Thursday, May 28, 2015

Rent vs Buy: An Adelaide "Cost Comparison" Revisted

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 (2015):
$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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  1. Interesting read. Thank you. I've also recently started looking seriously again in Adelaide. The bank offered me 4.19% variable (comparison) rate. There are also a few interesting infrastructure projects worth keeping an eye on. Cheers

  2. There are some interesting infrastructure projects going on or completed. Some of which have or are going to really open up the Northern & Southern suburbs to faster commutes to the CBD which can only be a good thing.

    I'm liking some of the 3 & 5 year fixed rates, just wish we had access to some long term fixed at similar pricing (e.g. 7/10 year).

  3. I would never buy again from Perth Mint. You can't trust them. They have diluted the value of their collectibles by minting more out of pure greed and disrespect for their customers and investors.

  4. 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.

    Please show me this modern $500k house 10km from the city in Adelaide. Most houses for that price 10km from the city are very old houses that are only selling for the land value. I live in Newton which is about 14km from the CBD and houses on my street are selling for 500k at least and they are about 15-20 years old houses and are very basic 3 bedroom 1 bath on a small lot. Taking into consideration the economy and GDP Adelaide's housing market is overpriced there is no doubt about it.The housing market here has stalled so far this year. it was down .9% in the first quarter and up 1.8% in the second quarter, overall so far is only a piddly 1% increase up until end of June. with rising unemployment in SA and the tightening of bank loans I predict house prices will decline steadily from here on. There will be bargains in 8-12 months and even better bargains after that.

  5. Just as a quick example: Plenty of others around the Edwardstown, Melrose Park, Daw Park area. As I'm sure you know the east (e.g. Newton way) is typically pricier than the south.

    On the rest of your post I mostly agree, I do expect Adelaide prices could see a double dip due to economic weakness, but wouldn't expect a significant correction (e.g. greater than 10-15% nominal). Can't hurt to start looking now and testing the market with low offers.

  6. Ripped Off by PerthJuly 4, 2015 at 3:26 AM

    I was an avid Perth Mint Collector but have suffered serious price and liquidity declines due to their flagrant disregard for collectors by reissuing popular coins in either other metals ( Golden Age of Piracy Original Silver-later in base metal at cheap prices) or reissuing them under a thinly veiled difference (as in Deadly and Dangerous Series.) All these have greatly affected values and saleability and makes holding them for investment and appreciation a joke. Their BS excuses mean nothing in light of what they have done to the value of the original issue coins.

  7. There are far better ways to invest money than to throw it at Perth Mint numismatic coins. They have an established duplicitous history that can no longer be trusted. They have ruined their reputation with a lot of collectors and dealers who will not buy anything from them. You don't know what they're going to do next. You can almost be certain that they will find a way to reissue anything that is popular which crashes the aftermarket values of the original issues. if i buy an old Govt issue coin I know there are only so many in circulation and that the US Govt won't suddenly dump more of them back onto the market with a minor difference that gets them off the liability hook thereby diluting values. I spent about $20,000 US Dollars on Perth numismatics. I don't trust anything they do anymore. No integrity. Goodbye Perth. Never Again!

  8. I wouldn't be so confident in the US Mint :)

  9. Deadly CollectorJuly 27, 2015 at 2:46 AM

    The Red back Spider holds value as seen in recent eBay auctions selling for close to $1300 in two or three cases, said price being the lowest price offered by far. Others wanting $1500 to $3000.