Professor Property says buy with both hands!

By Leith van Onselen

Last month, RP Data released its Buy versus Rent report for October, which showed that it is cheaper to rent than buy in over 93% of locations across Australia:

As explained when the report was released, RP Data used some generous assumptions to skew the results in favour of buying, including ignoring common costs associated with home ownership (e.g. stamp duties, rates, maintenance, etc), as well as assuming that the buyer had a 10% deposit and ignoring the associated opportunity costs.

Overall, RP Data’s analysis confirmed what many of us already knew: that renting represents good value from a purely financial perspective.

Not so according to the “Property Professor“, Peter Koulizos, who claims that on financial grounds, property ownership beats renting hands down over a longer time frame. Below sets out the Property Professor’s case (my emphasis):

It is better to buy a property than to rent for your whole life… In the table below, I have outlined the money involved if you own a home as compared to renting a property. Some of the assumptions I have made include:

  • You buy/rent at the age 25, retire just after 65 years of age and live until you’re 85.
  • Property is worth $350,000
  • Property increases at 7 per cent per annum
  • You borrow 95 per cent of the value i.e. your loan is $332,500
  • In the first year, your gross salary is $50,000. Your salary will increase by CPI plus I’ve made some allowances for career promotions so as to work your way up the salary ladder.
  • Your net salary takes into account the tax you’ll need to pay.
  • The interest rate on your mortgage over the first 10 years is 6.5 per cent. The final 20 years of your mortgage is based on a 7.5 per cent interest rate. You are making principal and interest repayments.
  • Home expenses are the equivalent of 15 per cent of the rent payable. This includes council rates, insurance, repairs, etc.
  • Initial rent is $350 per week. This increases at a rate of  7 per cent per annum.

To be sure, those are some pretty outrageous assumptions. According to the good professor, home prices and rents are projected to increase at over twice the rate of inflation into perpetuity. As such, the professor’s example provides ridiculous results (my additions in red):

Under the professor’s assumptions, a $350,000 home would increase to over 13 times the individual’s peak (pre-retirement) income at 65 years of age, with the rental cost on the same home chewing-up 87% of the individual’s peak income (i.e. leaving just 13% of income to live-off if the home were rented)!!!

Obviously, such analysis is ridiculous and does not pass the laugh test (except if that test is for how funny it is!) How exactly does the professor think that rents and house prices could double every decade in tandem without a corresponding increase in incomes? Other factors aside, such a huge rise in rents would prevent most first home buyers from saving a deposit, thereby impeding their ability to borrow for housing and push-up house prices.

The article is clearly a shameless spruik aimed at scaring financially vulnerable Australians into buying property. That it could make it past the editors of news.com.au also beggars belief.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

 

Comments

    • I think the professor part is the biggest laugh. A graduate diploma is pretty well the lowest degree you can get other than a bachelor and certainly doesn’t qualify you for a professorship. This is something that takes years of effort and study and research to earn

      My boss has multiple PhD’s and Masters in physics as well as over a 100 publications in actual journals (not online news websites) and she is only an associate professor!

    • news.com.au is the worst mainstream media source in Australia, by far.

      it is basically a combination of reddit/imgur/twitter, but five days late and scrapes the bottom of the barrel of every scandalous and/or inane “story” out there.

      thats not a problem – there’ll always be shit media, and this is the shittiest – but the problem is as SoulChips says, the majority of Australians read it.

      • I don’t necessarily believe that its a symptom of a dumbed down education system.

        I think the average Australian incorrectly expects the media is there to inform them with balanced and accurate reporting. An expectation however is just like an assumption…

      • and the reason why the majority of Australians have this misguided expectation around the media and how it works is due to inadequate education in politics, media ownership and how vested interests work.

        Inadequate education is absolutely one of the root causes of this particular problem.

      • ThinWhiteDuke – Why would the vested interests want adequate education?

        Isn’t the aim of education to provide compliant tax payers?

        Ok I’ll agree with inadequate, how the world would change if it was adequate.

      • dumb_non_economist

        TP, you’re not comparing it the that venerable and august publication of old…The “Melbourne Truth,” are you?

      • Mining BoganMEMBER

        I do. I treat that mob as a woderful supply of mirth. Unintentional, of course.
        In fact, they have no sense of humour. I have been…um…’restricted’ from commenting on a number of their sites…

  1. I emailed the professor yesterday regarding some of the figures and this may clarify the income vs rent/price anomalies:

    ———

    “The $450,000 income you quote is retirement income. It is assumed in the example that the person will retire soon after they reach 65 years of age.

