Wednesday, November 17, 2010

Rent vs Buy: An Australian "Cost Comparison"

In late August there was a segment on the 7pm Project about property, it posed the question whether it is better to rent or buy (landlord vs mortgage). The show concentrated on the cost aspect and I found this interesting as it was some of these very calculations that influenced my decision to rent rather than buy again after selling a house in Adelaide around 10 months ago.

They honed in on what families with a tight budget/low income could do with the extra dollars saved by renting (e.g. like going on holidays, paying for private education for the kids), when ultimately it's probably these groups of people that would benefit most from the forced savings of a mortgage (assuming they pay the loan principal and interest). This was an irresponsible angle in my opinion.

They gave the example of a $500k property (rent versus buy) where they attributed a 5% cost of purchase price to rent ($25,000pa) or alternatively paying a 7% rate on a mortgage ($35,000pa). No mention was made of other expenses that one would incur when buying such as:

- Council/Water rates
- Building insurance
- Maintenance costs
- Stamp duty
- Buying & selling fees (bank, agent, etc)

Briefly mentioned was that some money managers rented, invested their saved money elsewhere (e.g. in the stock market), but they did not make this option (rent while saving the difference) look attractive.

Overall it was lacking substance, but no doubt it was produced for the mass consumption of the general public and the reality is that more detailed analysis of the subject wouldn't interest many.

Following on from the example provided in the show, here is a more realistic breakdown of what it would cost to rent vs buy:

Rent vs Buy - The Figures

Property: $500k House

$25k pa / 52 = $480pw

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

# Adelaide based figures, this would differ between states
* Cash rate has increased since 7pm Project aired with 7% example

While more detailed than the 7pm Project example I'm still making some assumptions:

Obviously a first home buyer would have the benefit of the FHOG and possibly other state incentives and stamp duty discount depending on location and type of property.

A 100% loan on the property is used in the example. A more realistic LVR would be 95% with the buyer funding the 5% and purchase costs with a saved deposit, however if we used that in the example then we would need to add the benefit that the funds would have otherwise provided in a term deposit for the renter (which just gets too finicky).

It also does not take into account buying and selling costs, such as:
- Mortgage application fee (not always applicable)
- Real Estate Sale Commission (usually around 2% of the sale price)
- Advertising costs during sale
- Conveyancer (for both purchase and sale)
- LMI (if buyer is using a high LVR to purchase)

Further to this in many metropolitan areas a 5% yield would probably be considered fairly generous (across most metropolitan/capital cities houses are at a gross yield of less than 5%)

So potentially we're looking at housing being 80% more expensive if you buy (with a mortgage) over renting the equivalent. Of course this is only a look at the average situation, each property will slightly differ for better or worse.

This example also doesn't take into account the potential for positive or negative price growth of the property if purchased. The reality is that only 4% capital growth would be required for the owner to break even with the renter in the example provided (that's not high growth if inflation is running at 3%). Suffice to say if you think property prices will continue to see moderate or even high growth then buying still may be the better option financially (from your point of view). 

The question remains though, will vendors always be able to find the greater fool to purchase the house for a higher price? It's a vicious circle and if those that seek housing start to look for refuge from overwhelming mortgages by renting then we could just as easily see price declines which puts the renter in an even better position.

The way I see it the landlord is not only providing me a place to live comfortably (for a great price, much less than it would cost to buy), but they are also absorbing the price risk. Win-win for the renter who believes that property prices will correct, of course not everything plays out as we expect.

This is only the financial aspect. There are other differences which separate renting from buying. Obviously the stability that owning provides might be invaluable to some, such as those with a family.

I would be interested in hearing how the rent vs buy situation stacks up in your neck of the woods...


Thursday, October 21, 2010

Gold in Japan

This is likely to be a fairly brief blog with more photos than content. I am currently in Japan and thought I would share some sightings, visits & purchases that may interest other Gold investors.

While in Kyoto I visited several temples and shrines, one of which was called the 'Temple of the Golden Pavilion' (also known by other names, see Wikipedia for more information). The top two floors of this temple are covered in pure Gold leaf. It is a popular spot for tourists and I had to fight crowds to get the below photo.

