Monday, May 9, 2011

Five reasons FHBs should avoid buying now!

A couple of days ago Chris Zappone wrote a follow up piece to his article on the First Home Buyers Strike (I posted about the original here):
The buyers' strike of Australian property sought by a tax reform group last month has proven to be a fizzer, precisely because some people don't like the idea of lower house prices.

Online activist group GetUp! decided not to pursue a strike of home purchases to protest at the lack of affordability in the housing market because its own members did not like the idea.

"While the issue of housing affordability is clearly an issue that resonates with plenty of people, GetUp! members don't support a boycott campaign," wrote Kelsey Cooke, online community co-ordinator for GetUp! late last week. SMH
Chris is a little late to the party with the news that GetUp! rejected the suggestion, they did so over 3 weeks ago. 

The first comment on the article really says it all though:
The Buyers' Strike is "on", it just doesn't need an official movement to promote what is blatantly obvious to everyone in the market: Prices are falling, and will do so for quite some time to come.

The smart property investors sold up last year. Time is well and truly on the buyers' side now.
I don't think there was ever any doubt that they would reject it, but regardless the strike lives on. Prosper Australia continue to cover related news on their website and social media sites:

Facebook - Don't Buy Now
Twitter - Don't Buy Now

There is some great interest and involvement from the public on the Facebook page and I would encourage you to 'Like' the page in support of the movement.

I think regardless of who is supporting or not supporting the strike, young Australians should make their own decisions about when to buy. Ignore all those with property interests (including parents, colleagues and friends) and do your own research into whether today would be the best time for you to buy.


Here are five reasons you should avoid buying right now:

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1. Renting is around half the cost of buying

As I recently covered in another post (Rent vs Buy: Cost Comparison) the cost of renting is significantly lower than it is to buy. With mortgage rates at 7% and yields at 4% the cost of renting is almost half that of maintaining the interest on the mortgage interest, let alone rates, building insurance, borrowing costs and maintenance.

Think about the money you could save by renting instead! In a situation where it might cost $500pw to buy, you could expect equivalent rent to be around $250pw. $250pw x 52 weeks in a year = $13,000pa. What could you do with that sort of extra money? That's an overseas holiday every year, a brand new car every 2 years or you could even just squirrel the money away into a term deposit or investments until a time comes that it makes financial sense to buy.

Have you heard the phrase before "rent money is dead money"? Well so is the interest on a mortgage and if the interest exceeds the rent you would pay for an equivalent home then you are paying more "dead money" to buy than you are to rent!

2. Falling prices will continue

The Herald Sun recently reported that, "Melbourne's property bubble is bursting, with $400 a day wiped off the average house price in the past three months."

There is no guarantee that prices will continue to fall that quickly, however even after a 6 percent slump (according to the REIV) in the first quarter of 2011, Melbourne prices and in capital cities all over the country continue to sit at ridiculous levels.

The credit bubble has inflated prices to a point where First Home Buyers are even struggling to afford prices in the new fringe suburbs. That begs the question, who is buying? With volumes having dipped significantly and stock on market up 50% on last years levels the answer is "not many".

Eventually vendors will realise they are going to have to start discounting more heavily to sell, that's when the real declines begin. This is likely to suck in even more sellers who have speculated on house prices increasing, they will leap frog over eachother on the way down just as they did on the way up, putting further pressure on prices and adding even more stock to the already over saturated market.

3. You may quickly outgrow your first home

One idea that I seem to hear repeated often is that you should just 'buy whatever you can afford' when it comes to your first home, just 'get your foot in the door' they say and work your way up the property ladder. What the older generations might be failing to remember is that you may outgrow your first home very quickly.

Imagine the situation where you've bought a 2 bedroom unit as your first home. Two years down the track and the casual relationship with your partner has taken a serious turn and you are looking to start a family (have kids). You may then be in a situation where you have to sell the existing property to fund the larger one. That likely means real estate commission costs (usually around 2% of sales price), stamp duty on the new home, possibly LMI (Lenders Mortgage Insurance) on the new loan if you will be borrowing on a LVR greater than 80% again. Not only that, but as per reason 1, you've possibly been paying a great deal more than renting to buy.

Do the sums. Make sure you consider all possibilities that arise. You may be a lot better off by renting until you can afford a home that will last years no matter what life throws at you.


4. Ownership ain't all it's cracked up to be

What are the benefits of owning? I mean besides bragging to your friends that you're now a proud home owner... can you really justify the extra cost?

The answer may be yes for some. For those that like to get hands on with their home, landscaping the garden, painting and renovations, extending the house & for those that need the security ownership (not relying on the landlord to renew a lease) then buying may be the best option. For me personally (and I'm sure many others) the benefits of ownership just do not outweigh the extra cost that comes with buying.

Personally I love the peace of mind that comes with renting. I know that if something breaks (aircon, heating, stove, plumbing, etc) then it's just a matter of calling the landlord to organise a fix.

Having owned before I know that owning isn't all it's cracked up to be. Council rates, water rates, building insurance, emergency levies, maintenance costs, fixing things when they break... it all adds up!


5. Living at home/renting = Freedom

Taking out a large mortgage is a yoke around the neck of the young. You should enjoy the freedom that renting/living at home provides while you can. Of course it would be prudent to put some of your income away for a rainy day or making a house purchase later in life, but don't give up your youth just so that you can say you own property.

Travel. See the world! You will find this much more difficult to do once you have a 30 year binding commitment to pay the mortgage on a house. You've got youth, money and an opportunity you may never have again in your life. Don't waste it!

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All that said, if you understand the risks associated with buying at the peak of the market, the excessive cost of buying over renting is no bother, you've got long term plans to stay in the property, you've got a large deposit and you aren't stretching the budget to buy then I wouldn't discourage you from buying, just make sure you know what you are getting yourself into.

So there you have it, my top five reasons Australians should put off buying their first house. Of course this doesn't only relate to First Home Buyers. I've been there and done that (owning my first home) and most of the reasons above are core to why I am yet to buy again after renting for the last 18 months.

When it makes financial sense again to buy I will be cashed up and ready having saved a fortune by renting and investing in appreciating assets. This reminds me of a Dilbert cartoon that I saw sometime ago:




BB.

3 comments:

  1. Go BB! The retracement of house prices to the long term trend will mean years of hell for those with mortgages. I feel very sorry for them. Don't Buy Now! David Collyer Prosper Australia

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  2. awesome article,
    i too have been an property owner/investor and thank god i sold up last year.

    now i rent a luxury family house, with a stack of cash in the bank and zero stress. in 2yrs i'll buy back into property for half the price!

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  3. Just posted on: http://www.facebook.com/dontbuynow

    "Went to CBA yesterday for a first home buyers loan, with a joint income and a good deposit (Over $120K) all I could borrow was up to $350K, so that means I cant even afford a house on the outer fringes of Sydney, it does make you realize that something is not right."

    If those with large deposits aren't able to access loans, I can't see this ponzi continuing.

    ReplyDelete