3 Reasons Not to Buy Your First Home

3 Reasons NOT to Buy Your First Home

“Physician Sense” is a US physician finance blog that outlined the three common errors doctors make when buying their home:

    • Too much house.
    • Buying too soon
    • Wrong form of financing           Johnathon Ford Hughes, Physician Sense Sept 18

I think I made all three!

I was taught, like many of you, that “Rent money is dead money” and that getting on the real estate ladder as quickly as possible was smart.  Now I understand the decision to buy a house should be carefully, and mathematically considered.

Properties all over Australia grow at different rates at different times.  It is tempting to believe your property value will double in the infamous 7-10 year window.  But there is huge variation in property performance over the long-term.

Data from Domain.com.au states the best performing suburb in Australia between 2014-2019 was Byron Bay, rising an impressive 117% to a pricey $1.3M median house price. Congratulations to whomever purchased in Byron Bay a few years ago!

The worst performing suburb was Newman in WA, falling a devastating 74.9% over 5 years to a median house price of just $195000.

Bob was as a recently qualified rural GP specialist who purchased a home in Newman for a bargain $260,000, at a very reasonable interest rate of 4.3% back in 2014.

Five years into mortgage payments, Bob owes $240000, but is only be able to sell for $195000. If Bob has to sell in 2019, he will need to find $45000 plus fees ($20000) to discharge the mortgage! Bob certainly hasn’t made any money, but has he lost out in comparison to renting?

Year House Value Buying costs + cumulative mortgage repayments Combined cumulative losses from buying Rent per annum Cumulative losses from Rental payments
2014 260000 14300 14300 18200 18200
2015 247000 30044 43044 17290 35490
2016 234000 45788 71788 16380 51870
2017 221000 61672 100672 15470 67340
2018 208000 77306 129306 14560 81900
2019 195000 93080 158080 13650 95550

From the first year, Bob would have been better off renting – and the losses from buying just keep getting bigger every year.  No wonder Bob doesn’t look very happy, even on the beach 🙁

Find out more out opportunity cost.

My Experience

I brought a house in a regional area in 2008, close to where I was working.  I recognized (In hindsight, correctly) the local market was not primed for a boom.  I brought less house than I could afford in a relatively cheap suburb.

Growth has only kept pace with inflation.  It is a suburb 20km from the CBD, with large amounts of land surrounding, that has been progressively developed, providing plenty of competing housing stock to keep house prices low.

I sat down and worked out whether buying was the right decision in retrospect, and in the process developed a simple rent vs buy calculator to help decision making in the future.

To consider a property of your choice, fill in the orange boxes below and scroll down to see the net outcome rent vs mortgage.  For annual rent you can add a formula =weekly rent*52 as you would in excel to easily calculate annual rent.  Council rates and property maintenance are not included as they are so variable, but another mark against buying to be considered as well as the calculator.

It has taken me around 9 years to come out better than renting for the same period!

If I had rentvested into a great capital growth suburb earning 7% per annum over the past 10 years I would be over $400K better off.  I hope the reader appreciates working this out has been a painful realization! Ouch!

There are, however, less mathematical factors involved in the decision to buy a house.  Like feeling more secure (no more 6-12 month contracts), absence of inspections and ability to paint and personalize as desired.

However, I remember feeling very wealthy as a PGY 3, paying a measly $220/week – I’m only just getting that feeling of abundance back now, eleven years into paying down the mortgage!  Property maintenance (est 1.5% of property value per annum PLUS time) and council rates are other negatives associated with home ownership.

I wouldn’t have known how to choose a property with good capital growth prospects in 2008, so the argument that I should have rentvested is academic.

What are the conclusions from my ramblings and calculations?

There are three big financial reasons why you should choose NOT to buy your home

  1. You don’t plan to stay in the home long enough (5-10 years) to make the outlay worthwhile
  2. The home is not expected to return capital growth more than inflation
  3. Interest rates are high than expected capital growth

Where do you find expected capital growth estimates?  Look at past average capital growth for as long as possible – you can get 10 year averages listed in Your Investment Property magazine (lists all suburbs every issue), online at Core Logic (with a paid subscription). High transaction costs (6% to buy, 2% to sell) mean Australian real estate must be a long-term investment.

If you end up renting, consider investing the extra money (that would have gone to mortgage repayments) in better performing real estate, or shares.

Use the calculator to work out whether you are better off buying or renting for your next job, and subscribe to ensure you don’t miss out on the next post – How to save up that elusive first home deposit.




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