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Rent vs Buy: An Adelaide "Cost Comparison" Revisted

Wednesday, May 27, 2015 19:05

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One of the very early articles I wrote on this site compared the cost of buying a home with renting one in Adelaide (Rent vs Buy: An Australian “Cost Comparison”). Earlier that year I’d sold a property I owned in Adelaide (returned to renting), I put my money where my mouth is and at the time it made more sense from a financial (and personal) perspective to forgo the security of owning (or more accurately “paying off”) my own home.

Almost 5 years later I am still renting the same property, the lower cost of which (less than the mortgage I had) has been an enabler to put away some extra savings and investment. In the meantime property prices have basically gone nowhere (fell around 8-10% over 2010 to 2012 and have since rebounded back to 2010 levels) and interest rates have dropped.

The comparison I did previously using figures in Adelaide, at the time most other Australian capitals were quite comparable (i.e. yields around 4-4.5% for houses), but today Sydney and Melbourne are in a league of their own. The figures I lay out below make owning look quite attractive, but that same argument probably doesn’t hold true in Sydney and Melbourne where prices have gone gangbusters and yields are woeful.

I have revisited the figures from the original article and compared them with today.

Rent vs Buy – The Figures

Property: $500k House

Rent (2010): $25,000pa / 52 = $480pw
Rent (2015): $26,520pa / 52 = $510pw

(Residex shows yields have slightly improved for Adelaide over the past 5 years)

Buy (2010):
$500k + $24,000 (stamp duty and transfer fee#) x 7.25% = $37,990
1% of property value for maintenance and insurance = $5000
Council and water rates = $2000
Total = $44,990 / 52 = $865pw (interest only)

Buy (2012):

$500k + $25,000 (stamp duty and transfer fee#) x 4.15% (3 years fixed) = $21,787

1% of property value for maintenance and insurance = $5000
Council and water rates = $2200
Total = $28,987 / 52 = $557pw (interest only)

# Adelaide based figures, this would differ between states

As I pointed out last time, this still doesn’t account for all costs of ownership (or for that matter renting), but you can see that there has been a squeeze in the gap between the two. In 2010 the cost difference was $385 per week, in 2015 that has narrowed to $47 per week, mainly as a result of falling interest rates and a small increase in rents. The above example shows a 6.25% jump in rents, in my personal situation I have seen a 13% rise in 5 years (which reflects the local market, different areas in Adelaide may have seen higher or lower). Over the last 5 years I have also seen my income rise which would make servicing the gap easier.

In Adelaide a $500,000 house would actually buy you something quite nice, a modern 3 bedroom house around 10km from the city, maybe even closer or a small house in the city if that is a preference. If you are prepared to look at modest homes you can buy something more dated, 15-20km out from the city, for around $300,000. Assuming a 10% (+ costs) deposit (leaving a $270,000 loan) and 3 year fixed interest rate of 4.15%, the principal and interest repayments would be around $300 per week. Rent for the same house might set you back $320-340 per week. Suddenly a home in Adelaide is looking quite obtainable, maybe even for a household on a single income.

Now I’m not saying Adelaide is cheap, it’s still expensive on a global or historical comparison (if we look back at the property to income ratios of the mid 1990s), but it is definitely obtainable for those who’ve had the capacity to save a reasonable deposit (circa 10-20%).

There are still some risks to the Adelaide property market, as I outlined a couple of years ago (What’s next for Adelaide property prices?) the economic conditions are not positive in the state, we already have one of the highest unemployment rates in the country and things may be set to get worse before they get better as the car manufacturing industry shutters. Further to this Adelaide property is at risk of being affected by recent changes to investor lending (that is likely to tighten further), falling wage growth and a crackdown on foreign investment (some of which was well described in a recent article by Callam Pickering). These factors are likely to continue weighing on Adelaide prices, but in my view with prices being the same level as they were 5 years ago, the risk of a substantial correction (i.e. 15%+ nominal) is unlikely barring a complete meltdown of our banking system or huge spike in interest rates (neither of which I consider to be likely).

FT describes an asset bubble like this:

When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely – at which point the bubble “bursts”.

Those referring to all Australian cities as being in a bubble (I do agree Sydney and Melbourne potentially are) are either wrong or have come up with their own definition of the term. Perhaps they think it’s likely we see a return to the historical price to income values we had in the mid 1990s (or earlier) and that we’ve been in a long lasting bubble since that time. I think that is an unlikely scenario (returning to ratios from 20+ years ago) given the political and financial system we have today.

On a personal note I recently started looking at property in Adelaide (to buy) for the first time in 5 years (looking at PPOR and/or investment) and I expect to purchase (perhaps more than once) in the next 12 to 24 months. Price growth may be slow to begin with and won’t rule out some negative growth (what a term! e.g. falling prices) in the short term, but there are some reasonable yields out there now and the time to buy will be while sentiment remains poor.

And if GFC 2.0 comes knocking on Australia’s door and smashes the price of all Australian property in half… well at least I’ll still have my Gold

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Source: http://www.bullionbaron.com/2015/05/rent-vs-buy-adelaide-cost-comparison.html

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