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Things wot I have done - Tactical Ninja

Jun. 2nd, 2011

10:51 am - Things wot I have done

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Made an appointment to find out how big the absorbed twin on my cochlea is and whether I'll need a hearing aid.

Made an appointment to see if I'm suitable for laser-eyes.

(i win at transhumanism)

Run some numbers in contemplation of attempting to buy the house I'm living in.


In a display of fiscal responsibility that our government could do with copying, I am not actually going to commit to anything till the money is safely in my bank account. I'm old and ugly enough to know just how easy it is for the coffee to end up in your lap and on the keyboard instead of in your mouth, despite everything seemingly being in order. And spending money I don't yet have isn't in my vocabulary.

Tats No.1 Rule For Life: Keep your arse covered.

But naturally I like to dream. And since the moving to Hong Kong thing went on hold in favour of finishing my degree, and since finishing my degree happens about the same time as Dr Wheel's contract in HK finishes, it seems likely that I won't be flipping burgers in the Hong Kong version of McDonalds and instead will be here with a small pile o cash.

Previous musings have concluded that I want to do two things: buy some illusion of security, and have adventures. These are not mutually exclusive but this is somewhat of a zero sum game because of, you know, there being a sum involved. That sum equals a decent deposit on a house plus a bit extra. So I could feasibly do both. The question then becomes, how much of both do I want to do, and is the house I'm living in the best choice?

I talked with the landlords a while ago about this and they were amenable, so it'd be a matter of negotiating a price. I've run the numbers on deposit vs income vs what I'm already spending, and it's likely that I could do it but that the mortgage would be getting close to the top end of what I could afford.

The thing is, I've been paying X rent plus Y half-a-mortgage for 5 years, and this house has a flat attached that has been let for the entire time I've lived here. Polly and I have a pretty stable thing going on living-wise. The house is pretty sound and has all the things I want in a home - it's low-maintenance, sunny, warm and mostly dry (although I'd probably add a heat pump on the south side), and has off-street parking. I've lived in it for 2 1/2 years and know all its foibles and I still like it.

The way the numbers add up at current interest rates, depending on what the flat was leased for I'd probably be slightly better off paying such a mortgage than I have been just renting - mostly because of the extra I'll have through not paying the mortgage on Mum's house. It's not quite as close to town as I'd like but looking around at the equivalent (essentially 4 brm 2 bthrm), I'd have to lower my standards quite a lot to get the same nearer to town and the sublettability of the flat is a real bonus. Also, Crofton Downs is a developing area and the houses up the road are posh so it'll probably increase in value.

So, on face value it seems like a good plan, and would leave me with enough play money to get my eyes lasered (not negotiable), rebuild The Kid's computer, have a trip to see Dr Wheel, and put aside a little nest egg for having adventures when my degree is complete.

However, I'm flinching somewhat at the idea of a) being that much in debt and b) committing myself for the next 25 years, complete with projected reroofing, repainting and re-everythinging that seems to go with house buying. I could just bung the money on term deposit for a while but I've been thinking about this for a year already and most advice seems to be that rent = dead money, mortgage, while owie on the interest, equals progress towards a large asset.

I'm 41. By the time I paid off such a large mortgage I'd be retiring. And I'd be committed to earning X amount of money until that happens, and that's scary.


So I'm looking for a reality check here. Am I missing something? Should I do the dreaded open home thing to look at other houses that are comparable price-wise? My kid will be leaving home in the next few years, do I really need 3 brms with a flat attached (which is still a good investment regardless)?

TELL ME WHAT TO DO!

Comments:

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From:tatjna
Date:June 1st, 2011 11:05 pm (UTC)
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(the chicken and spaghetti sounds like more fun)
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From:t_c_da
Date:June 1st, 2011 11:37 pm (UTC)
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I would modify the sell the house, buy a smaller rentable place bit with a comment to the effect of be prepared to do that but review the options at the time as you may find a use for that now empty bedroom.

You worry about having a mortgage until retiring time? I'm past the official retiring age with 10 years to go on the mortgage (admittedly on a rental property not my home) and I'm not particularly worried as I can continue to work, probably for a long while yet as my brain hasn't rotted yet, and if I die, life insurance will deal with the mortgage leaving $WIFE housed and supported...
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From:polychrome_baby
Date:June 1st, 2011 11:20 pm (UTC)
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I'm getting to the point where I really wonder if home ownership is all it's cracked up to be. I mean, the idea goes -

You're going to be paying money to live somewhere anyway. So, if you're paying money, you might as well own what you're paying money towards. Then, someday this ownership will magically transform into asset because you can sell it!

