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Comment by kspaans | Hacker News Reader

    Except young Australians, who have to rent and cannot rely
    on real estate property for their retirement.

This is orthogonal to the money laundering, but what's stopping the young people from investing for their retirement? Houses are not the only way to build savings.

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Because you still have to pay rent - if you could buy, your housing costs would be earning equity.

It's not uncommon for it to be better financially to always rent and just invest the difference between rent and mortgage+maintenance+taxes. With interest first mortgages as they are it is generally a long time before you earn any equity at all.

This. I did the math when I rented an apartment in downtown Toronto and the rent was less than mortgage interest + condo fees + property tax + maintenance.

Except if the value of the real estate goes up.

Ah but my equities-heavy roboadvisor portfolio has gone up way more than the landlord's apartment...

is it so? Is that still the case when your landlord leverages 20/80?

Usually when mortgage interest + etc. > rent, it indicates that the property is overvalued and the value (over the long term) is more likely to fall than rise. Every other buyer - or almost every other buyer, except the ones that need to launder money - is making the same economic calculation, and if the cost of money to buy the property is more expensive than the rent you can earn from the property, they're not going to buy the property.

So let's say you save 10¢ on every dollar by renting in your scenario. You'd have to have a hell of a return on that 10¢ you saved to beat the 90¢ you would have invested in the property but instead flushed down the drain in the form of rent....

You seem to think that 90c is going straight to equity when for many years it will be going straight to interest payments. So for the first 5-10 years your $1 is going down the drain vs the renters 10c going into investments.

At any point over those 5-10 you can turn around and sell the property and collect the full gain - it's entirely irrelevant to the mortgage payments being dedicated to interest. My $1 gets my name on the title, your 90¢ gets your name on the lease. Think about what your net investment is. So maybe my maintainance/tax/interest costs equate to 50¢. I'm still investing 50¢ compared to your 10¢. Also, I get incredible leverage. Let'say my property costs $1 million. I'm controlling a $1 million investment vehicle with a $4k/month mortgage payment + tax/maintenance. That's incredible. My return on the property is driven from the $1 million basis, and I get to keep all of it despite not having much of an equity stake in the property.

It sounds like nothing I will say will sway your beliefs so good luck with your investment.

it's how long term wealth is built best.

until the bubble pops up, like it did in 2008, but it comes back up so it's a rather temporary set back. Also, rents rarely come down, so most often the property value decline is temporary, or it is another opportunity to buy when things are in water - when there is blood in the streets, there is money to be made.

>My return on the property is driven from the $1 million basis, and I get to keep all of it despite not having much of an equity stake in the property

And if that property falls to $900,000? Now you owe $1 million on a home worth less; literally throwing away $100,000.

You don't actually lose anything until you sell. A paper loss is a different thing. It has plusses and minuses.

If you're willing to employ a "buy and hold" strategy for property to ride out the bottom of the RE market, you should be able to do it just as well with a diversified investment portfolio.

>You don't actually lose anything until you sell.

If the value of your asset falls, you've lost net worth.

It's preposterous to claim that, even though the price of your home has fallen by half, and you are servicing the mortgage on the old value, that you haven't lost anything. Or that the fact that you can offset capital gains with capital losses somehow makes a plunge in value "worth it".

"Paper losses" are losses. The value of the asset isn't based on the price you paid.

If you think of it in these terms, that's about two years worth of rent. But as a renter, you have no chance at benefitting from future appreciation. If you think the housing market is going to be in decline from your move in time, then it might be a good idea to rent depending on your time horizon. Over the long term, it has proven to generally not be a good idea.

"flushed down the drain"

Oh not this crap again

https://www.youtube.com/watch?v=KAMeI4uHAFE

"But practically speaking, ownership has worked out better for most people over the long run."

As I said before, as long as you don't buy high and sell low, your money has effectively been flushed down the drain in the form of rent.

You can't predict the property market. It's kind of financially risky to put your entire investment into not just a single sector of the economy or a single industry but a single property! What if you'd bought your house in Detroit? What if you bought at the peak of a bubble? Even if it's not such an obvious disaster, it can still easily perform worse than other investments.

