Would you buy a new family home [Australia]

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Mues
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Would you buy a new family home [Australia]

Post by Mues » Mon Oct 09, 2017 5:55 pm

Question - need independent advice about what to do about housing. Living in Australia makes general advice skewed.

I live in Australia which is currently somewhere in a property boom/bubble/growth phase. People in Australia are obsessed with property. My wife wants to keep our current house and then buy a new one. I’m not sure so wanted advice from people not living in the Australian market.

Status: married
Kids: 1, 6 months old
Age: both 33.
Salary: him. 220,000 (job unstable but good industry). Her. 100,000 (currently on maternity leave for the next 6 months. Probably go back 4 days or full time. Job very stable)

Assets:
House: $850,000
Vanguard total USA stock market: $25,000
Vanguard total Australia stock market: $15,000
Emergency fund: not needed as I use an offset account for my home loan. Currently contains $200,000

Debts:
Home loan: $400,000 (but effectively $200,000 as I have $200,000 in the offset account so I don’t pay interest on that). Interest rate 3.6%
Student loans and cars paid off.

Retirement funds:
Her: superannuation: $95,000
His: $90,000
Contributions are maxed tax free. We both lived outside of Australia for a bit before we met which slowed initial contributions.

Our current house is a two bedroom In the area we love and my wife wants to keep it and buy another house further out while renting our current place. She wants to spend up to 1mil. Current place would generate 3k a month rent.

I’m more tempted to move to a bigger house and rent and see what happens with the Australian property market while inventing in other bits and finishing paying off our homeloan.

Challenge is that houses in aus are going up 15% a year and fear of missing out kicks in. We even look at others who make less than us spending more on houses. We have worked really hard to pay our current house down, not sure I want to do another big loan.

What would bogle heads do? How have they handed this with nesting wives before :D

runner540
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Re: Would you buy a new family home

Post by runner540 » Mon Oct 09, 2017 6:57 pm

The mentality "fear of missing out on gains" is a classic feature of an asset bubble. Everything I've read about Australian markets here in the US for the last year has discussed that it is in a bubble phase. You already have a large exposure (relative to net worth) to the market in your current house, and don't need more. It sounds a lot like what happened in the US in 2004-2007. Don't compare yourselves to others that have lower incomes. Am I right thinking that Australian mortgages are variable rate?

I would recommend you and your wife focus on continuing to grow your retirement and emergency fund accounts. They are small relative to your house and incomes. Make sure your accounts are diversified outside of Australian stocks only.

With your wife, read about what has happened in Toronto and Vancouver over the last year. Very similar "appreciation" rates, and suddenly has frozen up. People have gotten caught "swimming naked" as they say with little equity and lots of debt.

Is there a remodel or redecorating project that would help your wife like the current house more?

here are a few links I've found: (You'll know better than I whether these are reliable sources and whether they apply to your area)
http://www.yourinvestmentpropertymag.co ... 41997.aspx
http://www.smh.com.au/business/property ... yspxw.html
https://www.bloomberg.com/news/articles ... -australia
http://www.yourinvestmentpropertymag.co ... 41784.aspx
https://www.theurbandeveloper.com/bank- ... pite-face/
http://www.businessinsider.com/parents- ... sts-2017-7

adamthesmythe
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Re: Would you buy a new family home

Post by adamthesmythe » Mon Oct 09, 2017 7:25 pm

You are talking about a non-diversified leveraged investment. This is how some people get rich and some people get broke.

Never went in for this myself, just did took the slow and steady approach.

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bottlecap
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Re: Would you buy a new family home

Post by bottlecap » Mon Oct 09, 2017 7:28 pm

I had friends (a married couple) that did this in 2006 in the U.S. They were sweating in 2008 pretty hard because they were upside down.

It turned out okay. They brag the government bailed them out of a tight spot.

So if you are responsible people, don’t do it.

If you think you'll get bailed out, buy away!

JT

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kenyan
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Re: Would you buy a new family home

Post by kenyan » Mon Oct 09, 2017 7:43 pm

Ignore the part about 15% increases per annum. Those are wild assumptions and should not be used in your calculus. As others have said, it might be a bubble, especially if the underlying fundamentals (price/rent, price/income) don't support such increases. I will admit that even if it is a bubble, there might still be money to be made, but it's risky. Instead of counting on crazy price increases far above the rate of inflation to support your decision, I'd ask the following questions:

1. Do you want to be landlords? It is a part-time job. Would you know how to do that job?
2. Do you want your assets to be even more real-estate-based than they currently are?
3. How do rents compare to the all-in costs with taking on another property? There are plenty of better guides out there on how to calculate this (much better than I could convey), but you need to consider your maintenance costs/repairs, vacancies, etc. in addition to your typical, more concrete housing costs. If you can't be cash-flow positive, you're taking on a serious speculative risk, and this course of action isn't really advisable even if you answer yes to the first two questions.
Retirement investing is a marathon.

Mues
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Re: Would you buy a new family home

Post by Mues » Mon Oct 09, 2017 8:28 pm

Hmmmm.

