The real cost of home ownership in Australia


Jason Prowd  |  29th May 2018  |  5 mins read

Key points:

  • They say owning a home is the best investment, but is it really?
  • Don’t believe the hype: there are more stable, less time consuming and potentially much more profitable avenues for wealth creation.
  • Taxes, mortgage fees, council rates, maintenance and insurance can be hidden but significant costs.

Rent money is dead money. Property always goes up. You know them all. We’ve heard them at every BBQ for the past 20+ years. Us Aussies are property obsessed. For many, owning an apartment or house is not only about having a home. It is also the main (and often the only) way we intend to build lifelong wealth. Whether or not we use the term, it’s not just a home, it’s our biggest investment.

This strategy has worked well so far for home-owners in Australia. Mostly. For the past 20+ years property investment has been a brilliant trade. Sure, there are a few leveraged-to-the-hilt investors who’ve lost their shirt trying to flip 3-bedders in Karratha, but they’ve been the exception. It’s been mostly good news.

Still, as Warren Buffett is fond of saying, you can’t drive a car looking out the rear window. So it is with investing. Just because something has been a great investment, doesn’t mean it will be.

And many people grossly overstate their success by glossing over a whole host of real costs that come with buying a property. Let’s dig in.

 

Buying a house

Let’s imagine that you’re buying a house in 2018 in Sydney. With median house prices reaching $1.15m [1] in 2017, let’s say you nabbed a bargain at $1m, and that you managed a 20% deposit – $200,000. Now you’re about to be hit with the bills. Strap in.

First, the legal fees – expect to pay around $1,800 [1]. You’ll need to pay a mortgage establishment fee ($450 on average [2]), valuation fee (average $200 [3]), transfer fee ($219 [4]) and mortgage registration fee ($109 [5]). Oh, and $40,768 in stamp duty [6].

 

Maintaining a house

Now that you’re sorted with a property to your name, it’s just a matter of paying off the mortgage. At an average of 4.42% [7] interest, this will cost you $4016/month in (principal & interest) loan repayments. That can be tough, but it’s all you have to do, right?

Wrong.

What is often forgotten is that buildings need upkeep. One rule of thumb for calculating maintenance costs is an average of 1% [8] of the value of the property per year, so in our case, you’re looking at setting aside around $10,000 per year in order to keep the house in good repair. [9]

Then there are local government taxes and rates (averaging $775/year in NSW), home and contents insurance ($2116.58/year on average [10]), and your ongoing mortgage fees (up to $395/year at most major banks [11]).

Not to mention that predictions are that home loan interest rates are expected to rise  over the next few years [12]. Feeling skint yet?

 

Selling a house

Let’s assume that you own the property for seven years, and that your property’s value grows nicely, at 7% per year, over that time (even though there’s a prediction of a fall [13]), and you sell in 2025 for $1.6m.

Real estate agents’ fees are your big cost here, with NSW average commissions at 2.46% [14] plus GST – $39,360. Then there are more legal fees and a possible mortgage exit fee, depending on your mortgage type [15]. Yep, everyone seems to get their pound of flesh or three.

 

So, what do you end up making?

Despite an impressive sale price, a substantial amount of ‘profit’ is eaten up by paying over $6000 per month to maintain the asset and service the loan.

So, what do you end up taking home as profit?

Let’s look at all those figures in a table:

 

Table 1: Home ownership – Costs over 7 years

Item Total costs over 7 years
Mortgage establishment fee $450
Transfer fee $219
Mortgage registration fee $109
Valuation fee $400
Stamp duty $40,768
Legal fees of buying $1,800
Mortgage repayments ($4,016/month x 84) $337,344
Mortgage fees (annual rate x 7) $2,765
Home and contents insurance $14,816
Maintenance ($10,000 x 7) $70,000
Legal fees of selling $1,800
Agent’s fees $39,360
Mortgage discharge fee $160
Total costs $509,991

 

Table 2: Home ownership – Profits after 7 years

Sale price $1,600,000
Outstanding loan balance (i.e: what’s left of loan amount after paying back principal and interest for 7 years) $694,999
Gross profit $905,001
Gross profit minus costs (i.e: from Table 1) -$509,991
Net profit $395,010

Your initial $200,000 has turned into $395,010. In today’s dollars, which adjusts returns for inflation, that’s $328,489. A handsome gain of 64%. This is great. But it can be bettered. Especially when you remember that none of this accounts for the time spent on maintenance and admin, the possibility of the housing market falling, or the opportunity cost of having all your money locked away.