    The average Australian property price is already almost 30 times the single person’s pension. Over the last 60 years, growth in property prices and rents have outstripped pension growth. If this continues, pensioners will have to downgrade/downsize when they retire. Alternatively, they will have to live with their children. This is quite common in more mature property markets where two or three generations of the same family live under the one roof.

    You question the rent v pension scenario. It is already the case where a person on the single pension, receiving approximately $400 per week, can’t afford to rent a house in Darwin ($610 pw), Sydney ($556 pw), Canberra ($535 pw), Perth ($496 pw) or Brisbane ($416). So where do they live? One assumes they are living in units on cheaper rent or they are living in government subsidised housing.”

    ———

    However the figures are still based on many assumptions and they also don’t factor in many costs one would expect over a 60 year period. For example according to RP Data average length of house ownership is 9 years, so we need to account for 6-7x stamp duty costs as the person/family moves over their lifetime. Or if adamant they are going to stay in the one house then there would be significant upgrade costs every 10-15 years which wouldn’t be covered by the 0.8% (of property value) the professor has assigned for maintenance, council and other ownership costs.

    Ultimately though he has answered a question with a definitive answer which doesn’t account for the many scenarios that people will actually face. There is no one size fits all approach to answering the question posed in the article title.

  2. Great to see that my article has sparked so much interest!

    Firstly, let me point out that I am not a property spruiker. I am a lecture in property who is genuinely interested in providing independent education and information.

    So far as my article is concerned, I’d just like to highlight a couple of issues.

    My article was written to illustrate that a 25 year old is better off buying a home than renting for their whole, assuming they live to 85.

    We could debate assumptions and growth rates for ever but the underlying principle is that in the long run, you are financially better off paying a mortgage for 30 years rather than rent 60 years or more.

    If anyone can show me different, please do and I’d be happy to guide my students and readers of articles to your website.

    There are 3 key points that will back up my point of view, almost regardless of growth rates.

    1. Rent grows faster than a mortgage repayment. Just consider the home you live in now. What would your rent be if you were a tenant compared to the mortgage repayment you’d making if you took out the loan 29 years ago?

    2. Assuming you paid off the loan after 30 years, you don’t need to make any more mortgage repayments. However, you need to pay rent until the day you die.

    3. After 30 years, you own a freehold asset. What it might be worth, nobody knows for sure but you can’t dispute the fact that you will own something worth a significant amount of money. I understand that you still have property expenses such as council rates, repairs, etc but these expenses would be far less than the rent due.

    As I mentioned earlier, if someone can show me that my underlying principles are incorrect, go right ahead.

    Cheers

    P.S. Funny photo!

      • Is it? I don’t know anyone who buys a home and stays in it their whole life. Shit, I’ve owned 6 houses in 5 countries, and I’m in my 50s only!

    • There are most likely millions of workers that will never improve in their careers, factory workers, cleaners etc…

      Many are taking 95 to 100% loans, because they have no choice

      Rents are just not going up in many places,

      • There are NO 100% loans available unless other security is offered, in which case the LVR is well below 100%.

    • 1.Rent grows faster than mortgage repayment. You are assuming that interest rates can stay at negative RAT forever and that rent grows at 7% forever. Our low rates are entirely dependent on falling prices ex China. I suggest you have a read of Shaun Rein’s book ‘The End of Cheap China’ and then have a look at the tradable and non-tradable sections of our CPI. The evidence is that we are at the END of a 50 year cycle of lower inflation because of cheap goods from China. So as long as current policy remains in place we are almost at the END (give or take a year or so) of a low interest rate cycle.

      2. To work in total amounts of money over long periods is just plain WRONG. You would well know you need to do a DCF analysis to compare anything over long periods. Dollars over 30 years count for almost nothing. If we use your 7% number one dollar now is worth .1314 cents in 30 years.

      3. You’ve shown nothing. What you’ve shown as Leith points out that if you take a whole series of fanciful absolutely impossible assumptions you can get the answer you want even if your methodology is correct…which it isn’t.

      Peter I stopped reading your article at the 7% assumption. If you are to have any credibility please answer, with some detailed analysis, how the 7% growth assumption for both rents and house prices is possible over the next 50 years.

      Frankly your whole piece is based on BS.

