Friday, February 5, 2016

How you can lose $40k buying a typical Perth house

Perth is getting close to a recession according to the National Australia Bank, with their predictions that Perth house prices will drop 3-5% in 2016. So if you are saving for a house and the house prices do fall in 2016, what would that mean for you at the end of the year if you were to save your money instead?

Assuming that you were not going to earn anything in 2016, if you have $150,000 in savings earning at 3.0%, you will earn $3,500 in 2016. If you were aiming for a house at $450,000, assuming a 5% drop would mean it is $22,500 cheaper at the end of the year.

If you bought the house at the beginning of the year at $450,000, and you put $150,000 savings to the mortgage and repayment, your $300,000 borrowing would have cost you $13,500 in interest.

  $22,500 capital loss ($450,000 minus 5% drop)
+$13,500 interest repayments on $300,000 borrowing
+$  3,500 foregone interest on $150,000 saving

= $39,500 difference between buying a house NOW and buying it in a year's time IF house prices were to drop 5% and interest rates were to remain at for example, 3% for savings, 4.5% for a home loan.

Thanks to JD's comment, we should also add a typical situation for those that are renting. If you were renting a place for $400/week, moving in a year earlier would save you $20,800 in rent.
In that situation, the difference between now or 12 months later drops to $18,700. Everyone's situation is different but this is just to highlight that you shouldn't ALWAYS assume that the right decision in real estate is to buy now. Unless you're a real estate agent.

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