Cheap house prices - should we buy? (Australia)

[cakie]

Being in Australia, we figured we would just always rent. The numbers just don't usually ever work in the favour of buying.

However, our regional town has rapidly dropped significantly in size over the last year due to a large number of redundancies. This usually happens once a generation, boom and bust local economy. As a result, the real estate (and rental) prices have come down dramatically as well.

There are a number of 2 bedroom houses on 1/4 acre blocks that were originally listed for $220-250k, but are now being advertised $140-170k. Could potentially get a place for $130-150k - should we do it??

We moved to the town 1 year ago, are currently both working full time with ~$5k surplus income per month.

Current rent: $145 /week for 1 bed unit (original place was $190 /week, we moved after 6 mths)
Current Lease expires late May
Current Assets:
$21k cash EF
$27k investments

We would want to put 20% down, then build EF back up within the mortgage (accessible in 1 business day through a redraw). It would mean directing surplus to house deposit for a couple of months, and then take us ~5 months to build EF back up to $20k.

MONTHLY COSTS:
Current expenses excluding rent are <$3k
Current rent $628
$130k: $496 mortgage, $26k deposit
$150k: $573 mortgage, $30k deposit

When we move elsewhere (in a couple of years??), we would probably rent it out. At the moment you would only get ~$180-200 /week, but in similar regional towns I am familiar with are ~$220 /week. Would have been $250 /week a year ago...!

[ForrestNinja]

Australia and WA in particular have considerable dependence on mining and oil & gas.  IMO there's an over abundance of optimism from so called RE experts who say it's a great time to buy despite recent drop off in rentals and decreased sales due to state of mining and oil & gas industries.  They have a lot more to gain convicing people to buy vs not.  I wouldnt buy but that's my expat in Aus opinion and based on fact industry still looking down.  What if that 130-150k dropped to 100k or less?  However your numbers are really inexpensive compared to what I'm used to seeing so my opinion may not be the best for your area.  Used to 500-600k avg where I'm at.  Australians are huge on RE b/c of insane returns in last 10-15 years but I think it's more of right place right time fortune. Past doesn't guarantee future.  Sellers are usually slow to react so best time to buy is after market has been down for some time and prices start to rise. 

If you're ok taking a little risk and consider all costs and want your home and plan to stay a while then by all means buy.  Renting out is not a good idea in Australia IMO b/c most are geared negatively and only way that would work is for huge increases in property values.  Again, oz love to think home prices will keep going into the sky but the fact is they won't.  I'd rather more security and flexibility than continuing to gamble with the market. 

[Minion]

Renting out is not a good idea in Australia IMO b/c most are geared negatively

Sometimes in the capital cities. Not in this scenario of a regional town where this is clearly positively geared.

Really depends on the town in question as to the future rental demand.

propertychat.com.au is another good resource you should check out.

[marty998]

Depends on which regional town it is...

In some of them the ....ahem.... quality of tenant is probably going to result in various issues such as meth labs, domestics, arson etc.

With the amounts you are saving each month ($5k) it's unlikely you'll have mortgage that lasts more than 3 years anyway.

[cakie]

Renting out is not a good idea in Australia IMO b/c most are geared negatively

Sometimes in the capital cities. Not in this scenario of a regional town where this is clearly positively geared.

Really depends on the town in question as to the future rental demand.

ForrestNinja - I know exactly what you mean. This is why we have never even considered it before. Right now my sister is renting a new 4b 2-storey townhouse in Melbourne for ~$550/week, even though is probably worth at least $1 million!! Using the 1% rule, for $550/week it should only be worth ~$240k...

If I assume rents stabilise at about $220/week, then 1% rule is ~95k. This is potentially do-able...but you risk ending up with a place that won't appeal to the good renters.

Depends on which regional town it is...

In some of them the ....ahem.... quality of tenant is probably going to result in various issues such as meth labs, domestics, arson etc.

There is a large amount of ex- (and current) public housing duplexes. Some streets are fine, but plenty are very bad. Luckily my SO knows where the worst streets are (some aren't so obviously terrible).

propertychat.com.au is another good resource you should check out.

Thanks for the tip Minion :)

What I find crazy is that even in this current market, the prices advertised don't even meet the 1% rule using rent prices from a year ago! How is it that this is so commonly achieved in the US to make it a rule of thumb? I get that we have indefeasibility of title, but I wouldn't have thought that would make much difference??