You think 90% of the mortgage is equity??

It would take you a decade for the equity you earn to match the interests you pay. (http://www.mortgagecalculator.org/ to fool around).

Theres property that rented out produces 2% income. If you can make more than 2% a year, then renters will be richer and compundingly so if they rent over buy.

>Theres property that rented out produces 2% income.

Exactly right. Most people here have probably seen nothing but rising house prices their adult life. Even with a massive bust, people still believe it. In reality, real returns to real estate are barely above inflation.

But once you have completely bought your house/apartment, you have that warm comforting feeling that it's yours. Nobody will get you out to puts in his children, nobody will raise the rent because, you know, he has no choice, etc.

But in the case of a house, you'll have to repair it as times goes by and that can be quite expensive. But the one who rents it to you would have to do it as well, so, buying a house just makes sure you don't pay the little profit margin of the landlord (just the one of the bank :))

>so, buying a house just makes sure you don't pay the little profit margin of the landlord

Buying is not universally better than renting, period. There is no such thing as a free lunch; any profit received by owning the capital asset is compensation for the risk of holding that asset.

Yep you're right. I just wanted to explain that there is also a psychological argument at play. That warm comforting feeling...

I would feel like there was a noose around my neck if I couldn't move without paying $30k in realtors fees (and possibly incurring capital loss depending on timing).

In Australia you are often treated poorly as a tenant. Rent increases every 6 months, 60 day eviction notice if the landlord wants to do anything (sell, paint the walls, let their cousin stay there, consider selling it...). You can't do any modifications or get longer than a 12 month lease.

Also, there is a collective paranoia about missing out, of tumbling off the 'property ladder' and neither you or your children ever escaping wage slave poverty.

This is very rarely true. The only case where I can think of where you may be right is when real estate is purchased at the top of the market and sold at the bottom. When you go to sell real estate, it doesn't matter how much equity you have in the property, you will fully collect the gain or absorb the loss resulting from the sale. Equity is usually only relevant when looking at creditworthiness.

It isn't that rare actually in major western cities. So you are betting on large increases in property value to offset the loss from front loaded interest payments to make your investment better? That's a gamble.

The interest is part of the investment. It gives you control of the property and ability to collect all appreciation. It takes a very minor increase in value to turn a profit if your time horizon is short term. A renter doesn't have anything to show for his or her rent payment and cannot collect any appreciation.

>It takes a very minor increase in value to turn a profit if your time horizon is short term.

It's hard to believe that amateurs on this board actually believe house-flipping is a sure thing.

I guess it depends heavily on the location's property market and the regional tax rules. E.g. here in Norway, good tax breaks for owning property means we're currently paying $1k/month on mortgage+maintenance+taxes, but renting the same apartment costs 50% more.

It also means you essentially can't rent anything bigger than a 2 bedroom apartment; bigger units make so much more financial sense to own (easily $1k/month cheaper even before you include the investment aspect) that there is no market for renting them.

In other economies that would severely punished poor people, but I'm guessing there is sufficient social housing. It still seems like it would lead to problems though.

Well that would be true if things were normal, like 10 years ago. But the rate of return on real estate is much higher than the rate of return of say the S&P 500.

10 years ago things were very much not normal in housing prices and 8 years ago a lot of people lost everything because they counted on prices increasing at way above historic norms. Much like you're doing here.

pundits have been predicting the bubble bursting here since the GFC. But the 'economic miracle' of the housing boom keeps rolling on in Sydney and Melbourne.

With Australian interest rates at record lows, property investors keep borrowing unperturbed.

That's extremely illogical thinking though. If the pundits have good reasons for thinking the market will crash (and I believe they do), and the fact that it hasn't yet doesn't make it less likely, or mean it won't happen. It just means that it's likely to happen sooner rather than later!

It's not an economic miracle, it's a huge amount of asset speculation built on one of the largest levels of household debt in the world, just like in the US and many other countries before the GFC. All it will take is a rise in unemployment, or a shock from China, and it will go (of course interest rates won't rise, the RBA would have to be insane).