The problems are thus -

Well, yes, you'll own it. You'll also own the upkeep. Which means you have to personally pay for all the repairs that will be made to that home forever or until you sell it.

Selling it = profit isn't such an obvious thing anymore. Especially when one is betting on an economy that is 25 years hence. (I don't know near enough about where you live to have any sort of idea, other than to know that the entire world is changing, and who the eff knows where anything will be in a quarter century at this point?)

Will you want to stay there after you do pay off the mortgage, or will you want to sell it? Will you have enough money set aside to continue to upkeep the home you then own, or will you have to take out a new loan to do such in the future?

I mean, on paper it seems reasonable to buy a place if that's truly where you want to be forever. If not, though... It's hard to say.

I do love the idea of it including a rental property, though. That makes things nice. I don't love the idea of it being at the upper limit of what you deem yourself able to afford. That always makes me nervous.
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From:tatjna
Date:June 1st, 2011 11:27 pm (UTC)
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You have many of the same concerns that I do. My brother recently had to reroof his house and while that's something that doesn't have to happen often, it's a big expense to have to pull money out of your arse for. And I'm terrified of that sort of thing (although I've been able to plan ahead and save for car maintenance these last few years so I'm getting better).

I'm also scared of the sheer size of a mortgage. Having had a small one for the last 5 years and seeing how slowly it went down vs how much went in interest was sobering.

The upper limit of what I can afford was calculating the payments based on the interest rate going up by 2% on what it is now, and seeing that the payments for that would be about the same as I'm currently paying in rent+mortgage while maintaining an ok lifestyle. I'm wary like that, I don't like being in debt eh?

I expect interest rates to increase because right now they're low, our economy is struggling and you're right, 25 years from now it could be worth nothing. I don't think I'll want to live there forever because OMG walking up that hill when I'm old Nooooo!

So thanks
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From:polychrome_baby
Date:June 2nd, 2011 01:12 am (UTC)
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Yeah. One of the things I seem to be enjoying about your journal being on my fl is that you seem to think in similar veins to me (but know some entirely different things).

I doubt I could come up with any argument that you hadn't thought of. :)

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From:tatjna
Date:June 2nd, 2011 01:30 am (UTC)
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I have noticed this similarity too, and I'm really fascinated by reading about your kids. ;-)

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From:vernacularity
Date:June 2nd, 2011 12:50 am (UTC)
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small thing: you say "committing myself for the next 25 years" well no or only kinda, cos if you turn around and sell the house in 5 years you cancel that out. (though of course if you sell in 5 years then you have been making payments based on 25 years so the amount of principal paid off the loan would approximately equal $100. or something.)

if your current income allows you to be paying rent for such a 5 year scenario (including the thing about no longer paying mortgage on your mum's house) then you are no better or worse off in that sense if you buy or don't buy.

however, what you did with the large chunk of the money in the meantime was stick it into a single asset. in the housing market. in wellington.

if you think you will get a decent return in 5 years on that chunk of money on that asset, well and good, that's what you do.

if you could get a better return on it by putting it elsewhere then yep-a-roonie that's what you do.

FINANCIALLY!

if you want to always have a place to come back to, then sure buy a house. But do you buy for the circumstances you would be in at that time?

I think the letted flat aspect is a side issue: if it adds onto the house price and then cancels itself out via rent, it's not really benefiting you and you always have a tenant just so you to get to live in the main house yourself.

I think you should:

-- at least LOOK at other houses in the price range you can afford.

-- consider doing something else with that money for the 5 years. at the least do the maths on a standard term deposit which is pretty sedate and low-return.




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From:tatjna
Date:June 2nd, 2011 01:06 am (UTC)
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If I put the money into a term deposit for 5 years I'd gain $23,000 in interest. The rates are lower for shorter terms.
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From:vernacularity
Date:June 2nd, 2011 01:38 am (UTC)
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i guess you take that as a baseline, and work out if the house is likely to get you more.

acknowledging you have to sell it to get it.

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From:tatjna
Date:June 2nd, 2011 02:25 am (UTC)
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So if I continued to pay rent for the next 5 years, I'd be down $52000 (factoring in the term deposit interest, otherwise it'd be $75000).

Using a principal vs interest calculator and some likely ballpark figures for interest and repayments, if I bought the house then in 5 years I'd be down $65780 (factoring in interest paid vs gains on principal of $40,000).

So if I'm figuring this out right, the house would have to gain in value by about $14000 for me to break even by selling in 5 years.

