Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Sunday, 2 March 2014

Let's hear it for renting -- 10 reasons being a homeowner can also suck

Going against conventional wisdom?

I know, I know. Whoever heard of a property buyers agent espousing the merits of renting instead of buying somewhere to live? Ah well. I just write blogs to record my trains of thought, even if it does involve shooting myself in the proverbial foot at times.

Rest assured, if I believe property prices, share prices or the economy will  tank in 2015 or 2016, then I'll say so. It takes a special brand of commentator, I think, to make brash or outlandish predictions only to forget about them a year later when the next book is due for release. Down such a path lies nil credibility.

Anyway, for today, let's look at why you might elect to rent rather than buy somewhere to live.

Renting or buying?

I guess everyone forms their own views when it comes to their property plans, so I doubt the views of a blogger will make any difference to anything.

Conventional wisdom says that rent money is dead money. Save a deposit, take out the biggest mortgage you can possibly wangle and pay it down over a decade or three. Thus commands the rule-book. But I've always reckoned rule books are made to be torn up, or at the very least, questioned.

Having rented for most, although admittedly not all, of my adult life, I'm finally at that point in 2014 where putting down roots is what I want to do, and so will buy a house as a place of residence. Buying a home is as much about the emotional aspect as anything else, as most people well know.

But renting where you live can also present you with some major advantages over home owners.

As a renter, you can be flexible to move around. You can generally rent somewhere much more cheaply than you can own, in terms of monthly cashflow. And while doing so, you can set about building a massive portfolio of investments in a tax-favoured manner - be that in equities, investment properties, gold, silver, pork bellies, or whatever else may take your fancy.

Yes, we all know the downsides of renting, and we hear all about them every day on the world wide interweb (and how).

Tenancy periods can be short. Landlords can be 'bar-stewards' (apologies, my blog goes to a subscription list, so I can't use swear words since email filters will cause my missives to bounce). The property you are renting might be sold. Rents can move up ahead of inflation.

As a renter, you generally can't tear walls down (what is it with walls? People seem totally obsessed with the ideal of being able to tear walls down. Walls are a good thing! They hold the roof on). Greedy landlords making a motza at the expense of younger buyers. And so on.

Yes, those may be some of the downsides of renting. But there are two sides to most stories. What about the great benefits of renting? Here are 10 of them:

1 - It's cheaper

In headier times before the financial crisis I rented a luxury apartment in Bondi Junction with magnificent views over Sydney Harbour, the Opera House and Sydney Harbour Bridge. For two years, I understood just a little what it might be like to be James Packer.

Well...sort of. I don't suppose James Packer has ever socialised at the Cock & Bull (the email filters will probably pick that one out too) or frequented Garlo's Pies. But the apartment was great.

Using some back-of a-cig-packet calculations, I don't believe that the landlord was attaining a gross yield of more than 2.5%, or perhaps 3% at a push, even before other holding costs are factored in.

The apartment complex had tennis courts, two swimming pools, several concierges, gymnasia, saunas and spas. The strata fee costs on such developments are mind-boggling. Living in these complexes is wonderful, but I wouldn't want to own an apartment there for all the tea in China. In fact, you'd probably need half of the tea in China just to pay for the strata fees. 

2 - Transaction costs

Property sometimes appears to me to be the asset class of magical returns. Magical, I say, because, property owners and investors somehow magically or conveniently forget when calculating their equity gains how much moolah they have tipped into their property or property portfolios in the first place. 

Let's say your plan is to buy a $600,000 property in Sydney, with a view to trading up the housing ladder in a couple of years. One should question whether it's even worth the effort. You'll be hit up for a few quid short of $23,000 in stamp duty, transfer fees and mortgage registration fees for starters. 

Lob in legal or conveyancing fees of a grand or two, depending on what level of service you opt for. Then there are the building inspections, the pest inspections, the lenders mortgage insurance (LMI)...you can be 5% behind the 8-ball before you've even gotten started. And then when you come to sell again and the estate agent fees...oh dear.

OK, you've got the picture. Transaction costs in property are painful, so unless you're planning to hold for quite a while, why bother? Renters, of course, don't have to worry about any of that. 

3 - Taxes

As noted, most property taxes in Australia are loaded into the purchase price. If you own expensive property or have a large portfolio of properties, you have the twin pleasure of paying even more tax as an owner. There are no tax deductions on mortgage repayments in Australia on your own home.  

Renters who opt to invest in property instead may receive deductions on mortgage interest and benefit from the negative gearing rules, but don't stand to benefit from a capital gains exemption which is granted on the principal place of residence (PPOR) in Australia. 

4 - Repairs and maintenance

Repair work. One of the sharpest pains in the great backside of home ownership. If you own a house, stuff will break and you will have to fix it yourself, or pay someone else to fix it for you. One of the true joys of being a renter is not having to pay for, or in any way get involved in, maintenance.

5 - Flexibility and freedom of choice

This should really be reason number one in favour of renting. How many of today's young people are going to work in one job, in one location and buy one home for life? It could surely only be a few percent. How much more sense might it make to rent when you're young, save hard and invest elsewhere? In many cases, a lot more.

Just adding it up I think I've lived in 10 different places in the last 10 years, most of them in Sydney, although some overseas. Thank goodness I've been a renter! With all that stamp duty the tax office could have paid half of News Corp's tax refund. Well, not maybe not quite that much, but my word it would been one heck of an eye-watering figure.