      OTH I will say that some years ago my son and I did some IRR’s on Sydney property. We did calculate that if you assumes a real growth in Sydney prices of 3%, given the leverage possibilities and favourable taxation treatment housing gets, you needed a 26% return in any alternative un-geared investment!

      That is not an argument in favour of housing so much as a demonstration of how absolutely totally screwed up our economy and political process is.

      • I would add in addition to all these fine points flawse that there is always such a thing as opportunity cost when it comes to investing.

        The question is with the difference between rent – (capital growth – interest – property costs) what you do with that money. Sure you won’t be paying anything for 30 years like you say if you own but you actually are – your paying the opportunity cost of not having that money somewhere else.

      • Peter K,

        I just did a rough spreadsheet based on my own situation (ball park figures) with what I consider more appropriate assumptions.

        Current rent $390
        Property value $590 000 (based on recent sales in the area)
        Property/rent increases: 3% a year
        $50k savings which would be used as house deposit or as investment
        Property costs/interest rates as per your example

        If I can get 5.2% return on my investments, renting is better than buying. If I get less than that buying is better. Add larger property costs and stamp duty and I need less.

        Then it is a case of whether I believe those returns are possible over 60 years. But I think it shows that buying is not always better than renting.

        Also worth noting that on these figures I would be paying $2231 per week rent in 60 years (not $22 000) and the house would be worth $3.4 million, not $24 million.

      • And remember shares are a geared investment in that the company has borrowings often about 50% of total assets.

        Comparing shares and houses without taking into account that shares are in a geared entity is quite misleading.

        Your comment seems to indicate that for a high marginal tax payer geared property investment was almost unbeatable. Is that still the case? Do you think it will hold for the next 10 years?

      • The costs of a company’s gearing are included in its profits and hence share price. If you think gearing is too high to allow a 5.2% return then my very rough calculations would say housing is a better investment. My point was that it is possible (not certain) that renting is better, and dismissing it out of hand is irresponsible.

        I think geared property investment for a high marginal tax payer is almost unbeatable IF you assume this is the bottom of the price falls and prices increase in line with CPI or wages from here.

        However, I think property has further to fall, so I disagree with this at the moment, but an argument could easily be made for a long-term investment – it just shouldn’t be based on the ludicrous figures used in the “Professor’s” article.

      • Hi Explorer
        Mainly I agree with Justin. Assess everything on its oown merits.
        I presume you were discussing with me.

        Frankly it was some years ago, like 7 or 8, so i wouldn’t want to extrapolate to today and I’m hazy on our details. I’d say your comment is fair that at that time, for a high marginal tax payer, property was unbeatable. From memory we were working on owning and living in the property which gives more capital gains tax relief.

        NOw??? I haven’t a clue! Just for information purposes…We just bought for my daughter on the Gold Coast. The property was probably down 20% or more from the peak and is close to University and new hospital. She is at the stage of life where a home looks a jolly good idea. Downside risk looks less than other places right now! Note …no great economic analysis 🙂 Just personal stuff!

        I need to buy a few houses. I’m 63 and I need one, wife needs one. My wife is looking at Brisbane. Worker’s cottages @$750K is BS! I’m on Sunshine Coast. Market there is pretty much down still. Lower end has picked up. Currently I rent a house that would have been worth about $750K for $24K. Average maintenance costs would be pretty horrendous if and when it is done! After rates and maintenance I’d reckon it would be about 1.5% return!
        I guess you’d buy it now at about $600K.

        I’m thinking when i can get a 10 year loan at 5% I’ll buy Sunshine Coast. I just can’t see how one would buy in Brisbane! It’s insane.

      • Flawse, there are some big cheap houses, on acreage, in the Mary Valley. Good views, nice and quiet.

      • Thanks patrician…yes I haven’t been watching and need to pay attention!!!! It’s just that bit further from my business in Brisbane.
        Is there a web-site that is better than others or do we just hunt around amongst all the RE agents?

    • “Firstly, let me point out that I am not a property spruiker. I am a lecture in property who is genuinely interested in providing independent education and information.”

      Interesting, your profile on the USA website has you listed as a Tutor:
      http://www.unisanet.unisa.edu.au/staff/Homepage.asp?Name=Peter.Koulizos

      So not only are you not a ‘professor’ in property, you are not even a lecturer. You would know through your property studies that it is illegal to incorrectly hold oneself out as a Licensed Land Valuer or Licensed Property Agent. It seems the same laws do not apply to academic positions.

