Thoughts on the Sydney property market and property ownership
After a few years in hibernation, Sydney house prices are now starting to head North. There is no question there has been a distinct increase in buying activity especially over the past 2 to 3 months.
There are a few factors which are bubbling away pushing prices higher worth a quick mention:
- Record low interest rates
The Reserve Bank of Australia now has the official cash rate at 2.50%, the lowest level since 1959. This has resulted in the big banks being able to offer home loans with variable interest rates less than 5% and fixed rates just above 4.5%. (If you’d like one of these rates or a review of an existing loan, just shoot me a note and I’ll put you in touch with a broker).
- The ‘fear of missing out’ buyers
With a flat property market over the past few years, many people have sat on the sideline accumulating larger cash deposits and awaiting a recovery in house prices before planning to enter the market. The problem has been the furious rate that property prices have picked up during 2013. It has taken many by surprise and some people now fear they may miss out. The ensuing panic has seen properties at auction sell for well above reserve as buyers rush in to secure property before it is too late (in their eyes).
- The self managed super fund investor
Purchasing property using superannuation has gone from a relatively unknown ability a few years ago to a mainstream investment strategy for thousands of Australians who manage their own super funds. Self managed super fund trustees have been very active in the property market purchasing property as part of their fund whilst interest rates are low and share markets appear to be nearing fair value for the time being.
“So James… is it better for me to buy or rent??”
This is a common question posed to me by people looking to enter the property market. Typically people who ask me this question can be stereotyped as follows:
- Aged in their 20′s and 30′s
- Good incomes
- Some savings and either on track for a deposit or already have squirrelled enough money away for a property deposit.
- Long term renters who now want to consider buying into the great Australian dream.
- A bit confused by the mixed messages around property: Some reports say property is overvalued and about to crash while other reports believe property prices will keep steadily rising over the next 5 years
Our conversations generally revolve around the pro’s and con’s of owning a property from both a financial and non-financial (lifestyle) aspect.
Contrary to popular opinion – rent money is not dead money
On a pure financial basis, in many cases it works out much better to rent a property opposed to own one. A leading Sydney property buyers agent used a simple example with me during a catch up last week to illustrate the point:
Generally the higher the property price, the lower the rental return. Instead of purchasing a home in Sydney that costs $800,000, imagine if you purchased two investment properties for $400,000 each and rented them for 5% net rental return ($40,000).
You then use the $40,000 received to rent out somebody else’s house and pay the owner 3% gross rental return for their property. This means that you get to rent a property worth $1,333,333.
So rather than own a $800,000 property, for the same amount of money, you can own two investment properties worth $400,000 each and live in a house worth $1,333,333.
So his advice was – never buy the house that you would like to own.
If that example went over your head, not to worry, let’s put it another way – to purchase the property that you currently rent, it would cost you a lot more in loan repayments compared to the rent that you pay. So on a cash flow basis, it’s usually more affordable to rent, however by renting, although you spend less money each month on rent, you miss out on any potential capital growth of the property.
But the lifestyle benefits??
If you’re renting, you will generally feel richer as you will not have a regular home loan repayment to meet. There is also the feeling of being unburdened by a mortgage and the associated responsibility of owning a house. To this end, some people may prefer to never own a house and use the extra money to travel and enjoy their lives pursuing things that may not otherwise be able to afford had they purchased a property and taken out a mortgage.
But on the other hand, it may be financially better to rent opposed to buy, but what about the lifestyle aspect of owning a property. Having recently purchased a property myself, there is now a large mortgage repayment that comes out each month that replaces what was previously discretionary funds to enjoy holidays and dining out with my wife etc. But regardless of the financial cost, there is now a new found sense of pride, stability and happiness in owning somewhere that our family can call home.
There’s the old argument that you can only nail pictures to the wall if you own a house, which is ironically outdated since the invention of 3M sticky wall hooks, but nethertheless, what recently struck me as compelling in regard to the lifestyle benefits of home ownership.
As I pushed my daughter on the tree swing that I built from the large maple tree in our front yard on the weekend, I thought about the future… many years into the future when my daughter thinks back upon her childhood. Hopefully she looks back fondly and remembers the memories of growing up in the family house. I hope that she remembers the fun she would have had exploring every inch of the backyard, being pushed by her parents on her tree swing and growing up with the same neighbourhood friends.
There is no right or wrong answer in regard to whether it is better to rent or buy. It is a very personal decision and ultimately comes down to what is important to you.
If property ownership is not something that you aspire to, you will generally have more cash flow available to enjoy lifestyle activities and have the feeling of not being tied down by the financial responsibility of a home loan.
If on the other hand knocking nails into the wall is your thing, purchasing a property can provide a strange sense of security and feeling of belongingness by the stability of knowing that you will be living in the same place until you decide to move, not being given notice by a landlord to move on.
If you are planning to purchase a property and would like to have a chat about the best way to make it a reality, please get in touch so that we can have a chat at our Sydney office about the unique end to end property solution we provide that has helped many Sydneysiders achieve their own property ownership dreams sooner than they had expected.