The real losers from lower rates Ironically, buying shares is one way of benefiting from lower interest rates.

For almost two years now investors have been taking out more mortgages than first home buyers.

When the Reserve Bank of Australia cut interest rates last week, we saw the traditional fanfare over winners and losers from the decision.

For the couple paying off a mortgage on a house they bought ten or twenty years ago, it was all upside. A lower rate reduces those interest payments and puts upward pressure on house prices, making them richer on paper and - due to lower interest payments - quite immediately boosts their spending money (or means they can pay off that loan more quickly).

On the other hand, retirees living in their own home off the income from term deposits, are seen as the victims. Lifelong savers, these people have too much cash to deserve the pension, but can't afford to live off the interest. Worryingly, they are eating into their principle. They are the first to receive our sympathy.

That's fair enough, but we hear a less about the impact on young adults. Still studying, or at the beginning of their careers, they are saving for a house deposit, often with a partner or spouse. The only problem is, their savings don't earn more than 3% in the bank, and - even putting aside a generous portion of their moderate pay package - house prices seem to outstrip even their best efforts at saving. 

House prices across the 5 largest capital cities are up 8% in the last year. Sydney has seen faster growth, with prices up 14.2% in the last 12 months, according to data from CoreLogic. There's little doubt this growth has been assisted by successive interest rate cuts. As a result, many young couples working in east coast cities, hoping to build their own nest, face little prospect of success in that regard. At least, not without some help from Mum and Dad.

Unfortunately, this leads to inequitable outcomes. Since support from Mum and Dad is now important in getting into to property, young couples who don't get that help are faced with significant hurdles to home ownership. This is particularly true in Sydney or Melbourne.

Adding insult to injury, some say that lower interest rates are to their advantage. After all, they are told, now they can afford to borrow more money. While true, this fact is hardly good news. It isn't just first home buyers who can afford to borrow more. It's everyone, including investors. And those same investors also benefit from the tax break afforded by negative gearing. 

Indeed, for almost two years now investors have been taking out more mortgages than first home buyers. For the entirety of 2015, first home buyers have accounted for less than a third of new Australian mortgages, according to data from the Australian Finance Group. That's a strong indication that investors are crowding first home buyers out of the market. 

Are there better options?

With record low interest rates offering a paltry return on savings, it is increasingly attractive for would-be first home buyers to postpone that ambition and invest in shares instead. With shares in high quality companies yielding considerably more than term deposits, the benefits of compounding are not out of their reach.

In fact, sharemarket investing is one area where a younger generation may have an advantage because statistics demonstrate that the length of time owning shares is one of the most reliable indicators of overall returns. With relative youth comes a relatively long time horizon during which a high quality business with honest and competent managers can generate value for its shareholders.

Foolish takeaway

Ironically, buying shares is one way of benefiting from lower interest rates. By investing in a sensibly diversified portfolio of shares, a young couple can position themselves to benefit from lower interest rates without taking out a 30 year loan. While it's no replacement for owning their own home (which is, after all, where the heart is) it may well be the most prudent decision. After all, a recent study from New York University found Sydney housing to be the third-least affordable in the world, with Melbourne not far behind at sixth.

http://www.smh.com.au/business/motley-fool/motley-fool-the-real-losers-from-lower-rates-20150511-ggyqca.html

Buying a Home

Buying a Home Vs Buying an Investment Property & Renting

Renting vs. Buying a home. Isn't buying always better than renting?

Renting vs. Buying (detailed analysis)






CNN Weekend Shows : Should you rent or buy a home?

The Five Year Rule for Buying a House

by THURSDAY BRAM 

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When I first considered buying a house, my entire family got involved. I have the luck of being related to real estate agents, investors and other experts that are more than happy to give advice about buying a property — even before you ask.

The first thing they asked me was exactly how long I expected to stay in the house. Most people don’t know these sorts of things for sure, but we wanted to make sure that I’d own the house for at least five years.

The Upgrade Cycle

It definitely varies by geographic area — if not by specific neighborhood — but a lot of folks in my area will buy a townhouse or condo as their starter home. After about three years, they’ll start looking for a bigger place to upgrade to, either a bigger townhouse or a standalone home. Depending on the family, that upgrade cycle can go through a couple of times as people work their way up to a house that they are happy with and is big enough for their family.

The thought seems to be that if you’re making a little more money every year, by three years out you’ll be in a position to afford a bigger house. And everyone knows assumes that buying is more cost-effective than renting — as long as you’re paying down the principal on your mortgage, you’re going to come out ahead.

But with an upgrade cycle of about three years, you’re actually losing money.

The Five Year Rule

When you purchase a house, the general rule is that you want to be sure to be in the same location for at least five years. Otherwise, financially, you’re probably going to take a hit.

