[Moorf]

In the current climate and with house prices falling and interest rates projected to rise, would we be better off selling our house now and renting and then buying something cheaper when (if!?) they fall further?

We've got a small mortgage here but the money from house, if put in the bank, would give us a nice income at current rates.

[Familyofmonkeys]

Are you still dreaming about a relocated villa then or is this idea just for discussion?

[Moorf]

Nah - relocating villa was last week's mad idea.... :D

This is just for discussion really...

[Peter&Liz]

I think it may well be, if you calculate the money you will save from renting….

Monthly net interest + your current interest payment part of your mortgage

Against the cost

Rent + ((cost of selling + the cost of buying again)/ number of months you plan to rent)

Then you can work out whether if prices where static how much better off you would be each month.

Obviously if house prices fall you have this gain to add on top, if they go up this might wipe out any savings.

We have been considering renting for a while after we move, for the very same reasons, especially as rents do seem considerably cheaper than buying.

Peter

[Familyofmonkeys]

Plus you don't pay rates when renting, so another potential saving!

[Tia Maria]

In the current climate and with house prices falling and interest rates projected to rise, would we be better off selling our house now and renting and then buying something cheaper when (if!?) they fall further?

We've got a small mortgage here but the money from house, if put in the bank, would give us a nice income at current rates.

Are they definitely falling in your area and not just leveling off?

Cheers

Tia

[Moorf]

Yes, I've definitely seen prices coming down somewhat around here, and houses taking an unusually long time to sell. Note: I've been looking mostly at rural places.

Have even seen prices marked down with "re-priced in line with market" or words to that effect and houses quickly coming back on the market after having been "sold".

Haven't seen as much of a drop in speed or sales of sections/land though.

[Familyofmonkeys]

Haven't seen as much of a drop in speed or sales of sections/land though.

We were watching that one closely for ages too ;)

[Tia Maria]

Well according to a property programme, March is the best time to sell your home in NZ, although I'm not sure exactly what they meant by that - most popular, most successful or highest price?

But I could see that maybe a lot of people think about it over Xmas, get their houses fixed up and ready to go on the market after schools have started back.

Prices still have the potential to go up around us, so I wouldn't dare sell.

Cheers

Tia

[Peter&Liz]

This might have an effect on the market....


Housing Minister Maryan Street has hinted that there could be changes to the tax laws by which landlords are able to offset losses on rental properties. The move is designed to dampen down the housing market


http://www.newstalkzb.co.nz/newsdetail1.asp?storyID=131267

[Moorf]

We were watching that one closely for ages too ;)

Yep, been watching it for my parents. It's like Sim City round Darfield these days, new houses appearing almost overnight in strange places! I see the Coalgate Tavern has sold off it's front garden and there's a house on it already! :laugh

Tia - I'd also been told Feb/March is the time when most houses bought and sold and the papers are certainly chocka at the moment. We've made quite a bit on this place and we're wondering whether to duck out now or "see how it goes" as our property is most of our pensions and savings!

Thanks for link Peter :nice1 Would a combination of property price decreases and high interest rates cause rentals to go up hugely - especially as demand could well increase as people sell up and move to rent? Would a rental be a safe place to be or would landlords be looking to sell at the best opportunity?

Am I asking silly questions? :o

[jo b]

Moorf,

some people are doing just that in the Uk too, one of Ian's mates at work sold his and plans to rent for 12 months until the market corrects itself. However I do think that NZ and UK housing market are a little bit different though.

I have been checking out this forum of late (just in case we try NZ again and loose money on this house I would hope NZ prices come down the same way).

http://forum.globalhousepricecrash.com/index.php?showforum=14

Talk about addicted to forums.

Jo

[Moorf]

OMG - that forum is exactly what I need!! :nice1 Cheers!

[Peter&Liz]

Thanks for link Peter :nice1 Would a combination of property price decreases and high interest rates cause rentals to go up hugely - especially as demand could well increase as people sell up and move to rent? Would a rental be a safe place to be or would landlords be looking to sell at the best opportunity?

Am I asking silly questions? :o

Something is only 'worth' what someone else is willing to pay.

I doubt that landlords would be immediately able to simply offset the loss on tax benefits by increasing rents.

If they think they could get $300 a week for their property now then why only charge $200?

I've yet to meet a landlord that rents out his or her property out of charity ;-)

I suspect that more rental properties would come up for sale, and this shift in supply of houses for sale would have a dampening effect on house prices.

And I'd also guess that fewer rental properties and the removal of this government subsidy would mean that in the long run rentals would be more expensive.

