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Member
 Originally Posted by Te Whetu
1) Current Net Worth : $23,000
2) Savings per week : $150 (half of $300)
3) Annual after tax return on investments 5%
4) In this case his net worth in three years would be $51,800
First scenario I'll run is purchase with no growth in house prices over three years.
1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000
6) In this case his net worth in three years would be $30,000
Now I would argue that this is a highly likely scenario in the current environment. But to be fair and reasonable I’ll also show what will happen with -2%/3% price change in property per year.
Second scenario is purchase house with 3% p.a. growth in house prices over three years.
1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000, and the property will be worth $224,000
6) In this case his net worth in three years would be $49,000
Third scenario is purchase house with 2% p.a. loss in house prices over three years, (reasonable chance as you will likely be buying a pour quality place which generally performs badly until the market starts to peek.
1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000, and the property will be worth $193,100
6) In this case his net worth in three years would be $18,000... i.e. you’ve paid a mortgage and gone backwards.
Cheers
Te Whetu
TW – great post. Exactly what I had in my head, but couldn’t be bothered posting it. However, a future cash flow/NPV expert like yourself could have rammed this (rent v buy) home even more
The $20k gain from investing at 5%, with 7.8k (300 a fortnight) reinvested each year will compound to $50k after 3 years, to $70k after 5 years and around $145k after 10 years. You could say you can compound the remaining savings after mortage over those years to a bigger number as well, however houses generally require reinvestment every now and then. This is a $$/time/Stress burden which could be avoided.
At the age of 22 your wages should grow by more than inflation in 10 years, with your wages your ability/skills will rise allowing you to average a higher return than 5% + adding in the lady mean your savings rate/income will rise substantially. When you factor this in, that 145k will double!
Couple this with the non financial un-certainty’s a 22 year old will have – big holidays (would be rent free), relationships, unforecasted events, job losses? Even what you want from a property/town even life in 5-10 years time..
The list goes on – but for me, there is no buying beats renting for a youngster in your position – The numbers speak for them selves, but even bigger than this is the potential effect of the unknowns.
Don’t mean to pi*ss on the camp fire, but think its important you step back and think about this kind of thing in depth.
Last edited by buns; 03-06-2011 at 05:19 PM.
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If we were to buy a 3/4 bedroom home then we would most definitely rent out the remaining bedrooms. On the North Shore it's relatively easy to rent a decent size room for $150 each, so taking that into account, it makes it about the same if we were to rent a double room in a flat anyway.
In time, the mortgage will decrease, rents will go up.
I have thought quite a bit about continuing to rent and value invest (Buffett style) into stocks in NZX/ASX but overall it just doesn't make sense to do so.
As previous posters have said, if I have 50k, a 15% odd return is 7.5k, however if I leaverage that 50k for a 20% down deposit and the house goes up, then what ever % capital gain the house gets will be multiplied by 5. So hence, house prices will only need to go up 3% as opposed to a 15% gain in stocks to get the same return.
Another quick question...
Who has done the opposite, used all their spare cash, continued to rent and invested in stocks
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Member
ENP
What is annoying here is you ask these general questions, wanting an answer in value terms, or what makes economic sense.
But the whole time you have your assumptions about things which are impossible for a third party to understand, plus place value on other things (non -financial) which we have no idea about.
I get the feeling you don't quite understand what some people have said, already have your mind made up and am just waiting and waiting for someone to say your idea is right - so you can go ahead..
You have got some top notch replies here, from some smart cookies who probably have limited time. But seems you have just chosen to ignore it, wasting their time.
Either that or you didn’t state your goals clear enough up front.
I don't mean to have a go at you. But, some of the stuff certain people say around here is bloody interesting. Those people will quickly lose interest when no one cares to listen or respects the time they put into posts.
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Buns,
I have re-read the entire thread and agree with you. You make pretty valid points about unforeseen things that may pop up over the next 5 or so years. Overseas travel, maybe moving town or across town to get new jobs, etc.
I guess deep down the reason why I would like a house is that its "the thing to do" and that it has a stigma attached that you are doing well for yourself and are all grown up. I really don't have an issue with renting as a whole but see home ownership as a solid start in life.
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Then on the other hand, if I was to buy a house, it would be in a cheaper, less desirable suburb. Definitely not Takapuna, close to work, motorway, supermarket, beach and shops.
If I got a job somewhere else in Auckland, it would be a bigger hassle to get to. If I wanted to go on an OE, with renting I could just pack up and leave. My rent doesn't include the expense and hassle of rates bills, insurance, mortgage interest, repairs, etc.
I'm beginning to see your argument! 
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So what you seem to be saying ENP is that you are concerned with how people perceive you and wish to be recognised as someone with some mana and maturity. Eminently understandable..we all want to be respected. However the surest way of getting there is probably not going to be directed by the concept of doing something because "its the thing to do". Question is well "who's thing is it"..if it is "your" thing then fine, but if its someone elses "thing" then perhaps it should be re-examined. Other people on this thread have given really compelling reasons for doing or making decisions based on your situation. The smartest decisions are always made when you gather all the facts, plug in your personal information and make a decision for YOU. Doing something because "it the thing to do" is surely the direction of a follower. Doing the right thing for you is the sign of a leader. Up to you.
Originally Posted by ENP
Buns,
I have re-read the entire thread and agree with you. You make pretty valid points about unforeseen things that may pop up over the next 5 or so years. Overseas travel, maybe moving town or across town to get new jobs, etc.
I guess deep down the reason why I would like a house is that its "the thing to do" and that it has a stigma attached that you are doing well for yourself and are all grown up. I really don't have an issue with renting as a whole but see home ownership as a solid start in life.
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Originally Posted by BIRMANBOY
The smartest decisions are always made when you gather all the facts, plug in your personal information and make a decision for YOU. Doing something because "it the thing to do" is surely the direction of a follower. Doing the right thing for you is the sign of a leader. Up to you.
Hey that's not bad. You could never be wrong, you don't even need all the facts, just do it for YOU. Oh and the Misses of course.
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Originally Posted by ENP
As previous posters have said, if I have 50k, a 15% odd return is 7.5k, however if I leaverage that 50k for a 20% down deposit and the house goes up, then what ever % capital gain the house gets will be multiplied by 5. So hence, house prices will only need to go up 3% as opposed to a 15% gain in stocks to get the same return.
No. This is incorrect. If it only goes up 3% you will not get a 15% return on investment, you have failed to account for the cost of your mortgage.
Originally Posted by ENP
Who has done the opposite, used all their spare cash, continued to rent and invested in stocks
I have, and I suspect others here have as well.
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Originally Posted by absolut-advance
ENP this may be another option for you consider, Buy a house but rent it, Manage it well, this would give you flexibility to live where ever you want via renting and still own property.
Don't you need a 30% deposit when a rental is your first house?
Banks seem more willing to give you a loan if it is your primary residence rather than a rental from my limited experience.
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