Renters never have these expenses to worry about when they move.
Most people in Australia want to buy their own home. It seems they reckon the financial returns are reasonable to good over the longer run, and then there are those non-financial aspects that are so vitally important for wellbeing and enjoyment of life.
Even a nice garden can add $50 000 and more to the value of a house, although the cost of establishing one is well short of that amount. And not only is there a financial benefit, but you get to enjoy the garden every day you live there.
Many years of high house price growth have created a lot of wealth for those who bought their house 10, 15 or 20 and more years ago. For them, house price increases are nothing but good news.
That is all well and good for those who bought their house 10 or 20 years ago, but the current level of house prices has seen a lot of young people and other first-home buyers priced out of the housing market. There is a requirement for a large deposit, normally 20 per cent. For dwelling prices in the $300 000, $400 000 and $500 000 brackets, this requires a huge saving effort. Without the 20 per cent deposit, the banks will insist on very expensive mortgage insurance or will simply not grant the loan. Added to that 20 per cent deposit is the inevitably high debt level for the mortgage to cover the remaining 80 per cent or so of the purchase price.
The current high prices confirm that it is tough, financially, to meet all of the monetary requirements in order to get your foot in the door of the housing market.
The fundamental drivers of house prices at the moment suggest a period of more moderate price increases or even a period when house prices move more or less sideways for an extended time. Nevertheless, there are various scenarios that could see house prices fall.