The first hit is your closing costs. Every time you go through closing — buying and selling — money hits the table. Depending on where your house happens to be, the buyers and sellers pay different amounts, but everyone pays something. We can easily be talking about thousands of dollars and limiting how often you have to pay out that kind of money is always a good idea.

But you take a second hit when you look at your mortgage statement to see exactly where those monthly checks you send in are going. The way mortgages are structured, you pay much more interest in the first few years that you own a house. Usually, it isn’t until you’re about five years into paying down that mortgage that you’ve made enough progress on the principal that the math actually works out that you’ve gotten a better deal than paying that monthly check to a landlord.

David’s Note: When you take out a mortgage, you are paying an interest rate on what you owe. So, in the first year, when the principal is highest, the interests you need to pay is the highest as well. However, since the monthly payment is the same through the loan (at least with a fixed rate mortgage anyway), more of the payment will be used to cover the interests payments, and therefore less goes towards the principal. As your principle goes down, your interests payments will go down, leaving more of your check to go towards the principal.

If you can wait at least five years to move, you’re in a better position to be ahead of the game.

Defeating the Five Year Rule

Five years is a generality. If you add in a couple of other factors, you can make buying a house that you don’t plan to stay in long-term a better choice.

The biggest factor is how much you’re going to pay on your mortgage. A lot of people buy as much house as they can afford, according to what lenders offer them. That’s usually the upper end of what you can financially manage. If, however, you buy at the lower end of what you can afford and make extra payments, you can pay off a bigger chunk of the principal. You need to run the numbers for the specific house you’ve got your eye on, but you can often come out ahead.

You may also consider buying a house that you won’t stay in for five years — but that you also won’t turn around and sell. It’s not out of question to purchase a home, start paying it down and fixing it up so that you can turn around and rent it out. You do need to be careful that you’re choosing a house that you can afford even if you don’t have a renter, on top of a mortgage for your next home. There are plenty of other arrangements that can work out similarly, but you need to study up on real estate before making such a choice.

But if you’re buying just on the basis of what the bank says that you can afford and you don’t want to think about it, stay in the rentals until you’re ready to spend at least five years in the same home.

David’s Note: Here is a quick and dirty formula that you can use to help you figure out whether it’s better to buy or sell that works with any duration of ownership. Try to determine the answer to: Seller and Buyer Agent Fees When You Sell + Purchase Price + Maintenance Cost for the Time of Occupancy + Interest Paid on Mortgage + Investment Gains from Your Down Payment + Taxes Paid Such as Property Tax + Closing Costs – Selling Price. This number could come out negative or positive, but if it’s lower than the rents you would have paid during the same time frame, then you would be better off buying. If the number is higher, meaning that the selling price wasn’t high enough to cover all those costs, then renting would be the more cost effective choice.

Of course, the big question mark is your selling price, which you sort of have to estimate. Also, note the obvious that the higher the selling price, the more buying makes sense. The five year rule is actually pretty arbitrary, but if you assume that the long term trend of real estate is up, do you see why buying makes sense the longer you stay in the home?

http://moneyning.com/housing/the-five-year-rule-for-buying-a-house/

Tip: Overpay your mortgage if you can.

Mortgages

The record low Bank Rate has been the saving grace for many households. And it is likely to be a saviour for a good while yet. The dire state of the economy has increased the likelihood that it will remain at 0.5pc for the foreseeable future – perhaps even until 2014, many economists suggest.

However, the downside for borrowers is that house prices are falling and they have done so for 10 months consecutively, according to Land Registry data. It is the price slide that borrowers need to consider when applying for a home loan.

Check out the lender's standard variable rate (SVR) before falling for a cheap two-year deal, as you could end up paying more over the long term. Once the deal is up, you could be stuck on a lender's high SVR for years, if prices have fallen and erased any equity you may have had in your home. This will make it difficult to remortgage.

Ray Boulger of John Charcol, the mortgage broker, suggested that if you were already on an SVR of 3pc or less, you should stay put. He added: "If you want to opt for a fixed-rate deal or a tracker mortgage, don't consider a two or three-year deal."

Tip: Overpay your mortgage if you can. Based on taking out a 25-year home loan of £100,000, overpayments of £300 a month would pay it off 12 years early. You would pay back £123,084 rather than £146,988 – a saving of £23,903.

http://www.telegraph.co.uk/finance/personalfinance/investing/8932939/Eurozone-crisis-surviving-the-second-credit-crunch.html

Global house prices hit by credit crunch and eurozone crisis but the rich are OK

By Ian Cowie Your Money Last updated: December 2nd, 2011

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House prices could soon start to fall around the world as a result of the credit crunch and eurozone crisis, one of the biggest global estate agents has hinted.