      You sir are devaluing the degree I earned in the very course you tutor in at the very university that employs you.

      Shame

      • Nice one Duke,

        I posted similarly below.

        Maybe he meant to say “I attend lectures in property…”

      • I’m pretty sure a grad dip doesn’t qualify you to name yourself anything at all!

        I have a Masters and lecture physics and don’t call myself anything more than Mr.

        This isn’t america mate where where the term professor has lost any and all meaning. I would guarantee if I called up your university asking for Professor Koulizos they would tell me there isn’t one there.

      • “Research publications” includes pieces in the Courier-Mail and realestate.com.au! When did the University of South Australia start allowing staff to say that?

      • well to be fair as an employee of UniSA I can tell you that they have almost zero research interest, they are all about student numbers. So I’d be surprised if many of the faculty members have ACTUAL publications in, you know, peer reviewed journals.

      • I wonder how many of Peter’s listed “Research Publications” have been put through the academic peer review process?
        Given that most of them seem to be internet or newspaper publications, I guess it is appropriate that the readers of Macrobusiness provide this peer review even if it occurs after publication.

    • Really? You’re not spruiking anything? Just providing information? Is this you? http://www.thepropertyprofessor.com.au/

      Here’s a thought – why don’t you ask your students what’s wrong with your numbers. See if they can find any justification for the numbers that you’ve used. You might learn something that way.

    • Hi Peter

      Your principles are not removed from the assumptions that underpin your calculations. If you don’t want to defend your assumptions then don’t expect people to simply accept your “principles”.

      In addition to issues others have raised you have totally disregarded risk from your analysis. Defaulting on a mortgage is likely worse than various renting scenarios.

      Also, mortgage repayments can grow faster than rent. Eg interest rates rapidly rise, causing flexible mortgages to become painful. Or, rents start to fall.

      And, what if property prices fall, you might have constant repayments but for a negative equity trap.

      Finally, to re-iterate you can’t throw up assumptions without defending them.

  3. I just choked on my muesli. The scary thing is that regular news.com.au readers would believe this drivel. Peter Koulizos – epic fail.

  4. Ignore all the professor’s crappy analysis, however one factor which all property analysts on both sides leave out (whether for or against buying) is that I would not like to be 60+ and having to rent. There is an income security issue here – declining income and at the mercy of a potentially greedy landlord which would worry me. I would not like to be in that position.

    • Yep ret

      There are all sorts of good reasons for buying your own home. That’s why we need to make it possible for people to do so!

      • There are all sorts of good reasons for buying your own home. That’s why we need to make it possible for people to do so!

        ….excluding Govt meddling/intervention via FHOG (er, Vendors Assistance), no FIRB distortions, restricting importation of people/future tax-payers (er immigration), don’t you mean flawse?

      • Sort of MsSolar. You are correct of course. I’m really thinking a bit more long term where you have a real productive sustainable economy. So lots of things involved..tax laws, interest rates, Govt spending aimed at REAL productivity not the BS measure we now have etc etc.

        Now ‘to get there i wouldn’t start from here’

  5. I will buy with both hands when I have my own savings to spend on my HOME and when over-priced property will fall to what I want to pay, and when these idealistic vendors are haemorrhaging, (not bleeding, as there’s still blood in em 😉 ) and also not what these idealistic vendors expect us dumb mug punters to get into debt for.

    huge rise in rents would prevent most first home buyers from saving a deposit, thereby impeding their ability to borrow for housing and push-up house prices.
    Bugger saving funds for a deposit, high, unsustainable rents mean we cannot even save for anything. It’s only since I’ve lived with my Mum in Briz that I’ve been able to save. (Yes, thankyou very much Mum)

  6. Edit:
    ” Dollars over 30 years count for almost nothing. If we use your 7% number one dollar now is worth .1314 cents in 30 years.”

    Should of course read the reverse and correct the cents

    One dollar in 30 years time is 13.14 cents now.

  7. People who are usually staying in same place (same home) for more than 10-15 years, buying is probably better option over the lifetime. However, this is not the most important question that needs an answer.

    The real question he should answer: IS IT BETTER TO BUY NOW OR IN 5 OR 10 YEARS?

    Even if property prices go up with CPI, in current environment it is financially better to delay home purchase by 5 or 10 years because of large savings on loan interests.

    Keeping home for less than 10 years for any reason (upgrading, investments, … ) is likely to turn into financial disaster, because of high buying/selling and interest costs.

