The Negative Gearing Poll

[Rosy]

Thanks TOT. All input appreciated. I realise poppa's argument is a tax one and have acknowledged that I'm coming from a different angle. My point of interest isn't in regard to someone who'd otherwise invest in a negative gearing property. It is solely in regard to renting vs owning ahome, specifically in regard to my kids who all rent at the moment but hope to buy/build houses in the near future. I can't see how paying off a loan, even if a large proportion is interest, compares negatively to them paying a similar amount of money in rent forever. The purchased properties would more than likely appreciate in value over the years and could be probably be sold for a profit whereas rent money is gone. There's obviously something I'm not getting.

 

[TOT70]

Thanks TOT. All input appreciated. I realise poppa's argument is a tax one and have acknowledged that I'm coming from a different angle. My point of interest isn't in regard to someone who'd otherwise invest in a negative gearing property. It is solely in regard to renting vs buying, specifically in regard to my kids who all rent at the moment but hope to buy houses in the near future. I can't see how paying off a loan, even if a large proportion is interest, compares negatively to them paying a similar amount of money in rent forever. The purchased properties would more than likely appreciate in value over the years and could be probably be sold for a profit whereas rent money is gone.

Yeah, I agree.

Buying a house to live in is a lifestyle decision, not a financial one. It doesn't matter how much money can be made from the property in the future because we all have to live somewhere.

The best advice you can give your kids is to save hard, buy their own place and work their backsides off the pay it back as quickly as possible. Sadly, for many Australians, this is the only form of long term saving they will ever experience, especially if they don't make personal contributions to Super.

BTW, I have also known plenty of people who have bought their investemnt properties in God-forsaken places that will never turn a profit for them. Start with the simple.

 

[Rosy]

Buying a house to live in is a lifestyle decision, not a financial one. It doesn't matter how much money can be made from the property in the future because we all have to live somewhere.

Again I see it differently. I reckon it can be both. Generalising but a person who bought a property would potentially be financially better of compared to having paid rent for the same period because they end up owning a valuable asset. We spoke to a FIS person yesterday who mentioned that some treat purchasing their home as a kind of super. A forced way of saving that could be cashed in at a later time. Also once a loan is paid off people are far better off financially due to not having to fork out rent money for the rest of their lives.

Anyway I've probbaly hijacked this thread enough by commenting from a different perspective to the original topic.

 

[KnightersRevenge]

I might wade in here.

The interest component of the repayment is a cost. Rent is a cost. They are identical. Any capital repayment is an investment in the asset. It is different.

If the $500 repayment is ALL interest, it is the same as paying rent. If $400 of it is interest and $100 is a capital repayment and reduces the loan by that amount it means that you have saved $100. This saving is permanent, or at least until you re-borrow it to buy a car/take a holiday/renovate the kitchen.
......

I might have this wrong TOT as I'm no expert but doesn't this only work if the asset doesn't depreciate? IMO the mortgage belt has been overheated for a while so it seems to me that you might find people encountering a situation similar to some European cities and heading for negative equity. Wouldn't that kill those savings?

 

[KnightersRevenge]

You can still buy houses in and around Melbourne for $300,000 or less and far lower in the country. From my experience, through my kids, rent is still pretty hefty for run down houses. That would make rent payments not that big a difference to paying off a loan. The hardest part for kids starting out is to save a deposit though.

Having never borrowed money, therefore admittedly being somewhat ignorant about it, I find this discussion quite interesting. I struggle a bit with the concept of paying a few hundred dollars a week in rent when you could pay similar and own the house. Of course it comes back to lifestyle choices as well as financial.

Quick Rosy...send me those addresses!

 

[TOT70]

Again I see it differently. I reckon it can be both. Generalising but a person who bought a property would potentially be financially better of compared to having paid rent for the same period because they end up owning a valuable asset. We spoke to a FIS person yesterday who mentioned that some treat purchasing their home as a kind of super. A forced way of saving that could be cashed in at a later time. Also once a loan is paid off people are far better off financially due to not having to fork out rent money for the rest of their lives.

Anyway I've probbaly hijacked this thread enough by commenting from a different perspective to the original topic.