Temple of the Golden Pavilion (Kinkaku-ji) - Kyoto

While in Tokyo I decided to check out the Japan Mint. It was located a short walk from the Otsuka Station on the JR Yamanote Line (I believe there are other stations within walking distance), right next to the Sunshine City complex (well known shopping/entertainment centre).

From the outside the Mint complex is fairly nondescript, you wouldn't even know what you were looking at unless you can read Japanese or were looking specifically for it. There were several banners such as the below which I assume help identify it to the local population.

Translation: Japan Mint (?)

The entrance was down a small street around the back of the Mint complex. Once through the gate you are required to sign in with name, time and country of origin and are issued with a pass that you clip on to your shirt. The staff at the gate had fairly poor English skills and I don't speak Japanese so communication was a little difficult at first, however they called down one of the museum tour guides who spoke English well and showed us through the museum on a brief tour pointing out interesting pieces and facts. Photos of some objects was allowed, below are a few themed coin sets that have been released by the Japan Mint.

Coins on display in the Japan Mint Museum

Also present at the museum were coins from the Silver Prefecture Coin program. 47 coins are being released (started in 2008, last coin released in 2016) as part of the series.

Silver Prefecture Coins in a display case

There were quite a few interesting coins and displays at the Mint including: 
  • Some coins dating back over 1300 years
  • Old minting equipment & machines
  • Displays showing the coin stamping & die cast creation process
  • A machine which you could put circulating coins into and it would check the weight, diameter, thickness for consistency ensuring the coin was in 'good health' 
  • A couple of nice large pieces of bullion which you were able to touch (15kg Gold bar, 30.5kg Silver)
  • Coins from other Mints in Australia, Canada, Singapore and other Countries
There were other bits an pieces, it will take you around 15 minutes to wander around and see everything.

Following the museum tour our guide took us over to the shop. I was hoping they would have the Silver coins from the Prefecture series available for purchase, but unfortunately this was not the case. They had some commemorative coins acknowledging the series so I picked up the Kyoto version (It cost 1000 Yen, around AUD$13). 

Kyoto Bicolor clad coin, Prefecture commemorative

Also I picked up a 2010 Standard Proof Coin Set for 7,500 Yen, which is around AUD$100. It's housed in an attractive leather and felt holder which folds up into a plastic slip cover for easy storage when not on display.

The most disappointing part of the Mint visit was the inability to purchase Gold or Silver coins in the shop. There were some Silver paper weights, but not having the ability to purchase the Prefecture coins directly from the Mint (at least not the Tokyo branch) seemed very odd.

Following the trip to the Mint I made my way to Shinjuku where I had been informed (by a member of Silver Stackers) that there was a bullion dealer. The Shinjuku train station is huge, busy and can be confusing to navigate, I ended up on a 1 hour walk looking for the store when it was only 5 minutes from the station!

Ginza Tanaka: A short walk from Shinjuku Station

The store mainly has jewellery on display, but did have Gold and Platinum bullion as well, which they sell as individual pieces or in pendants/holders. Below is a picture of their main "bullion" display case.

Ginza Tanaka: Bullion display case

I was a little surprised that they did not seem to stock any Silver bullion products (only Gold and Platinum).

Their service was fantastic, a polite saleswoman assisted with my pricing queries and then sat me down while organising the product I'd purchased, calculating the removal of tax from the price (due to being from O/S) and boxing the item up.

The final presentation of the product was immaculate. I'm used to small paper/plastic bags upon purchase in Adelaide so a small box, cleaning cloth, cleaning guide, etc was a pleasant surprise.

Packaging of purchase from Ginza Tanaka

The piece I purchased was a 1/10oz Maple Gold coin and an 18k pendant/holder. The cost (after tax removal) was 12,821 Yen for the coin and 5,715 Yen for the holder. In AUD at the rate I bought my Yen (around 75 Yen to 1 AUD) the cost was approximately $171 and $76 for a total of $247. Quite reasonable in comparison to the prices I can get in Australia for similar/equivalent.

1/10oz Maple Gold coin with 18k holder

Next week should see the resumption of more regular blogs and content.