For being a landlord - I’m not concerned about that. My parents have had two rentals my whole life and the agent manages most of it. All rent, repairs, bonds, leasing, advertising. I think the industry here operates a little more smoothly than in the USA.

From where my thinking is - I personally would prefer to move and rent and wait as see with the market. But we probably need a bigger place in the next few years. I’m not looking to make money out of buying our next house, more that we have been priced out of the areas we wanted to live and now are moving into less desirable areas to us. Wife fears if we don’t do it now we will end up in bad school zones or having to move the family around regularly as part of the generation of renters that are appearing in Australia. She just wants to buy the forever home and be done with it.

Having said that being in our early 30’s we have been working 10 years each and over the last 3 year our incomes have gone up drastically. I started on 42,000 so we are starting to get bg enough shovels to really move things.

I think we could invest 80k a year while wife is on maternity leave and more when she is back (I’m in the 49% tax bracket). I guess we could invest 400k over the next 4-5 years and see where we are at.

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Watty
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Re: Would you buy a new family home

Post by Watty » Mon Oct 09, 2017 10:33 pm

Mues wrote:
Mon Oct 09, 2017 5:55 pm
I’m not sure so wanted advice from people not living in the Australian market.
I'm in the Georgia in the US which you might be familiar with in film "Deliverance" and the TV show "The Dukes of Hazzard" :D

I have even heard of the housing bubble going on in Australia. They are a lot easier to spot from a distance.

(Atlanta is actually a modern big city but the US South does have a reputation for being a bit backwards. )

With two kids you might need the extra space so moving to the larger house could be more of a lifestyle decision than a financial one.

Keeping your first house as a rental hoping that the price goes up would be something that people typically do in a bubble. Keeping it as a rental just because of the rental income didn't sound like it had real compelling numbers.

There is no way that I would want to keep a the first house as a rental house there.
Mues wrote:
Mon Oct 09, 2017 5:55 pm
Challenge is that houses in aus are going up 15% a year and fear of missing out kicks in.
If you have one property you will do just fine if housing keeps going up.

I don't know how it works over there but in the US you might have a hard time qualifying for a mortgage on the second home while keeping your old one as a rental. This is because in the US a lender would want to see that the property has a good rental history before counting the rental income on your loan application so you would need to qualify for the loan just with your wage income. Are you sure that you could even qualify for a loan to buy the next house without selling the first one? If not then that might answer the question about keeping the first house as a rental.
Mues wrote:
Mon Oct 09, 2017 5:55 pm
Challenge is that houses in aus are going up 15% a year....
It looks like your net worth is around $900,000 and if you ended up with two houses you would have about $1.8 million in housing. If house prices dropped back to where they were two years ago that would not be an exceptional collapse in housing prices since even two years ago people were likely talking about how expensive the houses are. If that is a 30% drop then your two houses would only be worth $1,260,000 and your net worth would drop by $540,000 from $900,000 to $360,000 which would be a 60% drop in your net worth. Housing could drop by 50% and just likely be back to what it cost five years ago and that would wipe out all your net worth.

With just one house the impact would be a lot less.

Mues
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Re: Would you buy a new family home

Post by Mues » Mon Oct 09, 2017 11:13 pm

I feel like there is only two options for me.

A) Sell my current place and upgrade. Which might take my debt to 450k from the 200 now, but will also mean we are kinda done.

B) keep my current place and rent somewhere else for a few years and see how we feel.

If I do B I might invest in something a little more conservative then 70/30 that would be a fit for my age.

Maybe 50/50? This means I could still get to the money if I change my mind to buy another house in 5 years and the chances of a downturn cutting into my investment is lower.

The fees are higher, but opening one of these in the mrs name (for tax purposes) might work. https://api.vanguard.com/rs/gre/gls/sta ... ts/8295/au

Is that silly? I’m basically talking about pushing the decision off 4-5 years and going with a conservative investment strategy.

mega317
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Re: Would you buy a new family home

Post by mega317 » Tue Oct 10, 2017 12:21 am

Your numbers really jump out at me. Income is 320,000, 2/3rds of which is unstable and the other third is likely decreasing after maternity. You owe 400k 200k on a house and you want to buy another for a MILLION?

"Fear of missing out", "we look at others"

Your post is scary to me.
Last edited by mega317 on Tue Oct 10, 2017 12:37 am, edited 1 time in total.

Mues
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Re: Would you buy a new family home

Post by Mues » Tue Oct 10, 2017 12:32 am

I owe 200k on a house. Also by the time I found one to buy it would probably be more like 150-130k owing.

Added to that - If I rented the current house out, it would produce 36k a year rent. Even if I take that down to 20k after interest and costs that’s a nice bit of side revenue that would increase each year.

Don’t get me wrong - getting a million dollar loan is a big deal, but being able to service the loans are not my concern.

It’s the fundamentals of buying the house my wife dreams of as opposed to thinking able the logical Long term choices or considering other paths than what everyone else I know is doing. Those are the things I can’t work out.
Last edited by Mues on Tue Oct 10, 2017 12:43 am, edited 1 time in total.

mega317
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Re: Would you buy a new family home

Post by mega317 » Tue Oct 10, 2017 12:38 am

Sorry I edited. That makes me feel 14% less scared, which still doesn't feel great.

