Author Topic: Does the 1% rule work in Australia?  (Read 12617 times)

HappierAtHome

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Does the 1% rule work in Australia?
« on: January 07, 2014, 11:09:04 PM »
I currently live in a reasonably nice flat on the edge of the CBD, owned by my partner. When we buy a house in a few years we were planning to keep it as a rental, so I've started reading threads here and learning about real estate investment.

Problem is, I don't see how the 1% rule can possibly work in Australia's current real estate market.

The flat cost $365k six or seven years ago. Today it's worth approximately $425k. Based on other flats in the building, I estimate we could rent it for $500 a week / $2k a month. That's .5% even if we base it on the price my partner paid for it. To meet the 1% rule, we would have to rent it out for $3650 a month, which ain't gonna happen.

What's the answer? Not to hold real estate in such a crazy market, so we should sell it when we move? Keep it anyway and rely on capital gains (house prices went up 10% in my city last year)? We're keen on FI so I don't want to carry a low yielding asset forever, but I'm concerned that if we sell we're effectively trying to time the market and betting on a fall in house prices. Just because I believe that the market is overpriced doesn't mean there will necessarily be a correction anytime soon.

Any investors here getting 1% in the Australian market, or any other inflated housing markets?

Apologies if this discussion has already been held - I searched and couldn't find it.

limeandpepper

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Re: Does the 1% rule work in Australia?
« Reply #1 on: January 08, 2014, 01:03:39 AM »
I think it's pretty impossible in Australia too, but wouldn't mind if someone can come along and show me it can be done!

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Re: Does the 1% rule work in Australia?
« Reply #2 on: January 08, 2014, 02:51:31 AM »
Yields on real estate in Australia are rubbish, hence the 1% rule doesn't really work here. In the past, bountiful capital gains have made up for this, but with our real estate prices already amongst the highest in the world, I don't see this going on for too much longer. I prefer shares myself - similar long term gains, tax-friendly yields and, using index funds, virtually effort free (no tenant, property manager or maintenance issues!). Having said that, I effectively own my own house outright (mortgage <= offset account balance) and will continue to do so for at least some diversification, the self-satisfaction of home ownership and that I will continue to receive a monthly home loan subsidy of about $400 for the next 15 years as long as I don't pay out my mortgage :-)


HappierAtHome

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Re: Does the 1% rule work in Australia?
« Reply #3 on: January 08, 2014, 03:14:57 AM »
If we sold this place when we move, we could buy our next house (which would be a PPR) with cash, or pretty near to it. Or stick with our current plan to put down a 50% deposit, and buy $300k worth of shares. Those are both very tempting options.

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Re: Does the 1% rule work in Australia?
« Reply #4 on: January 08, 2014, 03:26:30 AM »
It can be done, mostly with (very) rural homes in non-mining towns.

Also there are always a very large number of uni student accommodation or serviced apartments for sale which are on 8-10% yields. When you ask yourself why they are projecting such good yields then you get an idea of why there are so many for sale.

But yeah, for the most part, if you applied the 1% rule here you would never buy anything.

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Re: Does the 1% rule work in Australia?
« Reply #5 on: January 08, 2014, 08:52:14 AM »
Forget a generic "rule" in a situation like this.  It's not applicable, it's a tool used as a broad evaluation when narrowing properties to evaluate for income purposes.

Look at your actual numbers.  If your flat is worth 425k, and you could net, say 391k after selling costs (8% or so?), and you could rent it out for 2k/mo (say 1200 profit after expenses, vacancy, etc., though it may be less if you have high HOA fees), that's a return of 14.4k annual on 391k.  That's a 3.7% return, plus appreciation.  Rather mediocre, but not ridiculously so, I suppose.

Run the actual numbers and evaluate versus what else you could do with the proceeds if you sold, and decide the best course of action.

"Does the 1% rule work in Australia?" is the wrong question to ask when you're looking at  what to do with a specific property you already own.
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Re: Does the 1% rule work in Australia?
« Reply #6 on: January 08, 2014, 12:59:47 PM »
I would sell it, and probably put <50% down on the new place because I am very risk averse.

If you keep it, you might do really well if house prices keep rising or you might do really poorly if the market crashes. That's risky. The alternative, buying diversified international stock and bond indices and only keeping a limited amount of your net worth in your house, is probably not as risky.

Having so much of your net worth invested in one asset class (or in this case, one asset) should make you a bit nervous IMO.

aclarridge

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Re: Does the 1% rule work in Australia?
« Reply #7 on: January 08, 2014, 01:01:57 PM »
"Does the 1% rule work in Australia?" is the wrong question to ask when you're looking at  what to do with a specific property you already own.

But if you ask it in general, the answer is probably "Sure it does, but it tells you that you shouldn't buy anything" assuming Australia is like Canada in this regard, which it seems to be.

