Don't bet your house on it...but it can be cheaper to buy . . . - 2009-02-07 23:27:47
Figures compiled by The Sun-Herald show that repayments for a median-priced property of $536,000 in Sydney - taking into account the most recent rate cuts - are $592 a week. A similar-priced property can rent for between $450 and $550 a week.
If the buyer takes out an interest-only loan, the repayments fall to $461 a week - about the same as, or cheaper than, renting.
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Also, Sydney house prices fell 4.2 per cent last year, while landlords increased rents by 16.9 per cent, according to APM data.
Past performance is no guarantee of future performance and all that, but lets just say it is.
Let's say you sign a 1 year lease, and then rents jump 16.9% for the second year when you sign again. And your rent starts at $461. Then in the two years you have paid 461*52 + (461*1.169)*52 which is about $52k.
Now say you take the no interest loan, then your payments for those two years are 461*52*2 which is about $48k. Woo woo, you're $4k ahead. Oh except at then end of the first year the house had dropped from being worth $536,000 to $513,488. And at the end of the second year to $491,921. So call it $492k. So you've lost $44k in house value. So your real cost of ownership was $92k or $40k more than renting for the two years. Don't forget to add the maintenance costs over those two years, the extra insurance costs, and so on.
And that's assuming a 16.9% increase in rents, which seems like a rather unsustainable rate. And only a 4.2% drop in house prices - which at least for the US is laughable (and I suspect Sydney has a just as bad if not a worse bubble)...
Of course interests rates could fall further, and I'm assuming an interest-only loan is going to have an adjustable rate. But there's no way they are dropping far enough to to get that interest only payment down to the $80/week it'd need to be to match the rental costs - that'd be about 0.75%...