Five reasons FHBs should avoid buying now!

A couple of days ago Chris Zappone wrote a follow up piece to his article on the First Home Buyers Strike (I posted about the original here):

The buyers' strike of Australian property sought by a tax reform group last month has proven to be a fizzer, precisely because some people don't like the idea of lower house prices.

Online activist group GetUp! decided not to pursue a strike of home purchases to protest at the lack of affordability in the housing market because its own members did not like the idea.

"While the issue of housing affordability is clearly an issue that resonates with plenty of people, GetUp! members don't support a boycott campaign," wrote Kelsey Cooke, online community co-ordinator for GetUp! late last week. SMH

Chris is a little late to the party with the news that GetUp! rejected the suggestion, they did so over 3 weeks ago. 

The first comment on the article really says it all though:

The Buyers' Strike is "on", it just doesn't need an official movement to promote what is blatantly obvious to everyone in the market: Prices are falling, and will do so for quite some time to come.

The smart property investors sold up last year. Time is well and truly on the buyers' side now.

I don't think there was ever any doubt that they would reject it, but regardless the strike lives on. Prosper Australia continue to cover related news on their website and social media sites:

Facebook - Don't Buy Now
Twitter - Don't Buy Now

There is some great interest and involvement from the public on the Facebook page and I would encourage you to 'Like' the page in support of the movement.

I think regardless of who is supporting or not supporting the strike, young Australians should make their own decisions about when to buy. Ignore all those with property interests (including parents, colleagues and friends) and do your own research into whether today would be the best time for you to buy.

Here are five reasons you should avoid buying right now:

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1. Renting is around half the cost of buying

As I recently covered in another post (Rent vs Buy: Cost Comparison) the cost of renting is significantly lower than it is to buy. With mortgage rates at 7% and yields at 4% the cost of renting is almost half that of maintaining the interest on the mortgage interest, let alone rates, building insurance, borrowing costs and maintenance.

Think about the money you could save by renting instead! In a situation where it might cost $500pw to buy, you could expect equivalent rent to be around $250pw. $250pw x 52 weeks in a year = $13,000pa. What could you do with that sort of extra money? That's an overseas holiday every year, a brand new car every 2 years or you could even just squirrel the money away into a term deposit or investments until a time comes that it makes financial sense to buy.

Have you heard the phrase before "rent money is dead money"? Well so is the interest on a mortgage and if the interest exceeds the rent you would pay for an equivalent home then you are paying more "dead money" to buy than you are to rent!

2. Falling prices will continue

The Herald Sun recently reported that, "Melbourne's property bubble is bursting, with $400 a day wiped off the average house price in the past three months."

There is no guarantee that prices will continue to fall that quickly, however even after a 6 percent slump (according to the REIV) in the first quarter of 2011, Melbourne prices and in capital cities all over the country continue to sit at ridiculous levels.

The credit bubble has inflated prices to a point where First Home Buyers are even struggling to afford prices in the new fringe suburbs. That begs the question, who is buying? With volumes having dipped significantly and stock on market up 50% on last years levels the answer is "not many".

Eventually vendors will realise they are going to have to start discounting more heavily to sell, that's when the real declines begin. This is likely to suck in even more sellers who have speculated on house prices increasing, they will leap frog over eachother on the way down just as they did on the way up, putting further pressure on prices and adding even more stock to the already over saturated market.

3. You may quickly outgrow your first home

One idea that I seem to hear repeated often is that you should just 'buy whatever you can afford' when it comes to your first home, just 'get your foot in the door' they say and work your way up the property ladder. What the older generations might be failing to remember is that you may outgrow your first home very quickly.

Imagine the situation where you've bought a 2 bedroom unit as your first home. Two years down the track and the casual relationship with your partner has taken a serious turn and you are looking to start a family (have kids). You may then be in a situation where you have to sell the existing property to fund the larger one. That likely means real estate commission costs (usually around 2% of sales price), stamp duty on the new home, possibly LMI (Lenders Mortgage Insurance) on the new loan if you will be borrowing on a LVR greater than 80% again. Not only that, but as per reason 1, you've possibly been paying a great deal more than renting to buy.

