Until recently, Australian house prices have marched upward so steadily that buying a house, while pricey, was rather predictable. That perception changed over the last year, as house prices fell 8.1 per cent in Sydney and 5.3 per cent in capital cities. It’s a healthy reminder that whether you are buying or selling, real estate, like any investment, can be volatile.
Australians have been conditioned to think of a house as an investment, but for most people buying somewhere to live is more of a practicality and an expense. We often forget that because rising property markets have the same effect as rising share markets, they focus people’s minds on gains and can cause them to overlook costs. Costs, however, always matter. It’s an eternal truth, whether you’re talking about your super fund or that charming cottage overlooking the bay.
Of course, charming cottages overlooking the bay have an emotional pull that, say the ASX 200, does not, so before diving in, take a step back to consider what you really want out of a home.
Owning property should perhaps not be your goal in and of itself. Having shelter that meets your needs within your budget is perhaps more sensible. Buying a house you can barely afford may only achieve the goal of keeping you up at night.
So before you go surfing on real-estate sites, take some time to plan how you want to live. How much space do you need? Owning may make more sense than renting for a family with children because large rental options can be hard to find, for example. How do you prefer to commute? If you don’t like to drive, getting a smaller place that costs more but is near your city job may be the way to go.
As you think about costs, some consideration should be given to the things that are hard to quantify in your decision. For example what is the lack of maintenance costs on a property worth, versus the peace of mind you might gain from not having to worry about a landlord moving you out of your rental property.
Most costs, however, are more concrete. Australians are fond of saying that rent money is dead money, but so is mortgage interest paid to the bank. Just 4.5 per cent interest paid over 25 years on a $400,000 loan adds up to about $267,000.
A host of other one-time fees — stamp duty, conveyancing fees, legal costs, search fees, pest and building reports — add up to tens of thousands of dollars, although first–home buyers get a break on some of them.
And then there are the ongoing costs, such as maintenance, council and water rates, insurance and, in some cases, body corporate fees. If you rent and have the discipline to invest the deposit you would have put towards the house and the cost savings, you could well generate a higher return than you would buying a house, according to Morningstar.
If you don’t have the discipline to invest the difference, maybe the forced savings of owning a home is the right option for you. The key is to chart a path toward your own individual goals rather than slavishly follow the ups and downs of the housing market.
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Reproduced with permission of Vanguard Investments Australia Ltd
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