"What is the difference between paying rent to a landlord and rent to the bank (that’s what a mortgage is – you are renting money from the bank with the interest you pay)?"
How to avoid the winter home buying blues: The case for and against buying now
Let’s start off with the winter 2012 $1 million question:
Is it a good time to buy or is it a good time to wait?
The argument for waiting and renting
We all need roofs over our heads.
What is the difference between paying rent to a landlord and rent to the bank (that’s what a mortgage is – you are renting money from the bank with the interest you pay)?
On a $2 million home that you resell in two years for the same price (if you sold it because it was a bad decision) you may have spent say $300,000 – stamp duty ($110,000), reselling fees ($60,000) and mortgage payments ($130,000). Now if that home went down in value and you had to sell it, it’s quite possible you could end up with a half million-dollar loss on top of that. If, however, during that same time you rented a $2 million home, your total outlay would be somewhere between $80,000 and $120,000 for rent.
Renting in that scenario on a $2 million home could be a $200,000 to $400,000 better decision.
Suggested guidelines if you are to rent.
Are you new to the area? Rent a home in the area you are planning to buy in, as this should help you understand the subtle nuances of precincts.
Rent a good home. If you rent a crap home just because it’s cheap, it may be counterproductive, as all you will want to do is rush to leave. That puts pressure on you buying a home, which can often be negative as you are forced to make a hurried decision.
Rent for 12 months. In this market it may well take you some time to find the dream home.
Important rider: We are making a case for short-term renting as a way of giving you time to find and buy the right long-term home. But long-term renting is rarely the answer to long-term emotional and financial happiness in Melbourne. We have met very few rich and long-term happy renters.
The argument for buying now and trading up
Most selling agents have begun to trot out the line that now is a good time to buy if you are trading up. We have to agree.
In this market, the gap between lower-priced and higher-priced homes is getting smaller. Therefore if you can find a good home now (and it is still possible), then trading up is certainly better now than it was during the stronger market of, say, early 2010.
Say in early 2010 when we had a strong market and lots of stock, your $ 1.5 million home had one bidder and you sold it for $1.5 million. And then you went and bought a $3 million home that had three bidders and you bought it for $3.2 million. At that time the mortgage gap was $1.7 million.
In 2012 your $1.5 million home may have had two bidders and sold for $1,420,000 – prices have dropped a bit but because stock is short on good family homes at your level and you priced it correctly, you had bidders. You had already bought a ripper $3 million home off market that was negotiated over a three-month period for $2,720,000. In this case the mortgage gap was $1.3 million.
Similar houses, different times. You’ve also paid $20,000 less in stamp duty and your mortgage is cheaper to maintain. $1,700,000@ 8% = $136,000 as opposed to $1,300,000 @ 7% = $95,000. Yes, the figures are approximates, but you get the drift.
Of course it needs to be the right long-term home – a good decision. Buying now because rates and prices are cheaper only makes sense if it’s a good decision for your long-term emotional and financial happiness. But be patient.
Mal James is principal of James Buyer Advocates, which advocates on behalf of buyers of property over $1 million. Mal writes weekly auction reports, advice and in-depth market analysis on James' website.