Do the sums. Make sure you consider all possibilities that arise. You may be a lot better off by renting until you can afford a home that will last years no matter what life throws at you.

4. Ownership ain't all it's cracked up to be

What are the benefits of owning? I mean besides bragging to your friends that you're now a proud home owner... can you really justify the extra cost?

The answer may be yes for some. For those that like to get hands on with their home, landscaping the garden, painting and renovations, extending the house & for those that need the security ownership (not relying on the landlord to renew a lease) then buying may be the best option. For me personally (and I'm sure many others) the benefits of ownership just do not outweigh the extra cost that comes with buying.

Personally I love the peace of mind that comes with renting. I know that if something breaks (aircon, heating, stove, plumbing, etc) then it's just a matter of calling the landlord to organise a fix.

Having owned before I know that owning isn't all it's cracked up to be. Council rates, water rates, building insurance, emergency levies, maintenance costs, fixing things when they break... it all adds up!

5. Living at home/renting = Freedom

Taking out a large mortgage is a yoke around the neck of the young. You should enjoy the freedom that renting/living at home provides while you can. Of course it would be prudent to put some of your income away for a rainy day or making a house purchase later in life, but don't give up your youth just so that you can say you own property.

Travel. See the world! You will find this much more difficult to do once you have a 30 year binding commitment to pay the mortgage on a house. You've got youth, money and an opportunity you may never have again in your life. Don't waste it!

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All that said, if you understand the risks associated with buying at the peak of the market, the excessive cost of buying over renting is no bother, you've got long term plans to stay in the property, you've got a large deposit and you aren't stretching the budget to buy then I wouldn't discourage you from buying, just make sure you know what you are getting yourself into.

So there you have it, my top five reasons Australians should put off buying their first house. Of course this doesn't only relate to First Home Buyers. I've been there and done that (owning my first home) and most of the reasons above are core to why I am yet to buy again after renting for the last 18 months.

When it makes financial sense again to buy I will be cashed up and ready having saved a fortune by renting and investing in appreciating assets. This reminds me of a Dilbert cartoon that I saw sometime ago:

BB.

The AUD Gold 'Pascoe Indicator'

Michael Pascoe is an Australian financial journalist. Well known and respected with more than 30 years reporting in Newspapers, on TV, Radio and Online.

Something he has made obvious over the last several years is that he's a Gold hater!

All the way up the bull market Pascoe has continued to berate and ridicule Gold and it's investors (or 'Gold bugs', a term he uses to paint us in a negative light).

Of course anyone following his articles might note that many have come around low points in the AUD price of Gold, so much so that his articles could almost be seen as a contrarian indicator (e.g. time to buy AUD Gold when he posts a negative Gold article), see the chart below:

Here is a list of the 5 points labeled on the chart and the article written by Pascoe at the time.

1. On September 27th, 2007, Pascoe had the following to say about Gold:

Gold bugs losing their bite

Of course, you can still find bugs who think the rally above US$1000 an ounce is only a stock market away – but other commentators don't think there's any meaningful correlation between the metal's price and wobbly equity markets.

The more reliable truth is that gold is really just another commodity, albeit one with a rich history. The good news is that demand for gold continues to rise and production doesn't keep up – but there's still a big overhang, thanks mainly to European central banks that still want to sell down their holdings. Super Living

2. This was followed by the below, 2 years later on September 14th, 2009:

Gold drops 25%!

Gold did finish in New York at a record high of $US1006.50 an ounce – which is all very entertaining if you happen to be American or have most of your assets in US dollars or a currency more-or-less pegged to the greenback.

But if your assets are Australian dollar denominated, it doesn't really mean much at all. Our overwhelmingly American-centric media tends to ignore that.