HappierAtHome

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Re: Does the 1% rule work in Australia?
« Reply #8 on: January 15, 2014, 07:57:07 PM »
"Does the 1% rule work in Australia?" is the wrong question to ask when you're looking at  what to do with a specific property you already own.

But if you ask it in general, the answer is probably "Sure it does, but it tells you that you shouldn't buy anything" assuming Australia is like Canada in this regard, which it seems to be.

Yeah. I guess I was hoping that either a) I had interpreted the rule incorrectly, the flat is a GREAT rental/investment and I should definitely keep it, or b) it would be nice and clear cut that I should sell it when we move.

We'll most likely have a 50% deposit for the next place regardless, so if we sell the flat we can either buy the next house outright and/or invest the cash in index funds (over a reasonable period of time - I'm not dumping hundreds of thousands of dollars into the market all on one day).

Discussed it with the BF again and we both think that the housing market in Perth is due for a major correction, or at least serious stagnation. So if it's still red hot when we want to move (10% price increases in 2013 would indicate 'red hot' to me) we'll definitely sell the flat, and either buy the next place or rent it if we think house prices are stupidly high. Then either wait for the crash or, if the crash does not happen, buy a place at some point when it makes sense to us.

If the crash/stagnation happens between now and when we want to move, we'll probably keep the flat and buy our next home.

I just hate feeling like we're effectively trying to guess where the market is likely to go. Obviously any decisions we make will be based on the market at the time, but I can't ignore my gut feeling that housing and rentals are not where we should be investing right now.

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Re: Does the 1% rule work in Australia?
« Reply #9 on: January 17, 2014, 04:46:14 PM »
"Does the 1% rule work in Australia?" is the wrong question to ask when you're looking at  what to do with a specific property you already own.

But if you ask it in general, the answer is probably "Sure it does, but it tells you that you shouldn't buy anything" assuming Australia is like Canada in this regard, which it seems to be.

I'm struggling to comprehend how this can be the case, Aus, US and Canada all have:
-Different interest rates
-Different tax rates and treatments
-Different costs that need to paid from wages (for example Americans may spend hundreds each month on health insurance, Australians generally don't have to)

I think the key thing to consider is the "rent/buy" gap in median priced housing (based on 90% Financing, as 10% deposit is typical for FHB). History shows "buyers" of median properties in Australia are willing pay a small premium over "renters" - typically up to 20% (the rule doesn't work with higher cost homes, as they are purchased by wealthier people who will happily pay a larger premium because they can afford to and value home ownership more.) If the "gap" is too much in favour of the renter (i.e. renter an rent at a 20%+ discount compared to financing) it indicates prices may stagnate. If the gap is very small/non existent it indicates prices are likely to rise. So on or around the median price-line home prices are driven by rents, rents are driven by population growth and availability of credit (inverse relationship - low credit availability, more renters, rents rise, people make more sacrifices to get into their own place, house prices follow.)

[Paraphrased from a Gavin Hegney presentation, but there is stuff on his website about it.]

However with inner city apartments you face an additional risk, which is the risk of increased supply. Perth is a long way from built up, so many more highrises can be built. These newer buildings will be more desirable to tenants and buyers while over time your building ages and requires ever higher strata fees to maintain it. So rents may not grow as fast as you hoped, while expenses grow quicker than inflation. However this doesn't mean you should avoid property investment altogether, although my gut feeling might be that the inner city apartment may not be the best possible investment (although using it as a PPOR can make a lot of sense, given the rent to own ratio).

Also one more thing to consider - if you want to get into property, you are still eligible for all of the first home buyer benefits, though your partner is not. If you were planning to allocate your portfolio across a lower value rental property and shares, it may make sense for you to be the property owner and your partner to be the share owner.

HappierAtHome

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Re: Does the 1% rule work in Australia?
« Reply #10 on: January 17, 2014, 05:39:09 PM »
Lots of food for thought, melody.

I thought that if you were common law (had lived with a partner for two years or more) then you could not claim the first home buyer's grant if your partner owned a place? I know people who have used a separate address from their partner just to be able to claim it, which wouldn't be necessary if each partner was assessed separately for FHB. Personally I think it's pretty dumb to commit fraud just for $7k or whatever it is. Plus all the other little bits of fraud involved in pretending you don't have a domestic partner - I'd be eligible for quite a few rebates if I was filing taxes without declaring the BF. That doesn't sit right with me. (Not that I think that's what you're suggesting at all - just sharing my thoughts on it and wondering why people would go to these lengths if separately eligible).

I also don't think that, even if technically eligible, it would be ethical for me to buy a property in just my name and claim FHB given that the BF would undoubtedly be contributing to the mortgage.

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Re: Does the 1% rule work in Australia?
« Reply #11 on: January 17, 2014, 06:06:37 PM »
Just checked - definitely not eligible for the grants (which makes sense to me).