Knight Frank, which operates in 43 countries, across six continents and claims to have sold property worth US $817bn or £498bn last year, can scarcely be accused of talking the market up. It reckons the average house price edged higher by only 1.5pc last year – little more than the margin for error across such a large sample.

The Knight Frank Global House Price Index includes fast-growing emerging markets where double digit increases were widespread until recently, but even these constituents showed more sluggish growth in the third quarter of this year.

As a result, the index remained flat for the last three months. Residential analyst Kate Everett-Allen said: “Looking forward, house prices are likely to show little improvement in the final quarter of 2011, given that much of the unravelling of the eurozone sovereign debt crisis took place post-September and has yet to be reflected in the index results.”

More than half the 51 countries covered by the index – which is based on government or central bank statistics – showed falling house prices during the last quarter. Hong Kong topped the global property table, with house prices 19pc higher than a year ago. The only other countries to deliver double digit gains over the same period were Estonia (14pc);India (14pc) and Taiwan (13pc). Mainland China lagged in sixth place with growth of less than 9pc with fears of house prices falling by 20pc next year.

At the other end of this year's global index, Ireland showed house prices falling furthest. The average was more than 14pc lower than a year ago,with some properties being offered for auction with asking prices of only £18,000. Russia was second from bottom of the table with prices nearly 11pc lower, following Ukraine (-8pc) and  Cyprus (-7pc). The latter Mediterranean island is popular with many British pensioners because of low rates of income tax on retirement income.

Britain ranked 30th in the table with an annual decline shown as just 0.5pc, despite this week’s figures from the Land Registry, based on tax paid by homebuyers, that show prices fell by 3.2pc. Britain’s sovereign status outside the eurozone has not protected it from global economic gloom. Ms Everett-Allen said: “With politicians seemingly helpless to get to grips with the eurozone debt crisis, this has reawakened fears of a double dip recession, not just in Europe but around the world. Unsurprisingly, this economic uncertainty has been reflected in the performance of the world’s housing markets.”

America ranked 39th in the table with an average decline in American house prices shown at 3.9pc. Obviously, the average price changes conceal wide variations at either extreme. Knight Frank’s research suggests luxury property is holding its value better than more modest homes, as the global rich continue to regard property as a safe haven for capital preservation while the squeezed middle and poorer people bear the brunt of tax hikes and government spending cuts.

http://blogs.telegraph.co.uk/finance/ianmcowie/100013552/global-house-prices-hit-by-credit-crunch-and-eurozone-crisis-but-the-rich-are-ok/

The housing affordability flaw

The affordability flaw
MARIKA DOBBIN
May 24, 2010
This time last year, houses were at their most affordable in eight years, but things are different now: affordability in Melbourne has crashed.

A SHEET of paper posted outside a shop in Victoria Street, Abbotsford, says a lot about the housing market.

''I buy houses and pay $20,000 more,'' it reads.

The words, scrawled and underlined in black texta, speak to the edge of panic about rising prices that has pushed buyers to extremes in the past year.

Affordability in Melbourne's housing market has crashed in spectacular fashion, according to the HIA-CBA First Home Buyer Affordability Report last week.

Although in the first quarter of 2009, houses were at their most affordable in eight years, things are very different this time around.

Melbourne led a national deterioration in affordability in the March quarter, with a 16 per cent decline in just three months and a 33 per cent drop overall since last year's purple patch for buyers. The index is calculated by taking into account house prices, interest rates and factors such as the removal of the first home buyers boost.

Senior economist Ben Phillips said further interest rate rises in April and May would probably mean affordability would plummet further in the June quarter, to match the record lows seen in 2007 when interest rates were above 9 per cent.

''Housing affordability will once again be a key issue in the mortgage-belt regions of Australia,'' he said.

''We are yet to see the required level of co-operation between all levels of government to deliver critical housing infrastructure.''

Making things worse for first home buyers is that most of Australia's lenders show no signs of easing strict criteria that have made it difficult to get a sizeable loan.

As prices have gone up, so have loan-to-value ratios.

The loan-to-value ratio refers to the amount of money borrowed for a property compared to what the property is worth. For example, if a property is valued at $300,000 and a buyer borrows $270,000, the ratio is 90 per cent.

Adjustments to maximum ratios are one of the main devices financial institutions use to increase or decrease the amount they lend, alongside interest rates and fees.

In May, there were 31 less loans available of, or above, a 95 per cent loan-to-value ratio than in February, according to financial comparison website RateCity.

But it is not just in the mortgage belt that the high expense of housing is making life difficult. The ripples extend far and wide, even to those outside the market.