Keep in mind that as an individual you cannot have a near-million dollar leverage at a relatively low rate to buy other investments.

Especially when rent for young people is around one third to one half of their income (I would know, it's about 1/3 of mine). Would take me about 6-8 years to save for a deposit on an older apartment.

If your rent is 30-50% of your income you are living in too expensive of an area for your means or need more housemates.

I've found that 30-50% of income being used for rent is fairly normal, regardless of where you might be living.

It's also the market rate in the affected cities.

You begin to see the nature of the problem.

I've lived in 2 of the affected cities. When I was making less I had housemates to bring the rental costs down(Sydney) or lived outside the city and commuted(Toronto). Both would work for either city and allow you to not have to spend 30-50% of your income on rent.

The existence of ways to work around a problem doesn't mean there isn't an actual problem.

I don't consider high demand locations having high cost a problem personally. But if you want to live in a high demand area and you don't make enough money there are ways to do it without spending excessively on rent.

Don't underestimate the costs of living outside a city and commuting. Not just the opportunity cost of lack of socializing, but commuting measurably decreases people's happiness, quite apart from how much time it takes.

It's also not morally wrong to pay more for accommodation that suits your lifestyle better.

I've not said it is morally wrong. Though I think it is wrong to complain about the costs of high demand areas if you're not willing to take actions to decrease those costs.

30 to 50% of a high take-home actually leaves you with quite a lot of disposable income. 30 to 50% of a low take-home is probably unsustainable. Not all costs are directly proportional to housing costs in a housing bubble.

Particularly for younger people, it makes a lot of sense to suffer the higher proportion on rent. Quality of life is much higher living centrally, and income will probably grow, while rents are usually a bit sticky.

I gave an option for lowering cost and living centrally too. Housemates.

I live with two other housemates, in one of the cheaper, older apartments in the area. I chose it because it's only one bus away from my work/uni, where a cheaper location (much further away) was only $30 a week cheaper, and saving 2 hours a day of commuting is worth $6 a day to me. I see other commenters saying 30-50% isn't that bad, but that's not taking Sydney's high cost of living into account.

What area are you in now and what area were you looking at because your experience really doesn't match up with mine of living in Sydney.

The east (think Kensingington/Kingsford), was in the south last year.

What about somewhere like Ultimo/Glebe surely they would have housing >$30/week cheaper than your area? And be ~20 minutes commute time.

When I lived in Ultimo my rent at both places was less than half what it was for my places in Bondi or Clovelly.

What price range? Mine's around 250, but I haven't checked the innerwest. I mostly like the east because it's close(ish) to the beach and a lot of my uni friends stayed in the east. I could never justify Bondi or even clov, too much money, and the culture is too far up it's own a@@. Coogee is liveable though.

I was paying ~$100/week for a 3 share in something called Dalgety Square in Ultimo which was a really nice building. That was close to a decade ago now though but I'd be surprised if it had more than doubled but even if it had it was one of the nicer options in the area so I'm sure there is a lot for less.

Understandable on wanting to stay east. Once I moved east I didn't want to go back but there are definitely options available if you do.

Though I did end up moving to Yamba this year for more space for my money.

I have friends in Glebe paying $300, but I think they're close to good bars/transport.

I love Yamba! It has always been my dream to get a remote job and move somewhere on the north coast. How much do you pay in Yamba/which part?

Glebe is the more upmarket of the two. Ultimo always seems to be overlooked though. Must just be drown out by Pyrmont/Glebe.

I pay $550/week for a 4 bedroom house with a separate full apartment(bed/living room/kitchen/bath) downstairs that I use as an office(for comparison I paid the same for a 1 bedroom apartment on Melrose Pde in Clovelly that was smaller than my office now). We're pretty much dead middle between Pippis/Main so a few minutes walk to 3 beaches and 15 or so to the river.

We had a floor of $400 when looking so not sure what the lower end is like here to be honest but given the work situation I'd assume there is a fair bit available around your price range.