Our apartment building is pretty old for our suburb, and it has stairs everywhere - even if you take the lift, you have to use stairs too! Not an issue for us, but potentially makes it harder to rent out long term. More considerations to add to my list.

Melody

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Re: Does the 1% rule work in Australia?
« Reply #12 on: January 18, 2014, 10:12:10 PM »
Yes, you're right I didn't realise the common law couple thing applied. I had always assumed it only mattered if the partner was buying the house with you or not. Hmmmm, BF has been thinking about buying an IP (flip) - maybe we shouldn't be so hasty to move in together if that is the case! [The grant is $3k on an established house plus a saving of up to $20k in stamp duty.] OMG moving in together seems like a taxation/legal nightmare! Any suggestions for stuff I can read to educate myself about this?

The only thing I would be careful with regarding the property is:
1) sunk cost falacy - because you've already got the apartment you look at it as a "keep apartment or sell apartment" not if the apartment is the optimal real estate investment for your goals. (Would a house with subdivison potential be better, a duplex, something in a regional area etc etc - I'm not suggesting anything here, I'm just saying do your research - "city apartment" is only one type of many real estate investments. Imagine you had 400k in the bank, how would you invest it?)
2) If you want to invest in property your apartment is not the most tax effective place to do it (as it's paid off or almost paid off). If you take a loan out against the apartment to buy a PPOR then the loan will not be tax deductible, and you will pay interest at 100% (i.e. no tax deduction) on your PPOR and tax at your marginal rate (37%) on the rent from the city apartment. If you sell city apartment, buy PPOR with 50% downpayment, your mortgage interest will be lower. If you then use the PPOR as security to take a 100% loan on your new IP, the interest on IP will be at 67% (i.e. 37% of it will be a tax deduction and you will pay minimal tax on the income). Hope this made sense, if not we can talk next meetup. Also read some books by Pete Wargent and Micheal Yardney, they explain tax reasonably well.

Also beware the stock vs home argument - yes historically stock have returned more, but if you consider a cash on cash return houses win over pretty much any decent time period. For example, $100K can buy you $100k of stocks, and you might make 20% on them! Awesome. But it also could have bought you $500k of house and you might have made 5% - the house had returned $25,000 while the stocks returned $20,000... and I think it's easier to find a home returning 5% than stocks returning 20% over an extended timeframe. You could counter argue this by advocating margin loans, but I'm guessing I don't need to explain how high risk these are (and MMM is not a high risk forum IMHO).  Ideally though, you would have both property and stocks in your portfolio before retirement.

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Re: Does the 1% rule work in Australia?
« Reply #13 on: January 19, 2014, 02:32:23 AM »
Yes, you're right I didn't realise the common law couple thing applied. I had always assumed it only mattered if the partner was buying the house with you or not. Hmmmm, BF has been thinking about buying an IP (flip) - maybe we shouldn't be so hasty to move in together if that is the case! [The grant is $3k on an established house plus a saving of up to $20k in stamp duty.] OMG moving in together seems like a taxation/legal nightmare! Any suggestions for stuff I can read to educate myself about this?

I might be wrong, but my understanding was that if your partner buys a property as an IP then you can still get the FHOG, its only if your partner buys a property as a PPOR then you won't qualify for the FHOG.

Also don't forget the $2000 grant from REBA.

If you haven't already looked, I think the department of finance and department of commerce websites would have some info.

HappierAtHome

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Re: Does the 1% rule work in Australia?
« Reply #14 on: January 19, 2014, 03:27:53 AM »
I'm not an expert on common law issues, but there's a lot to consider and the whole thing makes me wary. Which is funny because I moved in with the BF very quickly without thinking it through at all :-P but basically, from what I know, as soon as you're living together you're in a 'domestic partnership' which means you have to list each other on your tax returns, and your eligibility for a range of tax rebates etc changes. Plus your incomes will be jointly assessed, if, for example, your partner needed to claim the dole - based on what you earn, he wouldn't be able to. I have a friend who wasn't able to claim austudy because she was living with a partner who she'd lived with for all of one month at the time of applying.

The other side of the issue, of course, is that living together creates a potential entitlement to a property settlement if you break up. I believe that the two year threshold doesn't apply anymore, so technically somebody could live with you for a short time and still potentially be able to gain a share of your assets. A pre-cohabitation agreement is the best way to keep you both safe from that, though as I think I've mentioned to you at one of the meetups, I couldn't get the BF to sign one (he was the one bringing assets into the relationship). Obviously it's "not an issue" because I wouldn't try to get his house or money if we split, but it would make me feel better if we'd signed one, and if I was the one bringing assets in and he had been the one with a negative net worth, I would have insisted (ironically, he would have gone along with it if it was to protect me!).