    Property ladder doesn’t provides benefits any more, financial or any other.

    Everyone can calculate how long a buyer has to stay in a property to be financially better off.

    http://popping-bubble.blogspot.com.au/2011/05/rent-vs-buy-calculator-australia.html

    For an average property and the assumption that home prices will grow with inflation, an upgrader has to stay in a property for at least 15 years to be financially better than a renter without financial skills (a person who invests in TD).

    Whow many upgraders will keep home for 15 years?
    How likely is that home prices will grow with inflation for 15 years?

    If an upgrader sells earlier than 10-15 years (for any reason including upgrading) he will be financially worse than renter who decides to buy at that time.

    • +1 and this is one of the arguments I put forward in my email to Peter…

      “Further more you give no consideration to timing of the purchase. For example many properties are down 10%+ from their peak prices a few years ago and in my opinion will head lower over the next few years… a buyer may be significantly better off waiting for a better time to purchase as they are not only reducing the purchase price, but also the interest they would have paid on the difference for the life of the loan.”

  8. too many outrageous assumptions to fit in this space, but here are some obvious ones:
    1) 6.5% interest for next 10 years. Maybe the next 2.
    2) the yield seems too high ie 350 per week on a 350,000 house is around 5% – in Melbourne the av gross yield on stand alone house is around 3-4%. I pay 600 per week on a 1.2 million house with gross yield of 2.5%.
    3) prices rise 7% every year? as outlined above complete rubbish. If ppty did this then this would imply higher inflation and a rise in interest rates. The professor cant have it both ways.

  9. How is it that someone who is no more than a tutor at university calls himself a professor?

    Is it an effort to give himself undeserved credibility?

    What a fraud.

  10. “2. Assuming you paid off the loan after 30 years, you don’t need to make any more mortgage repayments. However, you need to pay rent until the day you die.” You do have to make de facto ‘mortgage’ payments! They’re classified as ‘alternative use of funds payments’ instead of using the words ‘mortgage payments’, though. Any ‘rent until you die’ calculation has to be compared to what the alternative income could be from liquidating the asset and renting another place of accommodation. I despair at the number of people, who think ” Once I’ve paid off the mortgage I get to live in my house – free!” They don’t….

  11. “Australia’s most respected and well known property academic.”

    Never heard of him and I’m sure I know the names of all the top spruikers.

      • +1 Heh

        I think we have a tour bolter for the Q&A Housing Bulls team.

        Current Bulls team Dr Andrew Wilson, John Symond and Peter Fraser.

        Maybe we could have “spruik-off” for the third spot. The nutty Professor deserves a crack.

      • For those that came in late, the current Bears team is LVO, Professor Steve Keen and Peter Schiff.

      • I think you mischaracterise the “players” here Pat.

        Let’s call this properly ok?

        There are permabulls – the Doc Wilsons, the Chris Joyes, the trolls etc, who contend that house prices will forever go up with income at 4-6% plus a year.

        There are the more reasonable moderates/maybe “bulls” who think that the previous property boom has passed but the future will not replicate it, with no real house price appreciation – i.e 1-3% nominal p.a. and that the house price correction has mainly finished. Peter Fraser, Alan Kohler, etc

        There are the permabears who think the correction has only just begun and that a 20-40% crash from the peak is inevitable. Here, yes Steve Keen, Mish Shedlock, Revert2Mean – and a fair few other of you lot.

        Then there are the foxes who seen a gradual, painfully slow melt in nominal house prices over the next decade due to macro/demographic factors, but the likelihood of a “crash” is very small, but the possibility of a reflation to permabull style y-o-y growth is equally unlikely.

        That’s most of the team here at MB.

        It depends on your point of view what you call each other. I wouldnt call Peter Fraser a “bull”, I’d call him the mainstream position – thoughtful, but probably wrong.

        I’d call the Wilson/Joye/Ryder etc brigade the real bulls – no idea at all and plainly wrong.

        Unfortunately a lot of commenters here consider anyone WHO DOESNT SAY A CRASH IS COMING! is a bull….

        Point of view folks.

        And lets not make this personal either. We’re all entitled to an opinion….

      • dumb_non_economist

        TP, about 18 mths ago UE or HnH stated that while they thought a slow melt was most likely, if the bubble didn’t go pop it would be the first time one hadn’t.

        What event does MB believe is necessary to precipitate a large correction?