Peter

[Peter&Liz]

Thanks for link Peter :nice1 Would a combination of property price decreases and high interest rates cause rentals to go up hugely - especially as demand could well increase as people sell up and move to rent? Would a rental be a safe place to be or would landlords be looking to sell at the best opportunity?




Something is only 'worth' what someone else is willing to pay.

I doubt that landlords would be immediately able to simply offset the loss on tax benefits by increasing rents.

If they think they could get $300 a week for their property now then why only charge $200?

I've yet to meet a landlord that rents out his or her property out of charity ;)

I suspect that more rental properties would come up for sale, and this shift in supply of houses for sale would have a dampening effect on house prices.

And I'd also guess that fewer rental properties and the removal of this government subsidy would mean that in the long run rentals would become more expensive.

Peter

[jo b]

Peter the rental market in NZ is very different to the UK. The do something called nagative gearing, which means the rents are slightly less than the mortgage and they get some kind of tax relief, (I think I am right maybe someone with even more knowledge can set me right). Therefore it means their properties are always rented whilst they hope by the time they retire they have a decent capital gain as there currently is no capital gains tax in NZ.

Jo

[Familyofmonkeys]

I remember Diny posting something about their old rental that said the same thing, but I can't find the post :o .

[Peter&Liz]

Peter the rental market in NZ is very different to the UK. The do something called nagative gearing, which means the rents are slightly less than the mortgage and they get some kind of tax relief, (I think I am right maybe someone with even more knowledge can set me right). Therefore it means their properties are always rented whilst they hope by the time they retire they have a decent capital gain as there currently is no capital gains tax in NZ.

Jo

The government are talking of getting rid of the tax relief, and if it is a significant amount of money, I would have thought that it would lead to some landlords putting their properties up for sale.

Do you know how much the tax relief is worth?

Say I have a property I rent out at $200 a week but my mortgage is $300 a week, do I get the full $100 back in tax relief?

Peter

[jo b]

Peter not quite sure what the tax rates are.

I googled Google NZ and searched negative gearing from that search engine.

It came up with loads of info.

http://www.approved.co.nz/resources/rental_property.php

However I can't see the government axing that tax relief as many many kiwi's have second homes for their pension provision rather than stocks or pensions schemes as the stock market in NZ had a bad crash a number of years ago and many are still fearful of loosing lots of money again. But then again I could be wrong.

Jo

[Nick88]

The govt is planning to curb the use of LAQCs (Loss Attributing Qualifying Companies). This means that if you have a business (like a rental property) you can attribute losses run up by the business to your own personal tax. Consequently if your rental loses $100 a week you can effectively reduce your own taxable income by $5200pa. I don't think much will come of this idea, there are an awful lot of people that use this to make a rental more viable. If they sold up there would be a huge shortage of rental properties that would need to be filled by the govt, and they don't want to spend the money. I think the idea is to use this idea to scare people away from buying rental properties as an investment and so cool the housing market, but it isn't excessive demand that has driven prices up it's restricted supply, so these measures will do nothing but make renting much more expensive.

As for selling up and renting, well, if you were planning to sell and move anyway I would sell a bit sooner and rent for a while. I think it a bit of a risk to assume that prices will drop significantly in the next year or so. There will be a drop, but I suspect it will be fairly slow and over a few years, followed by a long period of steady prices. I could be wrong, however, councils could get a severe kicking from central govt and be forced to reduce the restrictions and levies that have done so much damage.

Personally, if I sold my home (and business) next week I would definitely rent for while before buying again.

[veronica]

personally don't think that its as much that prices are falling as that people have stopped asking over the odds for them., and are asking prices that are more realistic.
Also feel that money paid in rent is always just dead money where as money paid in mortgage is at least whittling the amount down.
Another thing to take into account is that in your own home you can do as you like and have pets with no hassles, in a rental you can be given 3 months notice to be out and theres nothing you can do about it.

[JWR]

IMO...
Prices are definitely falling, and a big bang is imminent I think, so firstly I don't think there is a big rush to buy, but I (for instance) am interested in the Queenstown area and I feel certain 'high spots' will ride this out. May go back a whisker, but that does not justify renting and throwing money away. If I was the average NZ home buyer I would shop around for a while. If I had young children, and had to have a job, I would have to commit to some sort of purchase as renting is DEAD money. If you are starting out on the home ownership get into something. BUT DO THIS.... buy the worst house in the best street (area you can afford), so many first home buyers do the exact opposite of this, and that's a recipe for disaster.
Remember, renting is dead money, get a mortgage that takes up about 75% of your borrowing capacity, leaving room for interest rises, to avoid having to bale out. You could go for 100% of what a lending authority (a bank) will lend, if you are the type of person prepared to tighten your belt and do without during the tough times. All the money I have ever made in my life has been from 'the family home'. All the money I have ever lost has been a result of being too adventurous and being over commited. Find the middle ground and you will be fine, and probably do very well. I should be charging you all for this advice. Good Luck, hope you all do well.