(i should also mention that the repayment calculations included the fact that my flatmate and tenant would be contributing, whereas my calculations for renting was based only on my share of the combined rent)

Edited at 2011-06-02 02:27 am (UTC)
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From:rivet
Date:June 2nd, 2011 04:14 am (UTC)
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I think Mike's advice is quite sound. If you like, I'm happy to show you my scenario calculations for my house (living in, renting out, renting out with professional management) that led me to move out. The difference was pretty clear!
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From:rivet
Date:June 2nd, 2011 07:09 am (UTC)
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The other thing, that you will be familiar with from recent experience, is that there are transaction costs in buying and selling houses. It would have to appreciate but $14K plus enough to cover listing, soliciting etc. So call it $18K to break even.

Another factor to consider is that right now interest rates are very low. When they come up, the cost of your mortgage increases, and so does the rate you can get for savings. In 2007, I was paying more than 9% interest.
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From:tatjna
Date:June 2nd, 2011 09:15 am (UTC)
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Whereas in 2007 I was paying 7% as we'd got a fixed rate before they went that high and when it ended last year the rates had dropped to close to what they are now.

I've calculated my projections on an increase of the rate because that's what I'd expect it to do, but I'd probably go for a capped rate for the first 5 years to take advantage of the current low ones.
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From:rivet
Date:June 4th, 2011 01:01 am (UTC)

factoring in interest paid vs gains on principal of $40,000

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Interestingly enough, this is exactly what I'll be helping users with in the job I'm waiting to hear back on. You're comparing the known return for a very low risk product (term deposit) with the projected return on a very high risk product (houses). What happens if you take out capital gains? I'd recommend rerunning the numbers using 2 different scenarios (or 3, if you want to dream about the 50% returns that Happy got). Run one at -5% capital gain, and one at +5%, which is slightly above inflation and probably a reasonable long-run average. Your answer likely falls somewhere between them.

A thing to think about is that capital gain and interest rates will rise and fall together. High gain and interest suck if you have a large mortgage and are beneficial if you have a lot of equity relative to your mortgage. I was on the wrong side of that myself, and it's cost me.
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From:tatjna
Date:June 4th, 2011 01:15 am (UTC)

Re: factoring in interest paid vs gains on principal of $40,000

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*nod* That sounds like a sensible approach.

Although my original numbers didn't include capital gain at all, rather showed what capital gain there'd have to be to break even at an interest rate of 7% (which I figured was a reasonable average expectation). $14,000 is under 5% capital gain, off the top of my head it's about 3%. A 5% loss would be $22500ish so I'd be down $87000ish factoring in the gain in equity staying the same - which it wouldn't if the value went down based on interest rates going down alongside it, it'd go up.

I'm a cautious bugger so I won't worry about projected 50% capital gain. ;-)

I expect the market and the interest rate to rise slightly rather than drop, and I think the $14000 is a reasonable cautious estimate of potential gain over 5 years. However the question is, would I be prepared to take the loss if it didn't? If I stayed renting I'd be down $52000 in that time, buying in a 5% capital loss scenarion I'd be down $87000. Am I willing to risk losing $35000 over 5 years? Good question.
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From:tatjna
Date:June 2nd, 2011 01:59 am (UTC)
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.. but still, we're currently close to the likely bottom of the market (for Wellington anyway), so increases in value are more likely than decreases at this point and it seems to me that as long as the asking price is reasonable for what it is and the zombie apocalypse doesn't happen there is likely to be a modest capital gain over the next 5 years.
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From:vernacularity
Date:June 2nd, 2011 03:56 am (UTC)
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yeah I'm thinking there's a lot of people around surprised that markets haven't risen, but then again refer who is in Govt, and the IMF declaration that our houses are too expensive.

Hey, my house has increased approx 200k in the um... 9 years that I have had it. ie about 85%

of course, up to the previous valuation it had been a 100% increase ie 230k. and then last year happened. so anyways....
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From:vernacularity
Date:June 2nd, 2011 03:58 am (UTC)
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i would also think about any other changes over the next 5 years, such as transport costs and the relative value of proximity... ugh. so as you can see you throw a dart at the board, having painted whatever you like as factors into the various points zones.
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From:rantydave
Date:June 4th, 2011 04:52 am (UTC)
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We missed the bottom by about 18 months - we're currently 5% up on the bottom of the market but (still) 5% down from the peak in 2007.
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From:rivet
Date:June 2nd, 2011 04:02 am (UTC)
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And my house in central wellington has lost $8k in value since 2007, while also costing me an arm and a leg. It's had $4K in insulation, $4K in heatpump, and is currently getting a bargin!$12K paint job. Miscellaneous over the last year has included plumbers x3, roofers, a glazier and a locksmith. A new roof is in the forseeable future, but I don't want to think about that.