  12. Considering he the good “Professor” is affiliated with UniSA (albeit as a tutor), I am surprised their media and comms department does not have anything to say on his use of the honorific “Professor” in his “publications”. Universities usually are quite zealous in protecting said term.

  13. Oh Gawd
    here we go again. The Schiller/Herrengracht studies came to the conclusion that, over time, property prices rise in line with inflation.
    If this were not the case we would have been in multi-generation mortgage territory long long ago.

    As for the spruik “past doesn’t project the future” stuff, assuming the Herrengracht house price rise between 1628 & 2018 looked like our man’s, if you’d paid $10 (yes – $10) for it then, you would now be putting it on the market for a cool:
    $5,497,558,138,880

    idiot….

    • My apologies, you would of course have to sell it in 2018. If you sold it now someone would get it for a snip at just over half the above price….

  14. Where is Gunna? I was hoping for some discourse between him and the Professor re the respective course contents.

  15. I see I am late to the party and Professor K has already been mercilessly ‘gimped’ by the MB crowd.

    Perhaps the Nutty Professor has more in common with this other shameless spruiker – Terry Ryder. This is also worthy of a clinical dissection if you haven’t already seen it:

    http://www.propertyobserver.com.au/residential/its-time-to-stop-procrastinating-and-get-into-the-real-estate-market-terry-ryder/2012120558315?utm_source=po&utm_medium=aida&utm_campaign=newjonathan/joye

    “This is as good as it gets, folks. It’s time to stop procrastinating and get into the real estate market.

    The Reserve Bank’s latest reduction in the official interest rate, which will probably translate into a 20 basis point decrease in mortgage rates, is the icing on a cake that’s pretty tasty for property buyers.

    The ingredients of the cake include higher incomes, lower prices, greatly improved affordability and interest rates at GFC levels, against a background of solid economic performance, low unemployment and, at long last, rising consumer confidence.”

    Ha ha ha

    The conclusion is also nice:

    “So the fence-sitters are all out of excuses. It’s really not going to get any better than this.

    Capital city prices have stopped falling and are now trending up in most the big cities. We have now had six interest rate cuts since October 2011 and we are unlikely to get more any time soon.

    Everything you’ve been waiting for is now in place. Stop mucking around and get active.”

    Get ‘active’ people. The nutty professor with a grad dip and math issues and the guy who owns a side-business locating ‘hot property’ for investment told you so…

    • “So the fence-sitters are all out of excuses. It’s really not going to get any better than this.”

      “Everything you’ve been waiting for is now in place. Stop mucking around and get active.”

      Are these guys for real?? I mean, what next? Question your commitment to Australia if you refuse to buy property?? Could I could likewise say, there’s never been a better time to buy Lance Armstrong memorabilia, so stop mucking around and get active?

      Ok, that was corny but can’t see the difference.

      • Forgot to add:

        The impression these numbskulls project is almost like buying property is a requirement to prove you’re really a good citizen, a decent bloke, a true-blue Aussie. Yeah, right. Almost as though it was government policy that property, housing actually, is critical to the economy.

        Oh, wait….

  16. When doing these comparisons one must remember tax and, in retirement the assets and income tests.

    Not taxed:
    Imputed rent
    Capital growth

    Not deductible
    Rent paid
    Interest on a mortgage for a primary residence

    Taxable
    Interest on investments
    Capital gains on investments (concessionally taxed if held for more than 12 months)

    The concessions for non-home owners for pensions are derisory.

    When you do the sums properly it is hard (but not impossible) to make the case for renting in the long term.

    The professor’s 7% growth assumption is obviously way too high, but if you just assume that everything goes up at the inflation rate, if you are paying a reasonable rate of tax buying usually looks quite OK.

    If we look at someone paying 45% tax who owns a $1m property outright which would rent for $35,000 per annum (3.5% gross yield which might be a bit low in the current market).

    What happens if he sells it, invests the proceeds and rents an identical house?

    So he now pays $35,000 of rent

    According to ratecity.com.au the best 12 month term deposit for $1m is 4.65%.

    So he gets $46,500 of interest on which he pays $21,600 of tax (including the medicare levy), leaving him with $24,900 after tax or roughly $10,000 per annum worse off after tax. Even allowing for some maintenance costs he is clearly better off now owning not renting, regardless of the future growth and inflation rates.

    If tax rate is 30% then it’s about line ball today before you allow for maintenance and inflation.