I've no doubt your partner is lovely and would never pull that kind of crap, but it's still better to think about it (and talk about it!), in my opinion, before living together.

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Re: Does the 1% rule work in Australia?
« Reply #15 on: January 19, 2014, 05:29:33 AM »
Agreed. It won't happen until the end of the year but it's something to talk about for sure.

I got screwed by the no centrelink if you live with your partner thing too... I was homeless (not on the streets, but couch surfing) I couldn't rent (as I had no income because I graduated which meant my scholarships got cut off, so would not have even had much luck getting into a houseshare off gumtree, let alone signing a lease) so ended up living with the boyfriend (short term solution) which meant then I couldn't even get centrelink despite still needing to pay my share of bills etc... cue credit card debt - I think I alluded to this at a meet up... It's crazy because in my case I only moved in with boyfriend because I was broke, and then I couldn't get centrelink - around this time I got interested in personal finance, as I realised you can't rely on anyone (especially not centrelink).

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Re: Does the 1% rule work in Australia?
« Reply #16 on: January 19, 2014, 08:58:11 AM »
Agreed. It won't happen until the end of the year but it's something to talk about for sure.

I got screwed by the no centrelink if you live with your partner thing too... I was homeless (not on the streets, but couch surfing) I couldn't rent (as I had no income because I graduated which meant my scholarships got cut off, so would not have even had much luck getting into a houseshare off gumtree, let alone signing a lease) so ended up living with the boyfriend (short term solution) which meant then I couldn't even get centrelink despite still needing to pay my share of bills etc... cue credit card debt - I think I alluded to this at a meet up... It's crazy because in my case I only moved in with boyfriend because I was broke, and then I couldn't get centrelink - around this time I got interested in personal finance, as I realised you can't rely on anyone (especially not centrelink).

Yeah we had a look into centrelink and realised how quick they are to decide you're able to be supported by someone else (family or partner). Fortunately we'd done our saving before partner (DDFP? Surely there's a quick phrase for common law/defacto partner) quit his job to finish his degree.

Using that "add 20%" rule, I think we're good to rent a while longer. Not that I'm satisfied with our deposit yet anyway!

HappierAtHome

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Re: Does the 1% rule work in Australia?
« Reply #17 on: January 22, 2014, 10:29:07 PM »
Quote
Fortunately we'd done our saving before partner (DDFP? Surely there's a quick phrase for common law/defacto partner) quit his job to finish his degree.

I use BF because it's easier than typing out partner all the time.

But yeah, there should be a shorthand for commonlaw/de facto, especially given that so many of us young 'uns aren't getting married anymore.

CLP - common law partner? DFP - de facto partner?

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Re: Does the 1% rule work in Australia?
« Reply #18 on: January 22, 2014, 10:50:50 PM »
Quote
Fortunately we'd done our saving before partner (DDFP? Surely there's a quick phrase for common law/defacto partner) quit his job to finish his degree.

I use BF because it's easier than typing out partner all the time.

But yeah, there should be a shorthand for commonlaw/de facto, especially given that so many of us young 'uns aren't getting married anymore.

CLP - common law partner? DFP - de facto partner?
Hmm. Could DP be confused with anything?

Bought the Pete Wargent book (kindle) on personal finance because partner said he'd read it.

With property, I've noticed in WA in particular you can only operate on a buy and hold strategy because you pay stamp duty when you buy and when you sell, which I believe is therefore twice what you pay in any other state in Australia.

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Re: Does the 1% rule work in Australia?
« Reply #19 on: January 23, 2014, 07:24:44 AM »
Hmm. Could DP be confused with anything?

Yes.  Yes it could.

Probably don't google to find out what though.  ;)

I'd probably just use DH, as it describes your situation better than BF (more permanent), and who cares if strangers on the internet don't know the intricacies of your relationship, but it doesn't matter too much.  :)
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« Reply #20 on: January 28, 2014, 10:32:47 PM »
Quote
Does the 1% rule work in Australia?


no.  The rule of thumb I use is: divide by 1000, and that is the standard weekly rent.  which could be called the "0.4% rule".

Compared to USA, australian houses are expensive, and rents are low. 

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« Reply #21 on: January 28, 2014, 10:37:08 PM »
Quote
Does the 1% rule work in Australia?

no.  The rule of thumb I use is: divide by 1000, and that is the standard weekly rent.  which could be called the "0.4% rule".
Compared to USA, australian houses are expensive, and rents are low.
That makes my rent look low for what I guess to be the value of the place I'm in.

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« Reply #22 on: January 29, 2014, 12:04:10 AM »
Quote
Does the 1% rule work in Australia?


no.  The rule of thumb I use is: divide by 1000, and that is the standard weekly rent.  which could be called the "0.4% rule".

Compared to USA, australian houses are expensive, and rents are low.