As gold sceptics know, the yellow stuff occasionally has a day in the sun when there's fear and loathing in the financial system or when the herd decides to make gold the next candidate for a speculative bubble, but its price is mainly a reflex currency play for the US dollar. The Age

3. Pascoe was still talking Gold down 10 months later on July 28th, 2010:

Time for gold bulls to feel a little fear

Nearly three years of fear and loathing have been very kind to gold bugs as worry about financial crises helped drive investors into the alleged safety of the yellow metal, whereupon the gold price rose further because the gold price was rising – the momentum players chiming in.

But there are signs that the tide of fear might be about to turn – an event that would be precipitous for the gold price and all who ride on her. It could be the gold bulls' turn to feel fear as pain instead of pleasure. The Age

 4. New year, another negative Gold articlefrom Pascoe. March 18th, 2011:

Buy iodine, sell gold and forget the Aussie

With all the present volatility in the markets, what’s perhaps most surprising is how very little gold has done. If I was a gold bug – and I’m clearly not – that might be a worry. Of course, the hard-core gold believers think life as we know it is coming to an end anyway and therefore are unshakeable in their strange faith.

I have been wrong about the gold price for the past several years [At least he's honest! BB], but that still remains more a matter of timing than fundamentals. The major leg of the gold rally was based on a reasonable reason – the need for those with US dollars to get out of them as the American economy and the greenback plunged.

Since that first leg, gold has risen primarily because gold had risen. The momentum trade kicked in, the exchange traded funds (ETFs) took off to capitalise on that and the great gold bubble bubbled on. There’s an entire industry devoted to justifying the rise – at any one time you can find people who will tell you that gold is a great hedge against inflation, a great hedge against deflation, a safe haven and a cure for baldness. Well, maybe not a safe haven. The Age

5. Only a month later and Pascoe is again laying in the boot. April 27th, 2011:

Rich rust beats dull old gold

Don't know why there's been so much excitement over the price of gold in US dollars - it's even better in Vietnamese Dong or Ugandan Shillings. The Australian dollar gold price though is terribly boring, but don't try telling gold bugs that they would have been much better off falling in love with rust than the yellow metal.

The uninvolved might be under the impression that the price of gold has been soaring to record highs lately, some using that as an excuse to bid up the price of shares in Australian gold miners in the hope that higher gold price might flow through to them.

Wrong. Gold actually has been doing nothing much for the best part of a year and remains well below its record high. That's gold in Australian dollars, of course – the only measurement that means something if you're wealth is in Australian dollars to start with. SMH

The above examples are just some of Pascoe's articles that highlight his negative outlook for Gold. There are others that can be found with a Google search, many of those also in dips or at lows as Gold in AUD continues to inch along it's long term trend line (marked on the chart above).

 

Pascoe is right in his latest article though, Gold in AUD has been boring for sometime, but one can't help but wonder whether the overvalued (in my opinion) AUD will correct back below parity against the USD at some stage in the near future. A move like this could give Gold a quick 10%+ boost in price and take us to new highs, surpassing the last high set 2 years ago in February 2009.

 

With any luck Silver's recent rise might also catch Pascoe's eye so he can start commenting negatively on this metal at it's lows as well. Keep some dry powder for that purchase point just in case!

BB.

 

Disclosure: Positions held in Gold. Not investment advice. Do your own research.

Thanks goes to user SaturnV on the Hot Copper forums (suspect registration required to view) for this posts inspiration.

Rent vs Buy: An Australian "Cost Comparison"

In late August there was a segment on the 7pm Project about property, it posed the question whether it is better to rent or buy (landlord vs mortgage). The show concentrated on the cost aspect and I found this interesting as it was some of these very calculations that influenced my decision to rent rather than buy again after selling a house in Adelaide around 10 months ago.

They honed in on what families with a tight budget/low income could do with the extra dollars saved by renting (e.g. like going on holidays, paying for private education for the kids), when ultimately it's probably these groups of people that would benefit most from the forced savings of a mortgage (assuming they pay the loan principal and interest). This was an irresponsible angle in my opinion.