  17. For a start this is not a professor.
    Secondly the only course he appears to teach is:
    “BUSS 105 Discovering Opportunities in Property”

    Also I note his “research publications” include such esteemed journals as
    Daily Telegraph
    CourierMail
    realestate.com.au

    Is this a joke?

  18. Well, the comments have certainly come thick and fast during the day.

    I haven’t got time to read all the comments posted but I would like to address just a few issues.

    Firstly, I never made out myself to be a Professor. Nowhere on any business cards, home page, etc do I use the title “Professor”. “The Property Professor” is a tag my publisher wanted to use when my first book came out.But Bobby Fischer’s “The Nutty Professor”, is clever!

    Even though I may not be appointed as a professor, the tag has stuck as I research and write about property.

    The fact that I have two property degrees, including a Master of Business (Property), am a full time lecturer in property, teach part time for two universities, coordinate the share investment course at TAFE,and owned property, I think this gives me some license to write about property and investment. I could also mention the teaching awards but I don’t want to make this about me; let’s just stick to the article.

    Many of you have questioned my projections of growth. They are based on historical data but you and I know that past performance is no guarantee of future performance.

    So just for a moment, let’s forget 7% growth in prices and rents and factor in say a lowly 3% pa for growth in property prices, rents, wages, pensions and home expenses.

    Even at this low growth figure, the rental payment in Year 20 is greater than the mortgage repayments and property expenses. I know the property will be worth much less in 60 years time based on this very low growth rate but so far as assets are concerned, the renter has none but at least the home owner has a property!

    Some of you have pointed out that I should factor in that the tenant could invest the difference between the rent paid and the owner’s expenses. Excellent idea! But to be fair, you should also factor in that the home owner could do exactly the same from the time the total property expenses are greater than the rent.

    Some of you have suggested that a DCF should be done to calculate NPV. If you’re going to do this, you might also want to factor in that when the share portfolio becomes sizeable, the renter can borrow against this at a 75% LVR at a margin loan rate currently about 8.5% However, you should also factor in that the property owner is also able to borrow against the equity of the property to buy shares at an LVR of 95% at a home loan rate of 6%.

    We could go on posting comments for ever but I’ve had a big day at the office and want to go home (which I own) and see my family.

    If you believe that renting property for 60 years is better than borrowing money for 30 years to buy a home, then that’s good for you. I just don’t believe that this is the case and history proves otherwise. Whether I am right in the future, only time will tell. I can’t see how paying market priced rent every year for 60 years is better than paying off a loan based on the price of the property you bought 30 years ago! And don’t forget about the freehold asset you own at the end of the mortgage?

    By all means you can further debate this topic but the reality is that you don’t need to be a finance/investment expert to fully comprehend the property market. You see, most property is NOT bought as an investment. Most property is bought as a home. Home owners aren’t concerned about the potential yield from their property. They are more concerned with its location, its suitability for their current and future needs. I think you gain a much better understanding of the property market if you have a grasp of property markets, especially Australian property, buyer behaviour and importantly, you understand the Australian psyche where most (not all) still desire to buy a home.

    Even though I am logging off for now, I will be back next year as I can’t wait to see the comments after the second book is published, titled “Property v Shares”!

    Cheers

    • See, the thing is Prof, there’s this concept of “falsifiability”. If you don’t actually present your figures, but rely instead on rules of thumb and the vibe then nobody can argue with you, but “what can be asserted without evidence can also be refuted without evidence” and that’s about all one can say to that latest post.

    • “Some of you have pointed out that I should factor in that the tenant could invest the difference between the rent paid and the owner’s expenses. Excellent idea! But to be fair, you should also factor in that the home owner could do exactly the same from the time the total property expenses are greater than the rent.”

      That is not a real answer. Of course the renter invests the excess money, the whole point of this exercise is that you are comparing investments, otherwise your assumption is that the renter blows all the additional money in their pocket vs the householder who scrimps to pay off their mortgage.

      So yes either include the additional income from the renters investments up until the point the house is sold or if you want to use a longer time frame then also include the income from the house owner.

      But you must include this income, otherwise professor your model is completely flawed, you should know that….

      Your article really is just an opinion based on the vibe, a farmers analysis.

    • “I can’t wait to see the comments after the second book is published, titled “Property v Shares”!”

      Yawn. Any other false dichotomies you can concoct to flog books?

  19. Hello all,

    I am a qualified financial adviser and I have helped hundreds of people to achieve wealth through investing in property and shares. I have seen time and time again how BUYERS are better off financially than RENTERS in real life situations.