My dad told me that rule... but he also told me to buy a $1.5M house, so I tend to take his advice with a grain of salt.

I'm leaning heavily towards selling our current place when we move. Thanks for all the tips!

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« Reply #23 on: January 30, 2014, 02:25:46 PM »
Quote
Does the 1% rule work in Australia?

no.  The rule of thumb I use is: divide by 1000, and that is the standard weekly rent.  which could be called the "0.4% rule".
Compared to USA, australian houses are expensive, and rents are low.
That makes my rent look low for what I guess to be the value of the place I'm in.

I had this same reaction: we're getting a bargain on our current rental, by that standard...

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Re: Does the 1% rule work in Australia?
« Reply #24 on: January 30, 2014, 04:34:08 PM »
It's a very rough rule of thumb - I don't think I will ever rent anywhere that meets it, as I seem to be all about the grotty house in ideal location ;-) The land is worth a tonne, but there are limited people who'd want to live this simply which forces the rent down. Does seem to work for houses priced up to about $600k reasonably well though...

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Re: Does the 1% rule work in Australia?
« Reply #25 on: January 31, 2014, 12:33:38 PM »
I just hate feeling like we're effectively trying to guess where the market is likely to go. Obviously any decisions we make will be based on the market at the time, but I can't ignore my gut feeling that housing and rentals are not where we should be investing right now.

I know exactly what you mean and for me, I am resigned to the fact that I am going to perform market timing when it comes to buying real-estate.
I think I have a much better chance of doing this effectively in the real estate market vs. the stock market (where I have very little chance). The real-estate market is not dominated by professional investors, instead it's dominated by regular people, many of whose primary motivation for buying/selling is not actually investing or finance-related at all. One of many differences, but it's an important one.
So by making the financial aspect of the decision to buy or rent my primary concern, I expect to do better than the average person over time by following my intuition and analysis, i.e. looking at historical price to rent ratio, affordability metrics, etc.

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Re: Does the 1% rule work in Australia?
« Reply #26 on: January 31, 2014, 03:57:29 PM »
Yes IMO the divide by 1000 rule is pretty accurate. It was explained to me long ago as the 10bps* rules - it's a finance thing, everyone talks in basis points.


Median Sydney prices were up 15% in calendar 2013 from $663k to $763k (Thurs Fin Review pg3).

Melbourne +8.6% to $569k
Perth +8.4% to $606k

National average was up 9.8% to $598k.

It's not popular here to take this view but capital growth really does trump yield on a pre tax basis and even more so on a post tax basis.

Please don't be caught with analysis paralysis. The market always moves on regardless of what anyone thinks. If you buy and it does crash and you come back here and say "see I told you so, now I've lost $x hundred thousand " I'm just going to reply "so? go out and buy #2 and #3 and #4 and....".


* For the uninitiated, it is pronounced "bips". 1bp is defined as 1 hundredth of 1% (0.0001). So when you hear finance journalists talking about interest rates moving say 25bps it is means 0.25%

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Re: Does the 1% rule work in Australia?
« Reply #27 on: January 31, 2014, 09:57:36 PM »
Hmm, with the capital growth does that mean the longer I wait the more I'm priced out of the market? I'd like to own my own house but it seems to be getting out of reach.

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Re: Does the 1% rule work in Australia?
« Reply #28 on: January 31, 2014, 10:10:03 PM »
If you believe that housing will continue to grow way beyond inflation - then yes.

I don't.

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Re: Does the 1% rule work in Australia?
« Reply #29 on: January 31, 2014, 11:24:41 PM »
But leverage means even if housing keeps pace with inflation you still loose out -i.e. Houses grow at 3% - house costs $500k, at end of year house is worth $509k. Your deposit, say $100k may also growth with inflation (But you get taxed on it) - deposit now worth $102k after tax. (3% rate, tax at $37%) Now instead of needing $400k more saved to buy the house, you need $407K.

But it all comes down to interest vs rent. If interest = rent, in the above scenario you would buy.... You can make a financial model to find the point at which you buy over rent (factoring costs for home-ownership over renting such as repairs, earnings on alternative investments etc) Home ownership is very location specific and cheaper properties have better yields, which would push you towards buying, whereas a more expensive area will tend to push towards renting.

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Re: Does the 1% rule work in Australia?
« Reply #30 on: February 01, 2014, 05:14:59 AM »
Correction Melody, $500k x 1.03% is $515k. So your loan will need to be even bigger.

And your financial model cannot just look at interest vs rent just for the first year either. What happens to rent each year? What happens to interest each year as you pay off the loan?

If you believe that housing will continue to grow way beyond inflation - then yes.

I don't.

My gut feel is that housing will always track real wages in the long term (>15 years), adjusted for any societal shocks. Big ones like when it became the norm for women to return to work after having children, which meant a 2 income household budget could stretch that much further.