 

Is there another way?

Now imagine that instead of buying a house, you use a different strategy to build wealth – starting with the same $200,000 (your home deposit) and using the same $6000 per month (your monthly costs).

In this new scenario, you invest your initial $200,000 in an investment portfolio and rent a similar house, in the same suburb. On a house worth about $1m, you’ll likely pay rent of around $3000 per month [16]. So that frees you up to top-up your investment portfolio by an additional $3,000 a month. For seven years.

Invested in our Growth portfolio you could end up with between $434,348 and $528,290 [17] after fees and taxes. (Again, in today’s dollars, which accounts for inflation.)

Of course, you should experiment with the assumptions to explore different scenarios. If property prices rise by more than 7% per year, the outcome looks better for home ownership. If it falls, it looks worse.

However, there’s a big gap between $328,489 and $434,348—the potential lower bound of the Growth portfolio forecast.

Investing in a managed portfolio also removes the time, stress and uncertainty of home ownership, since a diverse investment portfolio is managed by experienced investors and doesn’t rely on a single market succeeding in order to grow.

Best of all, you don’t have to wait until you’ve saved $200,000 to start.

 

— Jason Prowd leads Morningstar Next: ready-made investment portfolios.

Find out how much your money could accrue with our portfolio calculator.

 

© Morningstar Investment Management Australian Limited (‘Morningstar’) and any related bodies corporate that are involved in the document’s creation. Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third-party providers accept responsibility for any inaccuracy or for investment decisions by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment.  Any general advice has been prepared without reference to your investment objectives, financial situation or needs. You should consider the advice in light of these matters and if applicable, the relevant disclosure document before making any decision to invest. Refer to our Financial Services Guide for more information.


[1] https://www.domain.com.au/news/sydney-median-house-price-hits-115-million-buying-becoming-out-of-the-question-20170419-gvmnp8/

[1] https://www.finder.com.au/conveyancing

[2] https://www.finder.com.au/home-loan-fees#upfront

[3] https://www.finder.com.au/home-loan-fees#upfront

[4] https://www.finder.com.au/stamp-duty

[5] https://www.finder.com.au/stamp-duty

[6] https://www.realestate.com.au/calculators/stamp-duty-calculator/

[7] https://www.canstar.com.au/home-loans/how-much-will-your-mortgage-really-cost

[8] https://www.thebalance.com/home-maintenance-budget-453820

[9] https://www.smh.com.au/national/nsw/how-much-your-sydney-council-rates-will-increase-by-in-2018-20171128-gzufl0.html

[10] https://www.canstar.com.au/home-insurance/home-insurance-cost-2017/

[11] https://www.finder.com.au/home-loans/fixed-rate-home-loans

[12] https://www.smh.com.au/money/borrowing/how-much-your-home-loan-repayments-could-rise-this-year–and-how-to-stop-it-20180118-h0k7w7.html

[13] http://www.abc.net.au/news/2017-12-29/boom-is-over-most-experts-expect-property-price-weakness/9290190

[14] https://www.openagent.com.au/real-estate-agent-fees/nsw

[15] https://www.canstar.com.au/home-loans/home-loan-fees-you-should-know-about

[16] SQM have great property data. For Sydney rent, yields are between 2.8-3.8%. I’ve assumed ~3.6% to use round numbers for the rent.

[17]  These figures are a forecast and not a prediction. The projected balance are estimates only, the actual amounts may be higher or lower. This forecast is general information only and does not consider your circumstances. For more information on how it is calculated please refer to https://next.morningstar.com.au/portfolios.html.

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