Breaking The Property Myth

Australians under 35 looking to invest in the property market should consider their options objectives wisely before they jump into action. I look at the numbers of renting & investing in a share portfolio vs buying a property.

Australians under 35 reconsider buying a home as an investment. It is not so much that the investment metrics of property aren't sound, although I believe this is often the case, but rather the decision making process.

As a coach a common goal I hear is 'I want to build a property portfolio'. Great to have goals. But we first need to look at the why? What are you trying to achieve? We all know that the most important thing in life is happiness, so do what makes you happy; to do that you need to create a plan which allows you to do more of what makes you happy. So often we skip the life we want in exchange for the life we believe we should have. Here are the 8 reasons why buying a home in Melbourne probably won't align you with a happier life:

Life throws curve balls and your desires change; imagine if life turned out the way you designed it when you were six. I would be living in a pink be-jewelled house with a trampoline floor eating red gummy bears for breakfast.

1)      There are other investments that return a higher long-term average

Ok this next to points are numbers heavy. Stick with me, it's worth it I promise.

Analysing the overall asset class a diversified growth portfolio is better placed to achieve a higher return than residential property in Melbourne.  The Melbourne metropolitan property growth rate over the past 5 years has averaged 4.3% per annum. The Vanguard Growth Fund has returned 11.16% per annum over the same period. Respected economists are now predicting flat property price growth with some forecasts as low as  negative 7.5% return. I believe a fair estimate of the long term growth rate for property likely sits at 3%. Investment portfolios are also volatile; the over long term the expected growth rate sits at around 8% per annum.

When deciding the likely return you also need to factor in the direct cost of each investment.

A managed portfolio or fund will include management fees which will likely cost you between 0.30%-2.00% per annum. For a property you will need to consider rates, insurance, upkeep and non-deductible interest. Due to the compounding of returns, the lower the fees you pay, the higher your long-term return is likely to be.

2)      Interest payments on your home are ‘dead money’

If rent money is dead money then paying interest on your home loan is deader than dead money. Firstly, you do not receive a tax deduction on the interest on your home loan, but you will on an investment loan.

You will be better off by over $16,000 a year renting and investing.

The interest on a home loan is paid after tax, whereas the investment interest is a tax deductible, reducing tax payable by $6,000 in this example. Although if you don't own a home you will need to pay rent which is likely to cost you around $16,000 per annum.

However to help with the rent you will receive distributions from your investment portfolio, the Vanguard fund would have distributed you $24,915 per annum. 

Now we need to include the growth of both assets plus increase tax to pay for the investment distributions, we are left with the net position of owning the home at $62,973 compared with $79,865 owning the investment portfolio.

Still with me? The net difference is of buying a property and investing in a share portfolio is $16,892 per annum.

In reality it is unlikely we would be able to lock in an investment loan rate as low as a home loan. What about if we changed the investment loan interest rate to 6%? We still have a $12,000 net benefit difference.

Now times that benefit each year you are alive plus inflation. That is a lot of Lulu Lemon leggings, or nice dinners or whatever it is that tickles your fancy.

3)      Time is important home

If you live in your home for less then 10 years before selling it's going to cost you. The cost to buy and sell property is incredibly high.

The upfront costs are likely to be around $30,000 on a $550,000 home which includes stamp duty, registration, transfer, conveyancing and establishment fees. The cost of a sale is around $43,000 on a $550,000 home; this includes a 2.5% sale fee plus 5% commission plus $2,000 for basic advertising and legal costs.

Statistics show that the average home owner owns their house for 4.5 years. We know that situations can evolve quickly, your want to be closer to work, your family dynamic change, you want a garden & a golden Labrador (ok that's me speaking).

Forking out an additional $73,000 in 4.5 years for buying and selling a property places a fairly large return requirement just to break even.

4)    Do you earn less than $114,000 per annum?

The economic landscape has changed since the Baby Boomer’s era, house prices are now on average equal to seven years of our annual income versus just three years in the early 1980’s.

Buyers need to earn more than $114,000  per annum to afford a $550,000 home plus living expenses according to thefinder.com.au calculator. The six suburbs where you will find a property for a median price of $550,000 are Knoxfield, Sandhurst, Dandenong South, Attwood, Altona North and Airport West.

On a single income, it is more difficult than ever to afford to buy a suitable property in the areas we want to live.

5) You're not handy

Last month our dishwasher broke. We don’t rinse our dishes thoroughly and I am always breaking jars so food and glass gets stuck in the filter.

The landlord organised a plumber, who organised a new dishwasher. Then the new dishwasher didn’t heat the water. So the landlord organised the plumber who organised another dishwasher. The landlord paid for it all. I was busy doing yoga.

6)     Do you value freedom?

You might have a 20 year plan, or maybe your plan goes as far as what time you will have a coffee today. Both plans are right, but both need flexibility.

Life throws curve balls and your desires change; imagine if life turned out the way you designed it when you were six. I would be living in a pink be-jewelled house with a trampoline floor eating red gummy bears for breakfast.

Renting means that you can be flexible. When the pink house no longer suits you, you can generally find a blue one.

If you want to establish a business or go travelling it can be difficult when your money is tied up in property and any free cash flow is being used to pay off debt.  You can’t sell off a room like you can sell a portion of an investment portfolio. And if the market is depressed you might not be able to receive the price you want for it. Unfortunately property owners are the price takers, not the makers.

7)      You are making a financial decision not an emotional decision

Owning a home is like having a baby; it is an emotional decision not necessarily a great financial decision.

If you want to buy a home because designing your own space or living in the home of your dreams for the rest of your life will make you happy then yes buy it.  But realise that this is a lifestyle decision, financially it's more sound then spending all your money, however on average there are better net $$ investments.

Fulfilling emotional needs are the most important part of life; financial decisions should be made purely to support our emotional needs to make us happier.

8)   The share market scares you

Property is ‘real’ estate. I get it. Investing in a tangible asset is attractive you can see and touch it so we feel we understand it.

The share market scares a lot of people, but it may increase your chances of reaching your goals sooner while providing flexibility and liquidity.

Investing in the share market does not have to be complicated. You just need some basic knowledge; and a coach who will be able to walk you through it in simple terms. You can also set up a free practice portfolio with most of the brokers, allowing you to trade without actually using money is a great way to build up your knowledge.

Before you invest your savings in anything please chat with someone who can help you carve out a plan that will support your happiness.