If you could predict the next big shock and take advantage of it, I reckon you would get to FIRE very quickly indeed.

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Re: Does the 1% rule work in Australia?
« Reply #31 on: February 01, 2014, 06:15:29 AM »
My gut feel is that housing will always track real wages in the long term (>15 years), adjusted for any societal shocks. Big ones like when it became the norm for women to return to work after having children, which meant a 2 income household budget could stretch that much further.

If you could predict the next big shock and take advantage of it, I reckon you would get to FIRE very quickly indeed.

I don't believe I have any great ability to predict the market. But we're pretty happy to wait a little longer and keep building up our deposit. I always wince when my workmates talk about buying a house with a 5% deposit because they don't want to be priced out of the market... That doesn't seem great.

Wildflame

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Re: Does the 1% rule work in Australia?
« Reply #32 on: February 01, 2014, 11:39:24 AM »
Does the 1% rule work in Australia? No. But maybe rental yield is not the whole picture - instead, look at total returns off holding property. Taxation laws play a huge part, as well!

With property, I've noticed in WA in particular you can only operate on a buy and hold strategy because you pay stamp duty when you buy and when you sell, which I believe is therefore twice what you pay in any other state in Australia.

I'm not sure that's true. See http://www.finance.wa.gov.au/cms/content.aspx?id=2077: "The person liable for duty (usually the purchaser or acquirer)"... etc etc. If I read that right, if you are up/downgrading you will pay duty twice, once upon buying the first property, and once upon buying the second property, but you are not charged twice with respect to any one property, which is similar to other states.

I am currently doing my research very carefully with regard to buying vs renting in WA. The population growth factor seems to be driving demand extremely aggressively (Australia's population growth rate is somewhere around 1.6% annually, which is almost 50% above the WORLD average, let alone the OECD average), while supply is constrained by large property developers squatting on land / strict planning schemes restricting release / a lack of government support for infrastructure development / NIMBYs preventing high-rise development / insert your preferred political punching bag here. I just don't see how pressure on either end is going to cease any time soon, which tells me to buy, regardless of overvaluation!

One article I saw charted Melbourne's property market from somewhere in the 1800s, and found a 10% nominal growth average year-on-year from that time. It also suggested that a similar analysis of UK property had a similar trend dating back hundreds of years. After I stop procrastinating and write my damned assignment, I'll see if I can dig it up for your edification.

I also think that the 1% rule assumes the presence of property/land tax, which Australia lacks in any meaningful sense and which would drive property values down (and therefore yields up) by increasing the opportunity cost of holding property. The recent Henry Tax Review suggested we put in a land tax - and was duly ignored. Alternative thought: maybe due to negative gearing, Australian property yields are capitalised into the value of the property? (Does that even make sense? Needs further thought.)

That said, I find it very difficult to justify the job lockdown that buying implies, even if I figure I could clear the loan in 5 years or so. I still have plenty of wanderlust left in me, and that amount put into the property could turn up a very pleasant contribution to the annual budget in dividends. It's a shitty choice either way: put up with weak tenure and ongoing rent increases, or be tied down and pay for council rates and maintenance? Sigh...

I suspect the optimal way to get into property in Aus is to buy an investment property while renting to take advantage of negative gearing while improving the property to your liking (air conditioners and landscaping for all! Woo!) before moving yourself in. This assumes the tax benefit you gain from tax-deductible interest and improvements is not outweighed by something like the First Home Owner's grant and stamp duty exemption. Different interest rates may apply on the loan, too. Or maybe buy, and rent out rooms for a while. Best of both worlds? Note to self: look up tax treatment of renting out rooms in one's primary place of residence, or ask Tax Law lecturer. He'll love a curveball like that!

EDIT: I thought of more things to add. =)

EDIT 2: If you have the choice to buy cash or put down a deposit and use the remaining cash for investing, you could think of using a mortgage as basically a margin loan on your shares, at home loan rates (2-3% lower than normal margin loans) and with better terms (no margin calls). If your shares return more than your mortgage rate and you can handle the cash flow impact, that may be a good way to use leverage. Just remember it is still leverage, with the risks inherent.
« Last Edit: February 01, 2014, 12:30:44 PM by Wildflame »

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Re: Does the 1% rule work in Australia?
« Reply #33 on: February 01, 2014, 03:46:06 PM »
I will double check and report back, but my friend just sold one house and is building a new one, and she had to pay stamp duty on selling, and again on the purchase of the new property she's building. She didn't pay stamp duty when buying house 1 only because she was a FHB, but otherwise she paid stamp duty on buying and selling, so twice for the same property. I will enquire to see if her building makes a difference, or if I misunderstood.

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Re: Does the 1% rule work in Australia?
« Reply #34 on: February 02, 2014, 06:51:46 AM »
Correction Melody, $500k x 1.03% is $515k. So your loan will need to be even bigger.

