To Rent or Buy Part Three (The case for buying)
To Rent or Buy Part Three (The case for buying)
Blogs one and two discussed the age old discussion, it is best to rent or buy plus also the cons of buying, now we discuss the case for buying a property. Don’t forget to book a professional building inspector to ensure you have a comprehensive building inspection report prior to making any property decisions.
The case for buying
Over the last 3 years buying in major cities like Sydney and Melbourne has been a profitable strategy. Sydney prices have increased about 30% since January 2012 so combined with 10x leverage (80% LVR), investors in property would have enjoyed a return of nearly 300% on their initial investment, but what are the risks involved. Let’s say you buy a Brisbane property today and you have a 20% deposit (80% LVR), the property value would only need to fall 20% in value (after the GFC they fell below that amount) to completely wipe out the value of your initial investment. In the United States post GFC between 2007-2010 housing prices fell by 33.8% between April 2006 and December 2010 and in some states by as much as 60%, so buying with leverage magnifies both the good and bad. What happened then was that US homeowners ended up with zero or in most cases negative equity after the price of their property collapsed and simply couldn’t keep up with interest repayments and were forced to hand back their homes to their mortgage lender. What happened then meant due to the huge over supply of houses in the USA the sale price of their home barely covered their loan but in many cases, were insufficient to cover the outstanding loan. In the US loans are different meaning banks couldn’t go after the borrower for any loss because US loans are non-recourse. Here however, mortgage loans are recourse loans meaning the banks can chase you for any loss they incur when foreclosing your loan. In effect, Australian borrowers are at more personal risk should the property market go bust.
Although we escaped Australia a house price collapse during the financial crisis it could still happen here and indeed a number of economists and academics have suggested the possibility of a similar occurrence here in Australia. That said should it not happen and prices continue to increase, leverage will benefit those who own their own home. The value of leverage over the long term is roughly equal to (annual return – mortgage interest rate) x leverage.
Be wise with your investment when leveraging and ensure you have done your homework before purchasing, and it can pay off handsomely. Buying both now and in the future, is a personal decision for all of us, some agree some disagree but the arguments for buying are there. The next blog will discuss the case for and against renting and the final blog of the five concludes the discussion and hopefully helps provide a clearer picture in the case for both sides of the argument. Then the decision is entirely up to you.