I would not get into home ownership at this point in my life if I hadn't already committed to it.

Edited at 2011-06-02 04:06 am (UTC)
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From:tyellas
Date:June 2nd, 2011 01:36 am (UTC)
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Agreeing with other posters who have said, yes, definitely look at other places for sale. Based on this you may decide:
* To buy a different place than where you are living.
* That you can bargain the price on the place where you are living down.
* To stay a-renting.
You probably already know that if you really want a place you will get a builder's assesment, and you can ask them, "How 'bout that roof? That paint job? What major upkeep am I looking at here?"

I grumble about my rates and the costs of home maintenance. I've run some math that showed me I would have about $2000 more in my pocket annually if I was renting. That's an overseas trip! However, 5 years after I bought, rents in my area are catching up to what I'm paying on my (main) mortgage.
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From:thesecondcircle
Date:June 2nd, 2011 03:14 am (UTC)
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Option 1: you pay rent and invest the money in something safe
Option 2: you pay mortgage and 1% of the price/year maintenance

Option 1: you gain the security of money in the bank and the ability to relocate more easily
Option 2: you gain the security of a long term home base and an asset for your old age and to pass on to your son

Note that I don't mention resale value. That's because I don't think it's wise to consider houses as investmentsthat you expect to pay back a giant return. Plus a house is the least liquid investment ever. Better to think in terms of cost outlay and security/flexibility.

I agree that you should shop around.
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From:rantydave
Date:June 4th, 2011 04:54 am (UTC)
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Houses are reasonably liquid, considering the sums involved. You should try selling a company :)
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From:clashfan
Date:June 2nd, 2011 03:15 am (UTC)
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Just today read this article in Slate: http://www.slate.com/id/2295851/

Of course, it is heavily US-centric and some of the observations may not apply to NZ at all. The bit about tax codes especially.

However, buying a house is not an investment. It is a place to live that you can do whatever you want with (within limits of building codes and such). Housing markets can be volatile; my parents lost their house to foreclosure last year. If a sense of permanence is important to you, then buy. If you like the idea of painting it however you like and replacing the countertops with something better, consider buying.

If being responsible for everything that goes wrong scares you, don't buy. If you want to be free to move in the next 5 years, don't buy--especially if you don't want to be an absentee landlord. You're probably handier than I am, but if you don't want to shell out for a plumber, be prepared to fix the kitchen sink drain on a moment's notice.

If you lived in the US, I'd feel more comfortable giving you specific financial advice. But I say sock it away in something that's a mix of safety and risk/reward. Keep some in a more liquid form, in case of catastrophe. As you get closer to retirement, move your investment mix more to the safety side of things. Them's my thoughts.
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From:danjite
Date:June 2nd, 2011 03:32 pm (UTC)
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Thinking of home ownership in the next few years.

Just last month our rental agent asked if we would like to re-up on our lease and I near-instantly went into a round of having to search for and find a heated and insulated rental and move again PTSD.

I hate renting. I hate the insecurity of maybe having to move because someone has a whim. I hate the possibility of rent increases and not being able to do what I want with the place I live, including acid-green carpets if I can afford them.

That said, I and my partner both have trade experience and like hacking on houses, so we'll buy a do'er upper and lose a year or two or three of our lives to that mad activity, have tons of horrifying expensive surprises and hopefully wind up making more than minimum for all our efforts.

But it will be ours.

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From:tatjna
Date:June 2nd, 2011 06:42 pm (UTC)
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I am a fan of acid green carpet theory also. I'm kind of used to renting and its vagaries, but yeah - I always feel limited by what I can't do in a house that doesn't belong to me.
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From:danjite
Date:June 2nd, 2011 07:20 pm (UTC)
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Acid green carpet is definitely second place for me to the getting-it-as-perfect-as-I-can-given-I'm-renting and getting evicted so the owner can bulldoze it/ let their nephew move in/ raise the rent beyond reason/ insert landlord shite here.

I am just getting too old for the eviction, search and move again shit.
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From:(Anonymous)
Date:June 4th, 2011 12:12 am (UTC)
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I'd talk to Jodi very carefully about the numbers, it's not so straightforward as rent == dead money.

There are a *lot* of investment options other than property, and they all have their own risk/return/flexibility profiles. Mortgages are static, and they're a commitment over a timeframe I don't think is humanly possible to really grok (we end up modifying our behaviour to suit our mortgage, which isn't necessarily in our interests).

Cynical Will says that buying a house is a thing people do because it's a thing people do.