I’ll make one more comment on this.

I see a lot of clients who tell me exactly that: “My home is my Super.” What they mean is that they are planning to sell the home, downsize and live off the change in retirement at some future date, which is all well and good.

When challenged over downsizing, they generally want to stay in the same suburb because all their friends and support structures are there. That is exactly what everyone else wants to do, of course. As a result, a newish 2BR unit in the next street will cost them about as much as they will receive from their tired 3 BR house, once Stamp Duty and costs are taken into account. They will be lucky to clear anything.

I call it the “Broadmeadows Test.” My question is always: “Are you willing to sell your house in Surrey Hills/Balwyn/Camberwell and move to Broadmeadows in order to clear $400K to use in retirement?”

My view is that your house is your house, your business is your business, your investment property is your investment property and your Super is your Super.


With my apologies to all the fine residents of Broadmeadows, I’m just making a point.

We are also digressing.

 

[TOT70]

I might have this wrong TOT as I'm no expert but doesn't this only work if the asset doesn't depreciate? IMO the mortgage belt has been overheated for a while so it seems to me that you might find people encountering a situation similar to some European cities and heading for negative equity. Wouldn't that kill those savings?

Yes it would.

Many people have ended up losing their homes because they owed the bank $200K but it was only worth $100K. It has been more common overseas than here but it could happen. That is why very few home loans are "interest only." Banks don't like foreclosing on mortgages and ending up on A Current Affair.

 

[Tiger Rob]

I reckon it can be both.

Absolutely. You gotta live somewhere - might as well buy it if you can.

I'm sure I'll get into an argument I'm not smart enough to win, but the renting vs buying argument IMO is flawed in that (give or take) the loan repayments are fixed for the term of the loan. What might be a very significant cost in year one will be much less so after pay rises 20 - 30 years down the track. Rent keeps going up roughly inline with inflation.

An overly simplified expample.

Purchase a $450 k home over 30 years.
Total repayments $1,080,000 or near enough loosly based on current rates, after which you own the property and assuming the value of the property keeps up with inflation, it would be worth $920 k

Rent of this house (atleast in Tassie) is $450 / week = $23,400 per year.
Factoring in rate increase in line with CPI - 2.5% means total rent paid over 30 years is $1,015,000 or near enough at the end of which you have no asset.

(yes, I know I've left out rates and maintenance - I did say it was overly simplified)

The argument is made that if you invest the difference between rent and the loan repayment you come out infront. I can see how that would work, but I'd argue you can do that later aswell (loan repayments cheaper than rent) and you can also use the equity in the home to borrow for further investment.

 

[martyshire]

...

Purchase a $450 k home over 30 years.
...

Rent of this house (atleast in Tassie) is $450 / week = $23,400 per year.

...

Maybe it is wiser to buy in Tassie than it is in Melbourne then. This point relates to Rosy's posts as well. In other cities and OS you might expect a 5% p/a rental return which roughly equates to a 450k home renting for $450 per week (or 300k for $300p/w in Rosy's example). However in Melbourne a 450k home does not typically rent for that much - more likely around $300 p/w or lower, so the renter can invest an extra $150 per week.

That is not to say rents are cheap in Melbourne, far from it. It just reflects the fact that prices have gone up heaps in the last ten years (last 2 years excepted) and this has not been matched by rent increases.

Why? IMO, rents reflect what people are willing or able to pay to have somewhere to live, whereas purchase prices are affected by all sorts of additional factors that push prices up or down such as speculation, confidence in the market, bank lending, interest rates, government stimuli and, perhaps most relevant to this thread, tax laws for investments.

 

[poppa x]

Poppa borrows the same amount of money to buy another B&B and has the same interest bill. Providing he uses his B&B to produce income and doesn’t stay there every other weekend, the $10,000 is tax deductible against that income and costs him about $7,200 after tax, the difference being the tax saving.

Oh I wish I could stay every other weekend!
But they're all fully booked every weekend, and if was to "book one for myself" then I'd be costing myself $490 for 2 nights that I'd have to forego in revenue from a paying customer.