They gave the example of a $500k property (rent versus buy) where they attributed a 5% cost of purchase price to rent ($25,000pa) or alternatively paying a 7% rate on a mortgage ($35,000pa). No mention was made of other expenses that one would incur when buying such as:

- Council/Water rates

- Building insurance

- Maintenance costs

- Stamp duty

- Buying & selling fees (bank, agent, etc)

Briefly mentioned was that some money managers rented, invested their saved money elsewhere (e.g. in the stock market), but they did not make this option (rent while saving the difference) look attractive.

Overall it was lacking substance, but no doubt it was produced for the mass consumption of the general public and the reality is that more detailed analysis of the subject wouldn't interest many.

Following on from the example provided in the show, here is a more realistic breakdown of what it would cost to rent vs buy:

Rent vs Buy - The Figures

Property: $500k House

Rent:

$25k pa / 52 = $480pw

Buy:

$500k + $24,000 (stamp duty & transfer fee#) x 7.25%* = $37,990

1% of property value for maintenance & insurance = $5000

Council & water rates = $2000

Total = $44,990 / 52 = $865pw (interest only)

# Adelaide based figures, this would differ between states
* Cash rate has increased since 7pm Project aired with 7% example

While more detailed than the 7pm Project example I'm still making some assumptions:

Obviously a first home buyer would have the benefit of the FHOG and possibly other state incentives and stamp duty discount depending on location and type of property.

A 100% loan on the property is used in the example. A more realistic LVR would be 95% with the buyer funding the 5% and purchase costs with a saved deposit, however if we used that in the example then we would need to add the benefit that the funds would have otherwise provided in a term deposit for the renter (which just gets too finicky).

It also does not take into account buying and selling costs, such as:

- Mortgage application fee (not always applicable)

- Real Estate Sale Commission (usually around 2% of the sale price)

- Advertising costs during sale

- Conveyancer (for both purchase and sale)

- LMI (if buyer is using a high LVR to purchase)

Further to this in many metropolitan areas a 5% yield would probably be considered fairly generous (across most metropolitan/capital cities houses are at a gross yield of less than 5%)

So potentially we're looking at housing being 80% more expensive if you buy (with a mortgage) over renting the equivalent. Of course this is only a look at the average situation, each property will slightly differ for better or worse.

This example also doesn't take into account the potential for positive or negative price growth of the property if purchased. The reality is that only 4% capital growth would be required for the owner to break even with the renter in the example provided (that's not high growth if inflation is running at 3%). Suffice to say if you think property prices will continue to see moderate or even high growth then buying still may be the better option financially (from your point of view). 

The question remains though, will vendors always be able to find the greater fool to purchase the house for a higher price? It's a vicious circle and if those that seek housing start to look for refuge from overwhelming mortgages by renting then we could just as easily see price declines which puts the renter in an even better position.

The way I see it the landlord is not only providing me a place to live comfortably (for a great price, much less than it would cost to buy), but they are also absorbing the price risk. Win-win for the renter who believes that property prices will correct, of course not everything plays out as we expect.

This is only the financial aspect. There are other differences which separate renting from buying. Obviously the stability that owning provides might be invaluable to some, such as those with a family.

I would be interested in hearing how the rent vs buy situation stacks up in your neck of the woods...

BB.

Gold in Japan

This is likely to be a fairly brief blog with more photos than content. I am currently in Japan and thought I would share some sightings, visits & purchases that may interest other Gold investors.

While in Kyoto I visited several temples and shrines, one of which was called the 'Temple of the Golden Pavilion' (also known by other names, see Wikipedia for more information). The top two floors of this temple are covered in pure Gold leaf. It is a popular spot for tourists and I had to fight crowds to get the below photo.

Temple of the Golden Pavilion (Kinkaku-ji) - Kyoto

While in Tokyo I decided to check out the Japan Mint. It was located a short walk from the Otsuka Station on the JR Yamanote Line (I believe there are other stations within walking distance), right next to the Sunshine City complex (well known shopping/entertainment centre).

