Buying 30% cheaper than renting in Aussie property

Via Cameron Murray:

Just don’t add that principal!

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


    • I presume the vertical axis is “number of times rent cost” although nothing is labelled properly. Presumably repayment rate is Principal interest as compared to IO

      Edit: fairly certain that is what it is, look at the divergence between blue and yellow as interest rates have fallen since the 90’s and principal has become a larger and larger component of repayments.

    • Strange Economics

      You need to go out more, and visit to some virtual BBQs to understand why everyone is keen and FOMO now.
      Its mass psychology (delusion?)
      Interest is half of rent.
      No-one you ever talk to pays back any at all of the principal.
      (The 10% a year increase will give you the principal. )

      • I must be the exception that proves the rule. Refinanced our loan to pay it off, not to reduce repayments, and the loan person argued and argued with me, told me I shouldn’t do it, that it was “not to my advantage”.

      • I have definitely observed this phenomena on the lower north shore of Sydney. And we’re talking $2.5+ million dollar houses and (typically single ie stay at home spouse) incomes well in excess of $200k. But by the time daily consumption, bank interest costs, private school fees and obligatory expensive holidays are paid for, there isn’t much or anything left to pay down the principal component of the loan.

    • They both amount to a cost paid for use of property, albeit a non equivalent use. Rent absolves you of maintenance costs, and also of exposure to capital gains or losses.

  1. Display NameMEMBER

    Why bother buying if you do interest only. You are still effectively renting, just at one address….forever.

    And given a mortgage is, for most people, a 25-30 year commitment, do rates stay this low for next 30 years. If you leverage up at current rates and the rates move back to the mean (we are at millennia Lows) I don’t think that housing loan is going to look cheap.

    Does anyone think the current state is medium term sustainable? I call BS on this view.

    • Display NameMEMBER

      Add to that the possibility that wages will not increase in real terms in the next decade (migration, automation, …) , you are not going find it any easier to pay any time soon.

    • Strange Economics

      Humans operate on the recency bias after 1 year. . If interest rates have been low for a year, then they believe will be for 25 years.
      House prices up 10% a year for the next hundred years.

      Do you want to do some risk analysis of higher rates ? – if so you will never get a job with a mortgage bank, so forget that.

      • I’ll do some risk analysis for you.
        What would higher rates do to the economy? Would it be worse than what happened this year?
        How much do you think the government would be willing to throw at keeping rates low to avoid it?

    • Rent does not expose you to capital gain/loss risk. Anyone ignoring this fact has done badly for the last 30 years.
      Also what exactly do you mean by the mean. Ever since inflation targeting started as the basis for setting interest rates the rate has been steadily decreasing. I would say the mean is a line falling ever lower that is right around 0 at the moment and will have to fall below to continue on. If you think the mean is just a constant at the average rate for the last 30 years I think you are in for a big shock.

      • The fact is it must lower over time. The main way interest rates boost the economy is by encouraging more money to be created in the form of debt. Sadly that means the populace becomes more sensitive to any change in interest rates since they have obviously more debt.

        Because of this you don’t have to raise them as much as they were before to cause the same contraction in the business cycle. There’s more debt, and therefore more interest per basis point so you can’t raise them to the point they were before even in boom times. Rinse and repeat the above cycle. Eventually interest rates tend to zero in a fiat system; and managing the business cycle is the mechanism by which it occurs.

        Currently with fixed rates close to 2% raising the RBA rate to even 2% (a very low interest rate even a few years ago) would cause interest burden’s to double. It’s like the 1980’s raising rates to 18%+.

  2. Goldstandard1MEMBER

    It’s a great view so long as you pay interest only and property always goes up.
    There’s the rub……it is extrordinary that in this model that is a fact for the purpose of the point he is making.

  3. Even StevenMEMBER

    The reality is the Australian government won’t permit owner occupiers to be evicted on mass should mortgage rates rise. Think First Home Buyer grant but in the form of huge mortgage payment assistance subsidies. Means tested of course – only available to households with sub $200k p.a.

    I’m not joking. Society is now so soft we protect them from their own mistakes.

    • This isn’t likely but the government/RBA has the power to set AUD interest rates at any rate they so desire, including -ve. Far easier to just avoid the rates rise in the first place. Consequences of this will be someone else’s problem at a later date, much like the helicopter money this year.