My B&B's were negatively geared for the first 2 years I owned them. For the past 4 years, they've been both cash and profit positive, meaning I pay tax on my profits. So I earn an annual income and gain the benefit (like a home-owner) of capital growth through inflation, etc. But with one BIG difference. If and when I sell, I pay Capital Gains Tax - unlike a home-owner.

The rent V buy issue IMO is a financial one and should be free of emotion. But unfortunately we're all human and emotions (go tiges) keep getting in the way.

 

[Rosy]

The rent V buy issue IMO is a financial one and should be free of emotion. But unfortunately we're all human and emotions (go tiges) keep getting in the way.

That's fine for those who feel that way but making money isn't the main priority for everyone. We could sell our farm, invest the money, and make zillions*. We could have invested in property instead of the farm. Neither would necessarily make our lives any better though. The peace, security, freedom, serenity, history, tradition and memories of owning our property enrich our lives. It's a lifestyle we love so I'm happy if that's considered emotional. No doubt it means more to us than making money. I understand others would feel differently.

*Give or take a few dollars.

 

[poppa x]

That's fine for those who feel that way but making money isn't the main priority for everyone. We could sell our farm, invest the money, and make zillions*. We could have invested in property instead of the farm. Neither would necessarily make our lives any better though. The peace, security, freedom, serenity, history, tradition and memories of owning our property enrich our lives. It's a lifestyle we love so I'm happy if that's considered emotional. No doubt it means more to us than making money. I understand others would feel differently.

*Give or take a few dollars.

I think you'll find Rosy that my statement endorses what you said!
We're humans.
We're emotional.
We make irrational decisions like buying a Collingwood Membership.

But please don't assume that my main motivation is money.
I'm as house proud as any home-owner and a long term tenant in the same rented joint.
The money part of my decision is based 100% on my retirement plans which regrettably is a lot closer than I'd care to think about!

BTY, happy Birthday to me. 64 today!

 

[Rosy]

Not making assumptions about you personally poppa. Sorry if it came across that way. Of course others can have what we do without owning the property. I've had different experiences in my renting days. Suddenly being moved on, not able to do renovations or repairs etc. I was more responding to "unfortunately" in regard to emotion . I just don't think owning/renting a house needs be a financial, free of emotion decision.

:birthday to you. Have a good one.

 

[martyshire]

:birthday to you. Have a good one.

+1

 

[KnightersRevenge]

:birthday to you. Have a good one.

+1
And thanks for your input Poppa. You've certainly improved my understanding and provided another perspective on this discussion.

 

[Rosy]

+1
And thanks for your input Poppa. You've certainly improved my understanding and provided another perspective on this discussion.

Ditto. All good food for thought.

 

[TOT70]

Have a good one, Pops, and sorry about that crack about every other weekend.

 

[tigersnake]

That's fine for those who feel that way but making money isn't the main priority for everyone. We could sell our farm, invest the money, and make zillions*. We could have invested in property instead of the farm. Neither would necessarily make our lives any better though. The peace, security, freedom, serenity, history, tradition and memories of owning our property enrich our lives. It's a lifestyle we love so I'm happy if that's considered emotional. No doubt it means more to us than making money. I understand others would feel differently.

*Give or take a few dollars.

I'm basically with you rosy, but we are older and its a complex issue. Markets are changing, behaviour is changing, demographics. People have been saying what pop is saying for 40 years. I'f I had listened to that view 20 years ago when i bought my house I would blown a significant amount of money. I beleived then that houses were undervalued based on rents, price to wage ratio etc, and punted accordingly. Now if I was the same age and looking at the housing market, I'd be listening. I wouldn't buy a house in current market conditions and projections, and just my hunch, which is what I mostly go on.

Having said all that, there is still money to made in real estate, but it requires a lot of intricate knowledge of localised conditions. There are still undervalued suburbs, towns, properties. The days of buy a house and it will go up are gone though. And do young mobile people want to be lumbered with a half million $ forced saving account thats going backwards in real terms by 1 or 2% a year? I wouldn't. But there is no yes or no here.

 

[ARCHYBOY]

Quick Rosy...send me those addresses!

Knighter, I work in the real estate game. You want properties less than $300,000, send me a PM, Ive got a plenty of them.