And your financial model cannot just look at interest vs rent just for the first year either. What happens to rent each year? What happens to interest each year as you pay off the loan?

If you believe that housing will continue to grow way beyond inflation - then yes.

I don't.

My gut feel is that housing will always track real wages in the long term (>15 years), adjusted for any societal shocks. Big ones like when it became the norm for women to return to work after having children, which meant a 2 income household budget could stretch that much further.

If you could predict the next big shock and take advantage of it, I reckon you would get to FIRE very quickly indeed.

Bad maths! Ha ha ha. Thanks Marty! I agree with you around tracking wages growth but I also think the housing we will live in, in the future will look different. In the past 5 years in Perth I have seen a switch towards apartments being "desirable" (yes, I am young but have a lot of older friends so 5 years ago is when many of my friends were buying) - 5 years ago, an apartment was a last resort - "i can't afford a house, this could be a stepping stone" - now it's seen as a lifestyle choice - "Low maintenance, trendy". They're even building apartments in places like Cockburn (suburb 20kms from city - not an employment hub, though there is a mall and a train station there.) - 5-10 years ago only the poor would have lived in apartments anywhere that wasn't the city centre or right on the water, now I know many young professionals who have bought these.  As suburbs are infilled big blocks close to the city become rare. Also as suburbs gentrify prices go up. Yesterday's ghettos might be tomorrow's next trendy suburb (for example Midland - 5 years ago a ghetto you would be scared to visit after dark, now a working class area, in five years could it be the next trendy precinct?) So I think certain areas/types of properties will outperform wages growth and others may under perform (I'm tipping many new housing estates in the burbs will suffer, especially those without trains to the city, as Perth traffic gets more and more congested each year, and as that housing stock ages - you know, those people who built all those 80s homes thought they were beautiful at the time... how we view those is exactly how people will view today's new estates in 30 years time). Though the market as whole will roughly align with wages growth, I'll go out on a limb and say Happier At Home doesn't really care what the Perth property market does - she cares if her home/investment makes her a good return or not, so I think it's more about picking "winners" than market timing.

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Re: Does the 1% rule work in Australia?
« Reply #35 on: February 03, 2014, 09:47:32 PM »
Picking up on a few things from Melody's post.

Increased population density / more apartments: I think this is an awesome thing for Perth. Increased population density means that there will be more suburbs with cool little cafes, libraries, good public transport. I love currently living in a reasonably dense area as it means that there are heaps of amenities within walking distance.

Suburbs further out decreasing in value while those close in retain or gain value: I agree with this, and it's one of the reasons why I don't know whether we'll see a decent decline in house prices for the suburbs we want to buy in even if the market declines overall. Within 5km of the city, I think prices are more sustainable / stable / based on actual value than they are further out. But this is just a feeling on my part, I don't have data to prove it. If nothing else, at least buying closer in reduces my exposure to rising petrol prices and public transport fares. I know someone who commutes 50km each way and his "suburb" has no public transport at all - his exposure to rising fuel costs could really hurt him, whereas where we live now, we could give up a car entirely if it became too expensive. I like having that flexibility.

I'll go out on a limb and say Happier At Home doesn't really care what the Perth property market does - she cares if her home/investment makes her a good return or not, so I think it's more about picking "winners" than market timing.

Correct! I care about buying a reasonably priced home that fits my needs and some of my wants, preferably one which we can either buy with cash or pay off within five years of the purchase date. And I care about not losing a mint by having an "investment property" that crashes and burns (which is why I was asking the original question).

I'd also quite like it if housing became more affordable because I think that affordable housing makes everyone's lives better. But my friends and family with $800k houses would disagree.

One situation that I do worry about is if we buy a very modest house because we think the market is overheated, then the market tanks and we are in a position where we really have to upgrade. But then I guess we could just consider ourselves lucky that the next house would be "on sale" and we should be in a position where taking a bath on the house we'd be selling wouldn't hurt us too much financially.

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Re: Does the 1% rule work in Australia?
« Reply #36 on: February 09, 2014, 01:08:37 AM »
I don't believe I have any great ability to predict the market. But we're pretty happy to wait a little longer and keep building up our deposit. I always wince when my workmates talk about buying a house with a 5% deposit because they don't want to be priced out of the market... That doesn't seem great.

This is why I'm happy to stick with renting: because the Australian property market is currently driven by investor speculation, fear of being 'priced out of the market' (which I don't understand why this should ever be a thing), opportunity cost of slinging all my future money at a debt that could potentially lose its value.

I can't tell you how many times I've heard/been told the following, with absolute conviction:
"You can't lose with Sydney property."
"You have to buy now before it becomes too expensive."
"The prices are going crazy! It's ridiculous!"