      • Even StevenMEMBER

        I agree. Which means very low rates to stay. Which means interest rates will remain supportive of house price valuations and increasingly people will take the perspective of ‘it’s cheaper for me to own’ (interest) ‘than pay rent’ (dead money haw haw haw).

        House price sustainability will increasingly be set by this metric and I can’t see a near term trigger for a collapse in prices absent a heavy economic recession (unless falling prices becomes a self fulfilling prophecy).

    • “I’m not joking. Society is now so soft we protect them from their own mistakes.”

      Let’s be honest it is at the very least a joint mistake. The government and RBA bascially told people via their policies (immigration, interest rates, land release, etc) that if you don’t you will forever be in the lower classes of society without a basic necessity such as your own home. Not much of a choice really.

      • That’s not the reason the whole scheme is propped up. ‘They’ ie the government, RBA, IPA etc are only concerned with the profitability of the banks, land and house values for the companies that feed off it and their own personal portfolios. They don’t give a toss about the real people beyond keeping them indebted and obedient and needing them on board when it comes to voting every few years, which is enhanced with the Murdoch press and other right wing garbage radio stations etc. In fact they have built a whole ersatz economy on this scheme/scam for the benefit of the mentioned cronies in scam industries. They have had more luck than skill over the decades, luck that is needed for the sham/pretend economy to survive.

        • One has to either be comfortable that it is highly unlikely they would have to make a forced sale (which might result in a loss), or in the alternative accept that as a risk. In most instances it is not a risk that eventuates — ultimately property investment carries risk with it, as does any investment.

          Bottom line — in my opinion, it’s still better than earning the money through hard work.

          • ” it’s still better than earning the money through hard work.”
            That is the thing that bugs a lot of the commenters here the most of all.
            Don’t buy now…

          • Tbh is any big, obscene amount of money actually earned from hard work? It’s rare. Usually the hardest working jobs despite inflation never touch 6 figures.

            Instead its decision makers with MBA’s (vs industry experience), bullshit jobs, etc. Even in industries where you could be seen to be producing an output if they shut down tomorrow would anyone care? (e.g. Finance, IT, Insurance, etc). Even in construction and engineering most of the projects these days have marginal value at best; negative for the community at worst (toll roads, etc). Maybe I’m just skeptical.

  4. happy valleyMEMBER

    “Just don’t add that principal!”

    After Josh Rainbowberg introduces the irresponsible lending laws, repayment of principal will no longer be required and indeed, also interest rates will soon enough, be negative and sub-prime borrowers (eg NINJAs) will be paid by banks to take loans.

    • As a counterpoint, rent has been more than mortgage payments on an investment I’ve had for the entire 5+ years I’ve owned it.
      I’d be willing to bet the 2 suburbs are at opposite ends of the price spectrum though.

  5. You need job security for 30 years and a stable society. Do we have that?
    Can people guarantee they’ll have a job in 5 years let alone 30?

    Too much instability. Too much insecurity.

  6. Here’s a thought to ponder:

    If the Romans had discovered the key to getting interest rates down to 0% and keep them low, would the Roman Empire still be in existence today?

  7. Just comparing interest costs to rent may show a strong advantage to buying, but that requires ignoring the eye-watering strata costs in many modern developments and the very lacklustre rental outcome, as more and more buildings complete while the population falls as int’l students finish up and head home without being replaced (I know a few in this category).

  8. In my area (Eastern Suburbs Syd)
    100% borrowed for $1m apartment at 3% IO for 10 years = $2500/m repayment
    Over the 10 years total interest = $172,000
    Stamp duty = $40k
    LMI = $ 40k
    Costs (strata, council water) = $70k
    TOTAL cost over 10 years = $322k

    RENT = $2400/m
    Total cost over 10 years = $288k

    So renting still $34k cheaper over the 10 years. Not a big difference but cheaper.
    NOTES: Its not easy to find 3% loan for $1m property with no down payment. Its more likely 3.5-4% but let say you found a non-bank lender with loose standards.

    • darklydrawlMEMBER

      Yep, 5% of $120K vs 5% of $1.2 Million. This is also why even small IR rises in future will have a disproportionate impact – excessive leverage!! 17% on a $120 K loan is still a lot nicer than 5% on $1.2 M.

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