Victorian Housing Minister Richard Wynne last week was called before a public accounts and estimates committee to explain why the wait-list for public housing blew out to almost 40,000 people in March, having increased by 1013 in just three months.

There are now almost as many people waiting for government accommodation as there were in 1999, at the end of the Kennett government era.

Mr Wynne told the hearing that for the past few years the private rental market was the tightest the state had seen.

''And whilst the market has eased a little bit … there's a direct correlation between vacancies in the private rental market and the public housing waiting list,'' he said.

Mr Wynne said government interventions, including the expected delivery of 3800 new dwellings under federal social housing and economic stimulus money, and thousands more affordable rental properties thanks to the National Rental Affordability Scheme, would make a difference to supply.

Whether or not those goals are realised, conditions for those at the margins do not appear likely to improve any time soon.

However, it is not all bad news.

There are signs that Melbourne's property market may become a friendlier place for some buyers as winter approaches.

Auction clearance rates before Anzac Day were as high as 87 per cent, but have tapered off slightly since then. Last weekend it was 75 per cent, the lowest since the opening auction weekend of 2009 on March 21, according to the Real Estate Institute of Victoria.

Sales results have been the most patchy at the very top, a price segment that set the market on fire with a series of record-breaking results late last year.

Of course, there is no point mentioning clearance rates without taking into account the level of stock, and May is set to become the busiest auction month on record outside of the traditional spring selling season.

But even when the extra listings are taken into account, it seems clear that higher interest rates have finally tempered demand and will eventually slow price growth in other market sectors.

REIV communications manager Robert Larocca says the auction market at the moment has shades of autumn 2008, when vendors' confidence was still soaring from the 2007 price peak and listings were unseasonably high.

''Interest rates started to escalate and clearance rates dropped to the mid-60s,'' he says. ''This autumn, many of those same factors are in play but we haven't seen quite the same reaction. The market certainly has not crashed.''

Although affordability is yet to improve, it seems the market might finally be shifting back towards buyers, and sellers' reserves are not as likely to be exceeded as they were prior to Anzac Day.

In that context, a sign on the street offering $20,000 more than market value for houses appears even more out of place.

For the record, this columnist called the number on Friday, and was told that ''Sue'' would phone back. She hasn't yet.



Source: The Age

http://www.watoday.com.au/business/property/the-affordability-flaw-20100523-w41c.html

Buy Instead of Renting When You Have the Down Payment

Buy Instead of Renting When You Have the Down Payment
Friday, September 30, 2005

After looking at all the costs involved in buying house, you may have begun to have second thoughts: Perhaps, it is better to rent a home.
Real estate in most areas today is not a top investment compared with investment securities. "You're not going to get a 30 percent return on your house," said Steve O'Connor, senior director of residential finance at the Mortgage Bankers Association of America. In the past decade, people have been advised to think of a home "as shelter not investment" O'Connor said. "Wealth accumulation is secondary."
Still, as shelter, most experts say if you can afford the down payment, it makes sense to buy your home rather than rent it. That's because you can deduct mortgage interest on income tax and build equity in your property. This is especially true when mortgage interest rates are low. Mortgage interest rates are deductible up to a $100,000 annual limit.

Example
A homeowner has a gross annual income of $40,000. The monthly mortgage payment is $1,000 on a 30-year mortgage. In the first few years, 80 percent of that payment goes to interest and is therefore tax deductible. In the 15 percent tax bracket, the homeowner saved about $375 more in taxes with the home provision versus with only a standard deduction.

-----

Lease-Purchase Agreements

Some people take a middle road. They ease into homeownership by renting a house or condominium with an option to buy.

• Lease-purchase gives a buyer time to save for a down payment or to clean up a credit history.
• It can work in a buyer's favor in areas where real estate values are rising quickly at a rate of 10 percent a year. A buyer benefits from this appreciation because the purchase price of the home is locked in on the day the buyer signed the rent-to-own contract with the seller.
• In most agreements, the seller allows a portion of the rent to be applied towards the purchase price, which some lenders consider to be part of the down payment. The amount of rent credited could be 10 percent to 100 percent, based on your contract.
• Most rent-to-own options require some down payment to secure the agreement, which is not refundable in case the renter decides not to buy.

Homeowners who would agree to a lease-purchase option include people who have had property on the market longer than they wish or owners who had to move and want the house to be lived in. The owner benefits with rental income to help pay the carrying costs of the home, and the strong possibility of selling the house when the contract expires.

Copyrighted, Bankrate.com. All rights reserved.

http://finance.yahoo.com/real-estate/articleindex
http://finance.yahoo.com/real-estate/article/101345/Buy_Don't_Rent_When_You_Can_Afford_the_Down_Payment