Where is the down payment on the new house coming from?

AlohaJoe
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Re: Would you buy a new family home

Post by AlohaJoe » Tue Oct 10, 2017 12:39 am

I'm Australian but don't live in Australia. I wouldn't buy a house in your situation. Not so much because of worries about housing bubbles popping but just because it would have make you extremely leveraged and concentrated. I'd also be concerned that things that make it work for you right now -- like the interest rate and negative gearing -- might change and make it no longer tenable.

You have very little in your super for a couple your age with those salaries, especially given the market returns of the past 3-4 years. Are you making the maximum concessional contribution to super? If not, I'd start by doing that.

Where would the deposit come from? Would that be from your offset account?

Let's assume the deposit comes from the offset and your buy a $1 million house. That would leave you with $1.2 million in home loan at 3.6% -- assuming rates don't change. That's around $5,500 to $6,000 a month in total payments. What would your monthly cashflow look like if you were without a tenant for 2-3 months for whatever reason?

Are you going to be putting your child in an expensive school (Sydney Boys maybe? :D ) down the road? A future expense like would affect your cashflow, so keep things like that in mind.

Going to a single income seems like a terrible time to think about taking on an extra $1 million in debt.

I know a lot of Sydney wives who never returned to work after having kids, despite earlier plans to do. I don't know if that was particular to my set of friends & coworkers or Sydney or what. But at a minimum I'd want to wait until your partner is back to work before taking on another loan.

Mues
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Re: Would you buy a new family home

Post by Mues » Tue Oct 10, 2017 12:44 am

mega317 wrote:
Tue Oct 10, 2017 12:38 am
Sorry I edited. That makes me feel 14% less scared, which still doesn't feel great.

Where is the down payment on the new house coming from?
Sorry I post quicker than I meant to! I updated above :p

Mues
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Re: Would you buy a new family home

Post by Mues » Tue Oct 10, 2017 12:49 am

AlohaJoe. In regard to super. We have both been working 10 years but 5 of mine were outside Australia as were 4 of hers. Hence the lower super

Mues
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Re: Would you buy a new family home

Post by Mues » Tue Oct 10, 2017 1:13 am

It seems that nobody else would.

So I might go for my “plan b” above and invest conservatively for 4 years and decide again.

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Watty
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Re: Would you buy a new family home

Post by Watty » Tue Oct 10, 2017 8:52 am

Mues wrote:
Mon Oct 09, 2017 11:13 pm
I feel like there is only two options for me.

A) Sell my current place and upgrade. Which might take my debt to 450k from the 200 now, but will also mean we are kinda done.
Are those numbers right?

It sounded like you only owed $200K on your current $850K house because of the offset account and you were looking at buying a million dollar house. There would be some transaction costs but to me that looks like it would only increase your debt by $150K to $350K.

If house prices drop a lot, like even 50%, then having bought the $150K more expensive house would only leave you $75K worse off than if you kept in the small house. $75K is a lot but it is only a few months wages for you so you could get through that.

What did you mean when you said "but will also mean we are kinda done." ? If that means that you could get the house paid off in five years or so and then home price swings would not matter because you would always need some place to live in then that might not be a bad thing.

Wakefield1
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Re: Would you buy a new family home

Post by Wakefield1 » Tue Oct 10, 2017 9:26 am

The main reason to go through the trouble and expense of buying a new home would be if one enjoys the ambience of the new place more,perhaps it has more space or better kitchen,perhaps a larger bathroom which is easier/safer to bathe or shower in,especially for a person who is becoming invalid/aging or having problems with getting into and out of cramped spaces. Is the old place worn out or in need of major repairs/rebuilding? Perhaps better to sell it to someone else who is more prepared to deal with it rather than trying to bring it up to date yourself.
Also getting out into the country,perhaps some space for gardening,nearness to National Forest or other areas with good roads or trails for hiking/running,getting away from a congested noisy neighborhood that has too much traffic and property taxes.

bloom2708
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Re: Would you buy a new family home

Post by bloom2708 » Tue Oct 10, 2017 12:51 pm

This isn't a "Go for it! YOLO!" forum.

But, I think you want to do it and don't want to be convinced not to do it.

Go for it! YOLO!

:wink:
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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Re: Would you buy a new family home

Post by LadyGeek » Tue Oct 10, 2017 4:17 pm

This thread is now in the Personal Finance (Not Investing) forum (financial aspects). I also retitled the thread.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

halfnine
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Re: Would you buy a new family home [Australia]

Post by halfnine » Wed Oct 11, 2017 8:07 am

I am going to agree with Aloha Joe.

As best I can tell you have a concentrated risk in housing right now and are underweight equities. Quickly and crudely your assets appear to be around

400K equity in property (at around 2x leverage)
250K in bonds (your offset account is similar to a bond)
150K in equities (you indicated 70/30)

At this point, having two home seems awfully risky to me. I'd give it a few more years at least until you have a more balanced portfolio.

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