Everyone time someone says any of these to me, I'm reminded of a story about tulips. The owner of my rental property is currently racing to sell to a 'greater fool'.. He offered to sell it to me and I almost choked at how much he is expecting. Hint: It doesn't meet the 0.4% rule. The fucking irritating thing is he'll probably get it, come auction time.

Housing here is seriously at the absolute upper limits of affordability right now, but with stupid government policies and rampant foreign investment it could get even worse.

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Re: Does the 1% rule work in Australia?
« Reply #37 on: March 23, 2014, 05:48:39 PM »
Hello MMM, thanks for linking me into the thread.

I don't normally join forums but this one looks really excellent, especially since it emphasises being frugal (not something you see a lot of in Sydney these days...!).

No 'one size fits all' I guess, but yields in Australia tend to be much lower close to the CBDs - particularly in Melbourne at the moment - but move a little higher as you move out. And regional centres tend to have higher yields still.




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Re: Does the 1% rule work in Australia?
« Reply #38 on: March 23, 2014, 06:09:58 PM »
If it helps, the NZ market (or at least Auckland, Christchurch and Wellington) seems way overpriced to me in terms of wages/quality of house builds and the yields are even worse.

I feel like Australia, Canada and NZ are all in roughly the same position and that worries me as I think about buying into the Wellington market for a private house...

Melody

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Re: Does the 1% rule work in Australia?
« Reply #39 on: March 24, 2014, 04:50:43 AM »
No 'one size fits all' I guess, but yields in Australia tend to be much lower close to the CBDs - particularly in Melbourne at the moment - but move a little higher as you move out. And regional centres tend to have higher yields still.

Apartment and townhouse yields seem a lot higher, but I worry about the capital growth, when there is the risk of more townhouses/apartments being built, increasing supply. Although that being said everything new that is being built is very expensive, so older/cheaper properties may still have their merits... build costs will go up each year, and much of the easy to develop on land is likely to be already developed...
It's a tough call for me at the moment, when I could buy a townhouse for less than renting, but I've been too busy to do any serious research.


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Re: Does the 1% rule work in Australia?
« Reply #40 on: March 24, 2014, 06:25:46 AM »
It's a tough call for me at the moment, when I could buy a townhouse for less than renting, but I've been too busy to do any serious research.

Is your whole market that way, or do you have a special opportunity to buy?
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Melody

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Re: Does the 1% rule work in Australia?
« Reply #41 on: March 24, 2014, 05:19:42 PM »
Based on what research I have done there seem to be a lot of 1-2 bed apts and 2 bed townhomes that would meet this. The maths look something like this (all figures are weekly):
Current rent for 2 bedroom house = $390, however this is below market rent (two bedders in close proximity of the city rents are more like $400 - $450, the higher end applying to something modern, the lower end to something rough like what I live in)
Townhouse: $350K with $70K (20%) downpayment = $280K Loan (first homebuyers don't pay closing costs here and can get assistance of up to $2000 to pay for building inspections etc if they are buying below $400K). For example I saw a townhouse one neighborhood over from where I lives for $350K, rent was $450 - this is a better than average yield as the townhouse had been beautifully refurbished, but $350K townhomes renting for $400 isn't uncommon.
Loan payment: $250 interest + $100 principle (25 year loan)
Additional costs over renting: Strata (includes building insurance, maintenance, gardener for common areas), council rates and water rates: $50/week. Strata may occasionally include additional capital works levies, but you can minimize the impact of these in the medium term by buying into a complex that already has a large sinking fund and that looks well maintained. For the price I'd most likely be looking at groups of 6-8 units.
Depending on if you count Principle as an expense or not it's either a break even or $100/week less.

I guess the issue here is the rising unemployment rate and fact many large capital works projects are coming to an end. There is also the risk of a reverse migration (Perth has a very high percentage of interstate/NZ migrants who came here to work on the mining projects), although I suspect this will be partially stemmed by the large number of "stay at home kids" who have not moved out due to not being able to get into the rental market (many RE's require 3x rent as income... or $1200 a week) or property market. Although in the context of buying a townhome, it's easier for someone with stable lower income employment and a good credit history to buy than to rent, as banks only require income of $1100 for a single person a month + cost of repayments + 2% buffer or more like $600-$700 a week than $1200. I'm young and have lived through one market "correction" - prices didn't plummet, but 5% on $350k is still $17,500. So I guess I am trying to weigh up the opportunity cost of possibly buying at the wrong time (but into an area with good long term prospects) but starting to pay something off immediately, vs waiting.

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Re: Does the 1% rule work in Australia?
« Reply #42 on: April 26, 2014, 07:31:06 PM »
It's not bad buying first in regional areas. A friend's daughter bought something in Geelong and in Leongatha first. This was more than 5 years ago while she was studying at Deakin - I wouldn't be buying in Geelong now with the shutdowns. But regional centres can be quite good value.

I have always been more into stocks than houses.