*sigh* I started my post with "I don't understand why people find this so hard", and I still don't. Let's try this one more time, very slowly for the kids from the special bus who never mastered ratios at school:
(a) people who rent shouldn't even be paying off the interest on their landlord's loan because in if they make a loss usually they can do something called "negative gearing" (getting a double tax deduction) on the *loss* of the loan AND because after twenty years they also now have a big shiny property they own
(b) if you *are* paying off your landlord's interest (or worse) then you are paying too much and should move, but I'm sure there's a myriad of excuses people will make about how that's not possible
(c) comparing a city apartment to a suburban house (for example) makes no sense because as we have seen from the prices people have thrown around in this thread - location, location, location!
(d) if you are serious about buying a home then I am going to assume you have already got some idea what your maximum repayment budget really is (and that you also know what kind of rent properties of that type *in* that area are charging).
So, let's say that you have a choice between renting and buying. If you buy your repayment looks like this:
mortgage repayment = interest (bad) + principal (good)
Alternatively, if you're renting then your budget should look like this:
same income = rent (bad) + savings (good)
Both interest and rent are bad because the money is gone for good (although I'd still rather give that money to another person than another bank). The biggest problem people seem to have is understanding that when you rent the excess money doesn't magically turn into iPods all by itself!
If you are one of those people who are simply incapable of sticking to a damn budget, and thus saving the difference, then go buy a house already. Otherwise:
interest (bad) + principal (good) == rent (bad) + savings (good)
which leads us to:
buy ratio == principal / savings == rent / interest
which is a ratio (just like trade ratio = exports / imports) that tells you whether you're likely to be better off buying a house (> 1) or whether or not you're better off renting (< 1). If you get a number anywhere over (say) 0.9 then it's time to make an appointment with the bank.
And yes, there's eleventy brazillion things you have to take into account if you want to work the figures out accurate to ten decimal places, but my experience is that people who are so vague about home ownership are either (a) hippies, or (b) people with little (or no) savings. If they listen to all the other Talking Points(tm) of people whose income is derived from getting people to buy and sell property they can easily forget that at the end of the day the question is whether or not your money is actually being saved (in either a house or in shares), or whether your money is being lost (to either a bank or a landlord). All those other details may fine-tune the numbers, but they don't change the fact that interest and rent are BOTH dead money, while there is no good reason why people can't save money
while they are still renting.
The funniest thing is that this is not the first (or last) time I've tried to point this out to people, and it always cracks me up how the "wanna-be Enron's" always try to come back with numbers they 'feel' prove me wrong when in actual fact the more they exaggerate their figures the more it proves the ratio nails the important details (
edit: which I notice a couple of the brighter sparks have already picked up on).
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Topic: Buying a first home (Read 12333 times)