[mikewalkerfrom]

We're moving to NZ (fingers crossed) in April and we're definately renting for the first 6 months. We'll chuck our deposit in a high interest account and try to save a bit more money. I've seen prices in Christchurch dropping VERY slowly, but have no clue as to what will happen in a years time. And to be honest, I dont think anyone else does either... Now is the best time to be very very careful.

[Kiwi-In-Texas]

We will also be moving to NZ the first half of this year and renting for a good 6-12 months...Property prices need to drop a lot more than what they are before we would consider buying...We want to live on the Kapiti Coast when we return to NZ... I couldn't agree more, now certainly is the best time to be very careful.

[Nick88]

Job posted this link to another forum where housing is discussed alot more, the info and links here are superb.

http://forum.globalhousepricecrash.com/index.php?showforum=14

I am inclined to change my mind about a fall in prices, it seems to be much more likely than I had thought. Here is a really interesting table of price trends

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/NZHousingCycles.gif

Have a look at the 5 years to 1975 increase compared to now, and then what happened in the subsequent 5 years. Admittedly there was extremely high inflation at the time, and interest rates were ridiculous (13-14%), but the increases seen lately far outstrip anything seen then. If history repeats itself things could get a bit rocky for alot of people.

There are a couple of excellent podcasts by the BBC about the sub-prime crisis giving an example of the city of Stockton in California where prices have dropped by as much as 40%. There is a precis of the podcasts here
http://news.bbc.co.uk/2/hi/business/7164898.stm

The podcasts are here
http://www.bbc.co.uk/worldservice/documentaries/2007/12/071227_debt_threat_1.shtml

Brilliant link, thanks Job!

PS Does anyone else here remember the negative equity days of the early nineties?

[b&k]

Renting is not necessarily dead money.

On a new $300,000 25-year mortgage at 9% you pay $2446/month of which $2250 is interest i.e. you are only paying off $196/month in the early months.

Renting is typically cheaper due to the tax breaks afforded to landlords. So if you rented a similar property for, say, $2000/month you could invest $446 each month to be paying the same as a mortgage.

With prices going down, I'd rather stick $446/month into a high interest account than pay for something that will reduce in value.

[mikewalkerfrom]

That's exactly what we're doing! :cheers

[jo b]

Nick

we bought our first house in Dec 1991 (I think it was then god old age does funny things to your memory!!).
Interest rates were 15%, we moved in 1996 with a trade in deal type deal and the people who bought our old house got £5k towards it from our builders from our builders. We lost £4k on that property.
It was only when we moved that we realised in the way they had marketed this deal we really had been duped.

Oh and we had to have a meeting with the lenders and prove our incomes and they would only lend us 3.5 x our combined salary with a 95% mortgage.I think that the banks will move back to this lending model because of the subprime which in turn will aid a reduction in house prices as people won;t be able to get 6 x salary, I think those days maybe over.

There is also another forum which generally covers the UK that I scan every now and then.

http://www.housepricecrash.co.uk/

you may also find some little nuggets of info in there, they also have a news section so you can see housing market news.

I am not sure we will see big drops but do feel that the market will fall maybe 5% over the next year.

Jo

[JWR]

Never take a principle and interest loan. It is futile. Always try for an interest only one and then fix it for 3-5 years depending on your situation. Don't whinge if rates fall (highly unlikely) just feel good and secure knowing yours won't go up. More importantly 'interest only' means for the same repayments you can buy 'more' and reap the benefits when prices rise. Timing is important with of of this but I would be buying and I will. NZ is not some propped up place in working class USA. Keep a keen eye on the market and when you make a move borrow interest only and fix for 3-5 years.

In 10-20 years when your $500,000 property is worth $2,000,000-$4,000,000 you won't care about still owing $500,000. If you had bought a $400,000 property and paid principle and interest you would probably still owe $300,000and it would only be worth 80% of the $500,000 purchase. (obviously) So you have 'saved' $100,000 by paying off your loan and lost the increase that the extra $100,000 could have matured to, about $600,000.

Principle and interest is a con.

Everyone should see a financial adviser, I am not one, don't copy the other sheep and don't conform to what the bank does.