From the outside the Mint complex is fairly nondescript, you wouldn't even know what you were looking at unless you can read Japanese or were looking specifically for it. There were several banners such as the below which I assume help identify it to the local population.

Translation: Japan Mint (?)

The entrance was down a small street around the back of the Mint complex. Once through the gate you are required to sign in with name, time and country of origin and are issued with a pass that you clip on to your shirt. The staff at the gate had fairly poor English skills and I don't speak Japanese so communication was a little difficult at first, however they called down one of the museum tour guides who spoke English well and showed us through the museum on a brief tour pointing out interesting pieces and facts. Photos of some objects was allowed, below are a few themed coin sets that have been released by the Japan Mint.

Coins on display in the Japan Mint Museum

Also present at the museum were coins from the Silver Prefecture Coin program. 47 coins are being released (started in 2008, last coin released in 2016) as part of the series.

Silver Prefecture Coins in a display case

There were quite a few interesting coins and displays at the Mint including: 

• Some coins dating back over 1300 years
• Old minting equipment & machines
• Displays showing the coin stamping & die cast creation process
• A machine which you could put circulating coins into and it would check the weight, diameter, thickness for consistency ensuring the coin was in 'good health' 
• A couple of nice large pieces of bullion which you were able to touch (15kg Gold bar, 30.5kg Silver)
• Coins from other Mints in Australia, Canada, Singapore and other Countries

There were other bits an pieces, it will take you around 15 minutes to wander around and see everything.

Following the museum tour our guide took us over to the shop. I was hoping they would have the Silver coins from the Prefecture series available for purchase, but unfortunately this was not the case. They had some commemorative coins acknowledging the series so I picked up the Kyoto version (It cost 1000 Yen, around AUD$13). 

Kyoto Bicolor clad coin, Prefecture commemorative

Also I picked up a 2010 Standard Proof Coin Set for 7,500 Yen, which is around AUD$100. It's housed in an attractive leather and felt holder which folds up into a plastic slip cover for easy storage when not on display.

2010 Standard Proof Coin Set

The most disappointing part of the Mint visit was the inability to purchase Gold or Silver coins in the shop. There were some Silver paper weights, but not having the ability to purchase the Prefecture coins directly from the Mint (at least not the Tokyo branch) seemed very odd.

Following the trip to the Mint I made my way to Shinjuku where I had been informed (by a member of Silver Stackers) that there was a bullion dealer. The Shinjuku train station is huge, busy and can be confusing to navigate, I ended up on a 1 hour walk looking for the store when it was only 5 minutes from the station!

Ginza Tanaka: A short walk from Shinjuku Station

The store mainly has jewellery on display, but did have Gold and Platinum bullion as well, which they sell as individual pieces or in pendants/holders. Below is a picture of their main "bullion" display case.

Ginza Tanaka: Bullion display case

I was a little surprised that they did not seem to stock any Silver bullion products (only Gold and Platinum).

Their service was fantastic, a polite saleswoman assisted with my pricing queries and then sat me down while organising the product I'd purchased, calculating the removal of tax from the price (due to being from O/S) and boxing the item up.

The final presentation of the product was immaculate. I'm used to small paper/plastic bags upon purchase in Adelaide so a small box, cleaning cloth, cleaning guide, etc was a pleasant surprise.

Packaging of purchase from Ginza Tanaka

The piece I purchased was a 1/10oz Maple Gold coin and an 18k pendant/holder. The cost (after tax removal) was 12,821 Yen for the coin and 5,715 Yen for the holder. In AUD at the rate I bought my Yen (around 75 Yen to 1 AUD) the cost was approximately $171 and $76 for a total of $247. Quite reasonable in comparison to the prices I can get in Australia for similar/equivalent.


1/10oz Maple Gold coin with 18k holder

Next week should see the resumption of more regular blogs and content.

BB.