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The real cost of home ownership in Australia

Morningstar News Team  |  26 Mar 2019Text size  Decrease  Increase  |  
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Key points:

  • They say owning a home is the best investment, but is it really?
  • Don’t believe the hype: there are more stable, less time-consuming and potentially much more profitable avenues for wealth creation
  • Taxes, mortgage fees, council rates, maintenance and insurance can be hidden but significant costs

Rent money is dead money. Property always goes up. You know them all. We’ve heard them at every BBQ for the past 20+ years. Us Aussies are property obsessed. For many, owning an apartment or house is not only about having a home. It is also the main (and often the only) way we intend to build lifelong wealth. Whether or not we use the term, it’s not just a home, it’s our biggest investment.

This strategy has worked well so far for home-owners in Australia. Mostly. For the past 20+ years property investment has been a brilliant trade. Sure, there are a few leveraged-to-the-hilt investors who’ve lost their shirt trying to flip 3-bedders in Karratha, but they’ve been the exception. It’s been mostly good news.

Still, as Warren Buffett is fond of saying, you can’t drive a car looking out the rear window. So it is with investing. Just because something has been a great investment, doesn’t mean it will be.

And many people grossly overstate their success by glossing over a whole host of real costs that come with buying a property. Let’s dig in.

Buying a house

Let’s imagine that you’re buying a house in 2018 in Sydney. With median house prices reaching $1.15m [1] in 2017, let’s say you nabbed a bargain at $1m, and that you managed a 20 per cent deposit – $200,000. Now you’re about to be hit with the bills. Strap in.

First, the legal fees – expect to pay around $1,800 [1]. You’ll need to pay a mortgage establishment fee ($450 on average [2]), valuation fee (average $200 [3]), transfer fee ($219 [4]) and mortgage registration fee ($109 [5]). Oh, and $40,768 in stamp duty [6].

Maintaining a house

Now that you’re sorted with a property to your name, it’s just a matter of paying off the mortgage. At an average of 4.42 per cent [7] interest, this will cost you $4016/month in (principal & interest) loan repayments. That can be tough, but it's all you have to do, right?

Wrong.

What is often forgotten is that buildings need upkeep. One rule of thumb for calculating maintenance costs is an average of 1 per cent [8] of the value of the property per year, so in our case, you’re looking at setting aside around $10,000 per year in order to keep the house in good repair. [9]

Then there are local government taxes and rates (averaging $775/year in NSW), home and contents insurance ($2116.58/year on average [10]), and your ongoing mortgage fees (up to $395/year at most major banks [11]).

Not to mention that predictions are that home loan interest rates are expected to rise over the next few years [12]. Feeling skint yet?

Selling a house

Let’s assume that you own the property for seven years, and that your property’s value grows nicely, at 7 per cent per year, over that time (even though there’s a prediction of a fall [13]), and you sell in 2025 for $1.6m.

Real estate agents’ fees are your big cost here, with NSW average commissions at 2.46 per cent [14] plus GST – $39,360. Then there are more legal fees and a possible mortgage exit fee, depending on your mortgage type [15]. Yep, everyone seems to get their pound of flesh or three.

So, what do you end up making?

Despite an impressive sale price, a substantial amount of "profit" is eaten up by paying over $6000 per month to maintain the asset and service the loan.
So, what do you end up taking home as profit?

Let’s look at all those figures in a table:

Table 1: Home ownership - Costs over 7 years

Real cost of home ownership Australia 1

Table 2: Home ownership - Profits after 7 years

Real cost of home ownership Australia 2

Your initial $200,000 has turned into $395,010. In today’s dollars, which adjusts returns for inflation, that’s $328,489. A handsome gain of 64 per cent. This is great. But it can be bettered. Especially when you remember that none of this accounts for the time spent on maintenance and admin, the possibility of the housing market falling, or the opportunity cost of having all your money locked away.

Is there another way?

Now imagine that instead of buying a house, you use a different strategy to build wealth - starting with the same $200,000 (your home deposit) and using the same $6000 per month (your monthly costs).

In this new scenario, you invest your initial $200,000 in an investment portfolio and rent a similar house, in the same suburb. On a house worth about $1m, you’ll likely pay rent of around $3000 per month [16]. So that frees you up to top-up your investment portfolio by an additional $3,000 a month. For seven years.

Invested in  a growth portfolio you could end up with between $432,920 and $530,089 [17] after fees and taxes. (Again, in today’s dollars, which accounts for inflation.)

Of course, you should experiment with the assumptions to explore different scenarios. If property prices rise by more than 7 per cent per year, the outcome looks better for home ownership. If it falls, it looks worse.

However, there’s a big gap between $328,489 and $432,920—the potential lower bound of the Growth portfolio forecast.

Investing in a managed portfolio also removes the time, stress and uncertainty of home ownership, since a diverse investment portfolio is managed by experienced investors and doesn’t rely on a single market succeeding in order to grow.

Best of all, you don’t have to wait until you’ve saved $200,000 to start.

Resources

[1] domain.com.au: Sydney median house price hits $1.15 million: Buying becoming ‘out of the question’
[1] www.finder.com.au: The simple guide to conveyancing
[2] [3] finder.com.au: Home loan fees: Know what you might have to pay
[4][5] finder.com.au: What is stamp duty? Free calculator and exemptions guide
[6] realestate.com.au: Stamp Duty Calculator
[7] canstar.com.au: How much will your mortgage really cost?
[8] thebalance.com: How Much Should You Budget for Home Maintenance?
[9] smh.com.au: How much your Sydney council rates will increase by in 2018
[10] canstar.com.au: What Does Home Insurance Cost in 2017?
[11] finder.com.au: Fixed rate home loans comparison
[12] smh.com.au: How much your home loan repayments could rise this year – and how to stop it
[13] abc.net.au: Real estate 'boom is over' as most experts tip property price weakness in 2018
[14] openagent.com.au: Real Estate Agent Fees in NSW
[15] canstar.com.au: Home Loan Fees You Should Know About
[16] SQM have great property data. For Sydney rent, yields are between 2.8-3.8%. I’ve assumed ~3.6% to use round numbers for the rent.
[17] These figures are a forecast and not a prediction. The projected balance are estimates only, the actual amounts may be higher or lower. This forecast is general information only and does not consider your circumstances.

Please direct comments about this article to the News Team.

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