    So I feel well qualified to comment on this subject…

    I have been absolutely amused to read some of the comments on this post.

    It shows that there is a lot of misinformation (through ignorance no doubt) about basic financial facts, and also perhaps why some people NEVER reach financial independance.

    So for what its worth, I will add my 20c to this fire…

    How on earth can anyone with any financial sense at all say that renting is better than buying?

    An example to prove my point:

    Since everyone is debating what will happen in future….and no one knows at this point, lets instead focus on what has happened in the past! Because the facts of the past cannot be disputed – they are facts.

    If 2 individuals with EXACTLY the same income, for example in 1960, choose one each of the 2 options (1 buys a house, and 1 rents a house)….with everything else being equal other than that one point….which one of them would be wealthier now?

    Simple mathematics using the facts of what has happened in the past to property prices, and average incomes etc are used to calculate the outcome:

    The renter pays and pays and pays his rent (that rises every year) for all these years (to this day) and owns……..(drumroll)…….. NOTHING. Na-dah.

    The buyer pays and pays and pays (interest that reduces as the principal is paid off) his home loan off over 30 or so years…..and he is now relaxing on his porch drinking tea, looking at his yard and smiling because HE OWNS HIS OWN HOME! Boom-Boom.

    So how on this green earth is the renter better off? Mathematically, it is IMPOSSIBLE for the renter to be wealthier than the owner today. I challenge ANYONE to prove different. Remember – the case in point is that EVERYTHING ELSE is the same other than 1 person buys and one person rents.

    Another issue that some people have challenged Peter on was how ridiculously high the average house prices will be in 60 years from now…. whilst no one knows for sure, one thing is LIKELY….it will be HIGHER. Significantly higher if history is a guide.

    Lets go back to 1960 again…. let me ask whether there is anyone here who remembers what house prices were 60 years ago? And what the average wage was? And what the average basket of goods cost? I bet that going back 60 years ago, if you had told someone that the price of a house would be what it is today, they would laugh at you and have you committed!

    So dont think for a minute that is not possible….

    Im not intending to fuel this fire anymore – I just want to point out that some people’s ignorance may be what is keeping them from reaching financial independence!

    Merry Xmas

    • They don’t want to hear that zacz. the site is inhabited by people with two degrees who “know better”.

      Unfortunately the worst money managers on the planet are academics, school teachers, and doctors. Lawyers are hopeless as well.

      They are intelligent people, no doubt about that, but financially illiterate. There is no cure for the illiteracy because they regard themselves as being “too intelligent” to be taught by anyone.

      Their high earning capacity will keep them out of serious trouble, but they will never realise their wealth potential.

      • What a strange comment. Financial planning nights for junior doctors and new graduates continue to be very popular and well attended, and many professionals I know and work with have engaged with financial advisers for a variety of investment reasons. The obvious reason is that it is cheaper to pay someone instead of using up their own time where they could be getting paid in 6 minute increments. Of course, after the GFC it soon became apparent that despite paid advice, it did not prevent you falling behind those who simply stuck their cash in the bank.

        I would think that if one has a modicum of interpersonal skills, restoring trust in advisers and convincing high income earners of the benefits of your services would not be a particularly difficult challenge.

    • Lookout, we have another contender.

      Symond out. Koulizos and zacz to trial for the third spot.

      The competition is red hot

  20. “I am a qualified financial adviser and I have helped hundreds of people to achieve wealth through investing in property and shares. I have seen time and time again how BUYERS are better off financially than RENTERS in real life situations. ”

    zacz – I don’t believe your opening statement for a second. You sound more like a vested interest spuriker.

    However, what all you spruikers seem to forget is that a renter can invest the surplus cash they have every week so that at the end of the same period they will still own an asset that is (hopefully, nothing is certain) producing an income. Boom-boom.

    They can continue to rent while living off the proceeds of this investment.

    If the returns from this investing are higher than the returns from the property (not hard considering the leverage involved) then they could potentially be considerably better off.

    Not too mention a property can often require extensive maintenance through its life or there are switching costs as others have mentioned which reduces the potential return.

    I mean honestly, it is not a hard concept to grasp surely? As with any kind of analysis, if your assumptions are wrong the result is near worthless and your assumptions are basically terrible.

    So your assertion that renters end up with nothing at the end of the day is basically a massive fail.

    My suggestion to you is to please try harder.