And better still, I've enjoyed harbour views, hung out with the backpackers at Bondi, experienced executive city-living on Pitt Street, lived in a converted warehouse at Darling Harbour and rented a house in East Timor, among other things.

Think of all that variety a home owner misses out on. No thanks!

6 - Illiquidity

Consider the key rules of investment which have been developed by asset managers and portfolio modelling over the decades:

-diversify!

-don't own illiquid assets that can't be realised easily if required!

-don't put more than 10% of your net worth into one investment!

-don't use too much leverage or debt!

-don't have all your eggs in one basket!

Yet conventional wisdom on home ownership takes each of the key rules of investment in turn and waves two fingers directly back at them.

Why so? Largely, one suspects, because the conventional wisdom is passed down from the generation above unquestioningly. "I've always done well from my property. There is nothing safer than bricks and mortar."

I don't think I've yet met anyone who's parents have advised them to borrow as much money as they can and sock it into the share markets. For a home, on the other hand, it's common advice.

Yet people become forced sellers of homes at the most inopportune moments for all kinds of reasons: a new job, divorce, illness, painful commuting times, financial distress, termites, concrete cancer on the building, rocketing interest rates, disillusionment with ownership and many other reasons. Consequently, a higher percentage of people sell dwellings for a loss than one might reasonably expect. 

7 - Stress

Home ownership can be stressful - repairs, plumbing, sparky maintenance, redecoration, lawns - a home owner's work is never done. There can be a financial cost, and a different type of cost attached to stress.

When interest rates go up, who gets stressed? Not the renter! What about when property markets move into their correction phase and the crash community start telling anyone who'll listen and plenty who won't about inevitable massive corrections? Being a renter suddenly seems like quite a comfortable option...

8 - The negative equity trap

Negative equity has not been such a big issue in Australia in recent years with most markets remaining fairly steady, but by heaven it has been a problem back in the Old Dart. Last year it was estimated that 630,000 families in Blighty remained in negative equity following the sub-prime fallout and financial crisis...even half a decade on.

Probably a majority of families who are in negative equity cannot afford to sell. They are trapped.

In fact, a more sceptical man than I would question why governments have pushed home ownership so hard in developed countries since the Second World War in the first place? Arguably, herding ever greater numbers into taking out a 25-40 year mortgage is an excellent means of controlling a potentially unruly population. 

Certainly, people can effectively be entrapped in their homes, the ever-looming threat of mortgage default keeping people in a job for the company, and neatly in one place. Not so the renter, who is as free as a bird.

9 - Housing can be a poor investment

Controversial for a property buyer to suggest, perhaps, but nevertheless likely to be true over the long haul: the average home is not likely to be an outstanding investment.

For all the spruik, hyperbole, hand-waving and counter-spruik, on a national basis home values have only broadly tracked incomes over the last decade. Anyone who thinks it was easier for us to buy property in Sydney 2003/4 is unfortunately mistaken.

Prices will ebb and flow in different cities at different times (Melbourne has been on a storming run, for example), but certainly in Sydney prices have only tracked incomes for the past decade. Property prices, all things being equal, should over the long term only move in line with incomes and the ability to repay mortgages - there is no reason or economic need for growth to be anything otherwise.

Over time, inflation pushes the price of most properties up, and Australian housing markets in the past have been a no-brainer for those of around long enough to have taken advantage, but think of all the factors which have previously pushed prices up that won't happen again.

We've experienced the rise and rise of the two income household which has seen household incomes soar, the structural shift to low inflation and low interest rates...then on top of developer contributions which were passed on to buyers, we then added a Goods and Services Tax of 10% of top of everything (land, development, housing construction). It's no wonder prices rose.

Now don't get me wrong, skilful property investors can and will still attain returns because they have the ability to buy counter-cyclically, can select properties to secure above-average yields, can limit themselves to supply-constrained suburbs and property type which are likely to outperform the averages.

But home buyers are often constrained by the location of their employment and are rarely afforded such luxuries. Over the longer term, the average home is likely to represent an inferior investment to the productive assets, such as outstanding companies in the share markets.

10 - Time and convenience

Renting is the ultimate time-saver. Home owners tend to spend their time mowing lawns and fixing things. Renters frequent coffee shops and go to the beach.

Summary

All investments and asset classes have advantages and disadvantages, so making a blanket assumption that home owners automatically benefit at the expense of renters is at best presumptuous, and when the next downturn arrives, will most likely in my opinion, prove to be plain wrong.

Renters who save hard and invest their funds wisely will fare significantly better than home owners over time.

Of course, I've played devil's advocate to some extent here. There are reasons for and against buying and renting, as has been well documented. But I would encourage people to consider what their actual reasons are for buying a home are before taking the leap and tying oneself to a 30 or 40 year mortgage.

Is it for the assumed kudos of being a home owner? As a part of wanting to 'settle down'? So you can pull walls down (it's seemingly always either about pulling walls down or painting them). Because your parents told you that it's "the right thing to do"?

Buying a home may be a great route to building a nest egg for retirement if you're planning to be in one place and one dwelling for a long time. But it's definitely not for everyone and there are more factors to think about than simply buying because that's what conventional wisdom says you should do.

People fail conventionally all the time, and as any good Keynesian will tell you, it's far easier (and better for the reputation) to fail conventionally than it is to succeed unconventionally. But which would you rather do? Food for thought...