Wednesday, July 27, 2011

Why we're not that stupid

Over the past couple of years, there is no doubt a change in the air. On its way out is the idea that you must get a house as soon as possible. So is the idea that house prices always go up. Generation Y is getting more savvy with their money and have come to realise a debt trap in mortgage is not necessarily the wisest move. Especially when house prices have been stagnant at best.

Many Australians don't realise that we are now home to the highest interest rates in the developed world. Whilst the interest rate is not 17% like in the 80s, high interest rates mean that we need to pay more than everyone else in the world when borrowing money.

However, the flipside is that we receive more interest revenue when we invest our money instead. For every day that the house prices stay flat, people who are owning houses who could have deferred their decision to buy, are losing money through interest payments. Times like these, many first homebuyers have decided to tuck their savings into high interest accounts so that later, they can put in a larger deposit and pay no interest in the meantime.

For example, if you invest a savings of $80,000 in a high interest account which pays 6.51% and buy a place in a year's time, you would have an extra $5200 to add towards your deposit.

So the decision not to buy can be the best thing you can do but of course, homeowners who are seeing their house prices drop from record highs would not be happy with this. But you have to do what's best for yourself.

Edit: An article recently said that the median house price for WA dropped $33,000 over the past year. If you  took out a loan of 80% of a $500k house a year ago, assuming your house dropped $33,000 in value,  you would have also paid $28,000 in interest. This might not be completely scientific but $51,000... that's a lot of money to lose in a year!

1 comment:

Richard Self said...

Even though you have not bought a house and saving interest repayments you will still be paying rent or living at home or paying board. Yes you might be sharing this rent with friends or a partner but your quality of life is not the same if you are living at home and saving or living with friends and savings money.

So by buying a property you are paying mortgage repayments. If you were to rent that exact home now the mortgage and the rent payments would be closer than ever. Also when the market moves again and it will, you are already in the market and get the benefit of sitting back and watching your investment grow. You will always need a place to live, why not pay it off slowly and create some equity. It will go up in value, if you are buying to sell in one, two, or even three years than this is speculative and this sort of buying and selling real estate will catch you out anyway and you would probably be better off renting. If you are buying for the long term than who cares if the value of the home drops a little now but over 20 years doubles and triples, don't say this wont happen because this is more than a certainty.

So I find it hard to believe that you are 29 years old and have not bought a house. Why not? why not start with a unit or apartment and compromise and then step up along the way. The longer you wait you will miss out, the market will go up again, and no the market will not drop like the US or Europe. If you honestly believe this you are truly living in hope.

Thanks for the opportunity to leave a comment on your blog.

Richard Self.

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