-W
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From:tatjna
Date:June 4th, 2011 12:27 am (UTC)
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Cynical Tats tends to agree, hence the questioning. One of the questions is "Do I want more money, or do I want a thing?" And I think the answer to that is I do want a thing, but don't want to sacrifice my current lifestyle to get it.

Which narrows my options house-buying wise, but doesn't make it an impossibility. But yes, I'll have a talk to Jodi. Having been a homeowner already I'm aware of their potential moneypit-ness, and that definitely has to be factored in to any calculations. I've been advised that 1% of value per year is a rule of thumb but I'm wondering if that's realistic based on what I've seen. The Tawa house was cheaper, but Jodi's has been more expensive I suspect. Hmm..
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From:(Anonymous)
Date:June 4th, 2011 01:00 am (UTC)
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Yup. The thing that surprised me talking to Jodi is that interest+upkeep on a house isn't guaranteed to be less than rent on the same house, so the amount of dead money spent doesn't necessarily differ.

You always have the option of renting, sticking the money you'd spend on principal in the bank instead, and thus having a more reliable path to sitting on a large asset. You don't end up with a house but you do have money that's worth more than the amount of house you'd have accrued in the same period.
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From:tatjna
Date:June 4th, 2011 01:18 am (UTC)
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This is true at the front end of a mortgage. At the business end (the last 10 years), you're paying more to equity than to interest, at which point the 'vs renting' advantages become more obvious.

What I'm getting out of this mainly is that buying a house as an investment is really only worthwhile long term, and to bail in the first 10 years means probably copping a loss.
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From:rantydave
Date:June 4th, 2011 05:01 am (UTC)
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There is nothing wrong with renting. Your rent is quite possibly less than the interest portion of the mortgage on the same place and you almost certainly come out ahead once one accounts for maintenance etc. When you rent you can bugger off and have adventures with little or no worry. Or even bugger off entirely. Why, then, would one buy a house?

* The place you'd like to live in is not available to rent.
* You believe the capital value of the house will rise in the period where you own it.
* You don't want to (or more or less can't) have to find a new house based on someone else's whim.
* The ratio between rents and mortgage payments changes.
* Otherwise you'll piss the money away and be left with nothing when it comes time for retirement.

Don't talk to me about retirement. I'm trying not to think about it.
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From:wildilocks
Date:June 11th, 2011 10:48 am (UTC)
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I suspect you're less than keen to hear my opinion, but since you don't appear to have unfriended me here I'll make some observations:

All investments are risky. Housing, long term, is traditionally one of the less risky options, and anyone who says it's high risk has little understanding of risk.

However. We are living in particularly strange times: times which have seen the average proportion of income spent on housing increase drastically in the last 20 years, and the debt to income ratio reach long-term unsustainable levels - due in large part to over-investment in housing.



"In March 1990, the ratio of Debt to disposable income was 44.7 per cent with housing debt being 32.2 per cent of disposable income and in terms of debt carried by owner-occupiers the ratio was 27.6 per cent.

By June 2010, these ratios were 159.2 per cent (total), 141.6 per cent (housing) and 99.1 per cent (owner-occupied housing). So most of the debt is owed to banks, usually for dwelling mortgages, with the growth facilitated on the supply side by the machinations of the financial engineers in the form of securitisation. The misnomer for the aggressive behaviour of these engineers is “financial innovation”."

This is AU, but the page it comes from references NZ in places too.

Many folks who bought houses any time from before the early 1990's to the mid 2000's did quite nicely, or are sitting on a pretty small mortgage. I realised significant capital gain, and invested it in my business.

With the loss in value over the last few years in several markets, there has been a slight correction: but still only slight, given the figures above - and NZ, with the lack of capital gains tax and less superannuation (Kiwisaver) is in a generally worse position, with housing expenditure as percentage of income almost certainly worse in many places.

Hasn't stopped me from continuing to try to buy a place here though, even knowing all this. Everyone's going to be in the same boat, and it's going to be a strange one, great depression styles, and I am looking at the very low end of the market (which means I'm constantly missing out on places, as I can't put too high an offer in.)

I would say be very careful about going for something at the limit of your spending ability, if you do decide to buy.... but then I've always been very cautious and gone for small places, in poor condition, at the lower end of the market that needed huge renovations. That's not everyone's idea of fun, even if it has been mine, and probably will be in future.

I hope you are happy, whatever you decide.

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From:tatjna
Date:June 11th, 2011 11:12 am (UTC)
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Thanks for that, it's useful advice.

And, I haven't unfriended you anywhere. I stopped following you on Twitter because our communication style doesn't lend itself to 140 characters and I want to keep liking you. ;-)
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