[Peter&Liz]

Renting is not necessarily dead money.

On a new $300,000 25-year mortgage at 9% you pay $2446/month of which $2250 is interest i.e. you are only paying off $196/month in the early months.

Renting is typically cheaper due to the tax breaks afforded to landlords. So if you rented a similar property for, say, $2000/month you could invest $446 each month to be paying the same as a mortgage.

With prices going down, I'd rather stick $446/month into a high interest account than pay for something that will reduce in value.

Yip rent is as much dead money as the interest part of a mortgage.

If the market is falling, I’d be inclined to put my capital in a high interest account and rent for a while.

Peter

[jo b]

JWR,

I think that unless you have the capital to pay off your loan at the end of the term then your idea is slightly flawed. Even if you still owe 500k but don't have the means to pay it then the capital growth on your property is worthless unless it is true money in the bank.
Many people in the UK took interest only mortgages backed up with an endowment policy to repay the capital at the end of the term in the 1980's and early 1990's. The stock market crashed and the policies nose dived which left many many people without the means to buy their property. This caused many many reposessions and many switching to a repayment mortgage as they were told their policy wouldn't cover the amount owed, also at a time when interest rates were 15% lots of people couldn't even afford that. So even with a fixed rate for 3 -5 years if you over mortgage yourself it is very easy to think big when interest rates are low but when interest rates go up and everyone is off loading their property to downsize to reduce thier payments, the value of their property plummets as there is a glut of them on the market creating a buyers market and of course you are then in a negative equity situation.

The value of a property is only what someone is prepared to pay. My house might be worth 1 million but that doesn't mean I am a millionaire as it's only on paper.

Jo

[wilson182]

:nice1 Good post jo

[Nick88]

I agree entirely Jo.

@JWR, the other flaw in your tactic is that you cannot be sure the house will be worth more in the future. The are plenty of examples of markets where it took 15 years for values to recover their previous highs. I you need to move in this time you could be in negative equity. Somehow I doubt those houses in Stockton Ca will make up that 40% any time soon.

There have also been reports written that looked at the net worths of renters and mortgagers over the term of a mortgage. If the renter invested the savings he/she made by not paying the higher rate of the mortgage they actually come out on top. This assumes they are as disciplined as the buyer is forced to be by the mortgage, plus they have the bonus of being more liquid. If renting costs less than buying I can't see how it is dead money when mortgage interest is not, both are paying for the use of an asset of equal value (the house and the money to buy the house).

[jo b]

I quite agree Nick. Good post.

We are now on an offset mortgage (capital and interest) which means whatever savings are in the bank, reduces the amount of capital the interest is calculated on, this also means that it works out better than savings interest the bank gets as they always charge more interest for borrowing rather than saving. Also our current accounts are calculated (Thats if there is any money in there :roll).
So if we had a 100k mortgage and say 20k savings I would only pay interest on 80k. If the savings interest was 6.5% and mortgage rates were 7.5, I would be better off. I hope I am making myself clear:o for those who don;t know how they work and also don't want to teach you granny how to suck eggs either (British expression).

We have kept our endowment though although we are just seeing that as a saving scheme as we have the offset now.

Cheers

Jo

[Tia Maria]

Property has been an essential tool to getting us to where we are today financially, so on the whole I agree with the 'renting is dead money' idea.

However, there are times when its not. One of those is when you are not sure of the area you are moving to, this increases your chance of having to sell in less than ideal circumstances and in NZ that often means high estate agents fees. Plenty of people on this forum have moved area within NZ, or left NZ completely, in under a year of arriving. In this circumstance it is very possible to loose a lot of money if you chooses to purchase rather than rent.

Another situation is, about a third to a half, of the children's families in my son's class, rent. They can not afford to buy in Devonport but want access to the lifestyle and schools. For them its more than worth the cost of the rent. Also once the children get older they will probably move further north towards the secondary schools and have access to more and less expensive housing. In the meantime most of them are saving up for a deposit.

Mortgages can be so high in this area that both parents have to work, by going with the renting option one can be at home with the children. Also as most of the properties round here are villas, maintenace costs are very high.

Cheers

Tia

[JWR]

I respect others views, just don't agree and that is fine.

