Rent vs Buy: An Adelaide "Cost Comparison" Revisted
Property: $500k House
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)
Council and water rates = $2200
Total = $28,987 / 52 = $557pw (interest only)
# Adelaide based figures, this would differ between states
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
Source: http://bullionbaron.blogspot.com/2015/05/rent-vs-buy-adelaide-cost-comparison.html
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