Remote work is definitely required up here. When we were looking at houses the most common phrase we heard was "There are no jobs in Yamba".

You would be surprised how much Ultimo has been gentrified in the past decade, it's quite trendy now.

That's a good price for proximity to the main beach, and especially with the separate apartment. Have you considered subletting it out (maybe even just the holiday season?), could probably get a good price for that location. Do you find Yamba a bit dead? I grew up in Grafton, and know how slow-paced rural Australia can be.

Yeah probably, I've not gone to the area in a long time to be honest so I could be all wrong.

It is, it was a toss up between this place and one over by Coles which was far from the beaches but had a private dock and a pool. There was certainly a lot around though as I was told many many times "no jobs". :)

For subletting not really though I think we're the first people to rent the whole building. I like having the separate office space too much to give it up and we'd need to furnish it down here with more than desks/bookshelves/filing cabinets and whiteboards.

Yeah it's pretty dead here but that aligns pretty well with our interests. I like running/gym/working and my wife loves the gym/beach. Then we both like hiking which there is ton to do within sort of a 1-1.5h radius.

The slow paced part is definitely a problem but we lived in Chang mai for most of 2015 so we have had experience with it to an even worse degree fairly recently.

If your rent is more than 30% of your income and you are between the ages of 25 and 34, you are normal (46% of the renting population). Even at above 50% your rent to income ratio is still fairly common (23%). Having a rent to income ratio above 30% is also correlated with having an income that is very low [1].

If you are at 30%, you are also meeting one of the most common recommendations in personal finance (regardless of whether that recommendation is _good_ or not).

It seems obvious to me that recommendations of either moving or finding additional housemates both can have significant short and long term negative impacts on financial stability, emotional, and physical health (I didn't bother looking for a source for this because this is hacker news not a dissertation).

1. https://www.earnest.com/blog/rent-and-the-30-percent-rule/ which cites http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/jch...

I didn't say it was uncommon I said it was too much.

I would think the feeling that you're never getting ahead will have a more negative mental health cost than a housemate ever will.

That's true, the Australian system of superannuation is actually pretty great, your job pays a portion of your income into your super which gets invested for you, you have some choice as to where it gets invested (high risk vs. low risk etc.)

However what I fear is that if the super isn't managed well, inflation hits, or you just don't build up a large enough investment the high rental prices in Australia will eat up the majority of your investment returns.

But you don't fear buying a house that depreciates in value, or doesn't appreciate enough to cover mortgage interest, property tax, house insurance, and maintenance costs?

People don't fear buying housing because we always (as a general rule) need a roof over our heads.

Property investment in Australia has a huge amount of subsidies that make it an extremely lucrative investment category compared to things like shares.

If you get into the property market, you can count on capital gains tax benefits and negative gearing against any other income you have. Additionally, other benefits that are means-tested often exclude property (at least primary residences).

No, but it takes a lot less work to invest in real estate that you also live in than to try to find and monitor a 6% annual return on your own.

I've been throwing money into broad spectrum index mutual funds for the last 10 years, and in that time have averaged about 9% annually while investing maybe 20 hours thinking about asset allocation ("my age in bonds"), fees ("as low as possible") and deleting brokerage statements from my email inbox ("I know my worth to the cent already, thanks").

Meanwhile, I have invested at least 50 hours touring houses, applying for loans and trading texts with braindead realtors in December of 2016 alone while trying to buy my family's first home.

From where I stand, real estate is a terrible waste of time, energy and effort. If you want exposure to the asset class (why?!) buy into an MBS mutual fund; if you feel the itch to be a landlord (again, why?!) toss money into a REIT[1]. Do anything, basically, to avoid a large, career limiting[2] asset of uncertain value on your personal balance sheet.

[1] Assumes you live in high COLA area where renting is more sensible than buying. Do your math, I am not an investment advisor, and your situation may be different from mine.

[2] To avoid charges of hypocrisy: I no longer have a career, so I am happy to settle down, buy and customize the hell out of a house.

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