Property doubles in value every 7-8 years and principle does not reduce significantly until the last 10 years of a 30 year term, so little point in trying to pay it off. I have owned six different homes in almost 30 years in OZ, and rented in another 6 approx. In OZ people sell and buy homes (move in other words) A LOT, so principle reduction is not in the equation, but equity keeps increasing. Maybe it is different in UK, certainly seems to be a lot harder to sell your home there from what I have read on here. How many times do you find when you change homes and discharge the old mortgage that despite having being paying priciple and interest for say 7 years you still owe nearly the full amount when it comes time to discharge. That was my point. You could have being repaying the exact SAME amount on a more expensive purchase, 'interest only' and be reaping the benefits of larger appreciation on the higher priced property. Maybe it's different in UK, but I doubt it, market forces and all. You should heed what I am saying, as it is true, and worth thinking long and hard about. Like I said before, I am not a financial adviser, people should go and talk to one, but I bet 99% don't. They just think they know best. :no

[b&k]

JWR,

You're entitled to your opinion but I wouldn't recommend your plan to anyone.

You scheme only works if the market continues in an upward direction. If prices stabilize or fall (more than likely in the next few years) then you end up with less.

If you bought a house in the UK in 1989, it would not have gained any equity until 2002 in real terms. Most people can't risk waiting that long.

Incidentally, a $500,000 home would need to increase in price at least 5-fold for you to have more equity than a $400,000 home where you pay off the mortgage

$500k*5 = $2.5m
then take off the outstanding £500k gives $2m

$400k*5 = $2m
no outstanding mortgage so gives $2m

[JWR]

Fair enough B&K, we will agree to disagree.

I'm not suggesting others do this, only that they think about what I am saying as that has been my experience over the years and it worked for me in Australia. A typical house in Perth Australia in 1989 worth $200,000 by 2002 was worth $500,000 (despite the 1990 'recession' here, no growth through to 1993). Today the same house is worth over a million dollars, but admittedly in the last 2-3 years prices here have gone through the roof due to a boom period. This all has to be averaged out, but the general rule of thumb is that house prices double in value every 7-8 years, so if are young get on the 'wagon' the sooner the better. If prices fall 25% across the board in NZ over the next year or two some will say 'told you so', but I don't think that is going to happen, BUT I COULD BE WRONG.

All this is food for thought, just trying to help. ;)

[Nick88]

Absolutely JWR, in the past that has worked. However the affordability multiples (price to income ratio) were not as high as they are now. Perth (fantastic city btw) now has a ratio of 7.6 according to the Demographia survey. This means that the average person can no longer afford the average house, and unless income increase dramatically (unlikely) then prices will have to come down to meet the market. Aus didn't have as rough a time as many others during the recession in the 90s due to a resources boom, so prices did not get checked as much as they might have been. This has lead to a more sustained rising market in Aus (and to a certain extent NZ), this is a factor in the high affordability multiples seen there.

There is no base of first time buyers coming in to keep the whole property ladder going, home ownership levels are slipping as a result. For those FTBs to be able to buy prices have to come down, either by an increase in supply (council planners need their heads banged together!) or by a correction in the market.

House prices do not double every 7-8 years in the long term, they have only done so lately. Long term studies have shown that prices increased only just above inflation (+1.3%) since the 1960s, excepting the huge rises of the last few years. They cannot sustainably rise any faster, rents are linked to wages, and property prices (until recently) have been linked to rents. They are going to have to come back into line again some time, landlords can't go on subsidising their tenants' rents forever.

[jo b]

Some interesting info on this link about the OZ and NZ market has had a bigger bubble than most countries and also why their will be a bigger decrease.

All the lenders will have been hit by the subprime but moreso by borrowing against the yen as it has a lower interest rate. The credit squeeze will happen banks will go back to thier original borrowing criteria rather than risking classing everyone a a AAA rated borrower only to find they are not. Also Japan is seeing a higher inflation level as opposed to 0 or 0.5% that they have been used to in previous years. Many borrowers are coming to the end of their great interest rates and when they have to pay the nearly 10% you will see an influx of houses on the market and couls drop as muich as 40% which is what they dropped to in the 1970's.

Well worth a read.

http://forum.globalhousepricecrash.com/index.php?showtopic=27321

[Nick88]

I stumbled across this picture in a blog. It is not immediately apparent, but the vertical axis is % increase in median house prices.

http://www.slightlytallerthanaverageman.com/wp-content/uploads/2007/08/581px-economisthomeprices20050615.jpg

If history repeats itself (when does it not?) then it looks like there will be a bit of a drop in the next few years.

[Jo Jo]

There was an article about the pros and cons of selling up and renting in last Sunday's Sunday Star Times, with some figures given as examples. I can't find it on the web, but I'll scan it and email it to you if you like, Moorf.

[Moorf]

Yes please :nice1

I'll PM email addy...