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Posted on 21 Aug 2017 by Steve Johnson

How to Retire Happy, Comfortable and Property Free

How to Retire Happy, Comfortable and Property Free

 

My parents, some investors, politicians and a large number of journalists seem very concerned about me. I’m one of the renter generation, and everyone seems worried about us because they think we are going to retire without a roof over our heads.

Please don’t concern yourself. Yes, it’s true. My wife and I don’t own a house. But we do have a very clear plan for living a happy and secure retirement. For any of my fellow renters out there, here is a simple three step plan for you to do the same.

Let’s begin with a few assumptions.

Rent versus own

I am going to use an example of a 30-year-old renter in Sydney or Melbourne considering buying a home to live in. The assumption is you are 30 years old and are currently renting a home for $700 per week, or $36,400 per year. You and your partner have saved $200,000 thanks to financial discipline and some good investing and now have enough for a deposit to buy the home you live in, or something equivalent.

The market price is $1.3m, equating to a 2.8% rental yield, roughly in line with average rental yields in Australia’s two largest cities at the moment. Adding stamp duty you will need a $1.16m mortgage. To pay it off by the time you are 60, assuming a 4.5% interest rate, you will need annual repayments of $71,291 to the bank, or slightly less than $1,400 per week. You’ll also have council rates and maintenance on the house, which I have pencilled in at $8,000 per annum, so a total cost of home ownership of $79,291 per year.

Annual rent ($700 x 52) $36,400
Typical rental yield 2.8%
Purchase price $1.3m
Stamp duty $61,257
Total purchase price $1.36m
Deposit $200,000
Mortgage required $1.16m
Interest rate on mortgage 4.5%
Annual mortgage repayment $71,291
Other home ownership costs $8,000
Total annual cost of home ownership $79,291

Your alternative is to rent for the rest of your life. Assuming 3% annual rental escalation, by the time you are 60 your rent will have more than doubled to $88k per annum. Follow my simple three steps, though, and you will have enough investment income to cover the rent for the rest of your life, and more than $73k[1] per annum of additional spending money. Here’s what you need to do:

1. Save what the homeowners save

The one irrefutable benefit of taking out a mortgage is that you are forced to save. If you want to do better than your homeowning friends, you have to be at least as disciplined. The most important element of our savings plan to is put away the difference between your rent and the cost of owning the same home. In year one that’s going to be almost $43,000 and the early years are particularly important. The rent is going to increase while the mortgage repayments stay the same (see the chart below). In fact, by the end of the 30-year period, our rent is going to be more than a homeowner’s cost of owning a home[2], but by then we are going to have a big pot of money stashed away.

How to Retire Happy, Comfortable and Property Free

While you are looking at the chart above, let’s end some arguments before they start. This blog post is not about whether you will be better off renting than owning a house. That will depend on dozens of different variables that I don’t have the answers to.

The point I’m making is that, if you have the discipline to save those black bars and invest them sensibly, you are going to retire with a big pot of money. Whether it’s bigger than the value of the same house in 30 years’ time, I don’t know. But it will be more than enough to cover the rent.

2. Minimise tax on your investment returns

Homeowners get a few free kicks from the tax office but there are plenty of things you can do to keep your own tax low. Most beneficially, get your savings into a super fund where the tax rate on long term investment gains is only 10%. I have assumed you can contribute the initial $200,000 deposit you have saved as a non-concessional contribution and keep doing the same with your post-tax savings. You will do a bit better than this if you have room to make more concessional contributions up to your $25k annual limit, but we will keep it simple for the purposes of this exercise.

As you can see in the chart below, keeping your tax rate low makes a massive difference to your investment balance at 60. Even if your starting point is a 40% marginal tax rate, if you do your saving outside super, your growing investment returns are going to push you up into the top tax bracket fairly quickly. I have assumed a 10% tax rate but your average tax rate will be even lower if you build wealth in a super fund, avoid realising gains for longer periods of time and generate a good portion of your returns as fully-franked dividends[3].

 

How to Retire Happy, Comfortable and Property Free

3. Maximise your investment returns

Cash in the bank isn’t going to cut it. You need your money working for you. Minimise costs, and make sure the portfolio is invested in a portfolio of real assets like shares, property and bonds.

You should target total portfolio administration and management costs of less than 0.5% per annum, either through a low cost industry fund or running your own self-managed super fund. And I have assumed a 6.5% gross annual investment return, leaving you with a net return of 6% per annum. This is below the historical returns from most aggressive or even balanced low-cost super funds, but we are starting with high asset prices across the board and I think this is a sensible long-term expectation[4].

The difference between a 7% return and a 3% return is staggering, as you can see in the chart below. At 3% per annum our savings will be $1.7m in 30 years’ time and the annual investment returns won’t go anywhere near covering your rent. At 7%, you will have $4.0m of savings and $160k per annum of spending money over and above your rent. If you can get to an average return of 10% per annum, you’ll have a balance of more than $7m[5]. That’s the power of compounding.

Our base case, however, is that you can earn 6% net on your money. This, combined with your annual saving, is going to build you an investment pool of roughly $3m over 30 years. By the time you retire, these savings will be earning you $180,000 per annum before tax, more than double your rent.

How to Retire Happy, Comfortable and Property Free

No need to live in fear

There are plenty of non-financial reasons to want to own a house: security and flexibility to renovate just a couple of them. And for all I know property prices might keep rising and rental yields falling, meaning the mortgage-free home owner could end up with something “worth” more than the renter’s pot of savings. More importantly, most people I know aren’t capable of saving $3,000 a year let alone $30,000. A mortgage is the financial discipline they need.

This post is not to criticize anyone who does buy a house. I simply want to point out that there are alternatives. A life of renting is perfectly feasible.

Be as financially disciplined as someone with a big mortgage, invest the money sensibly and you won’t have to worry about retirement[6].


Footnotes
[1] $3m savings at a 6% return = $180k per annum of investment income. Less 10% tax, less $88k rent equals $73k. Worth noting that your rent is likely to keep increasing during retirement, so you should be stashing some of the extra away to cover future increases in rent. 

[2] Conservatively assuming interest rates, rates and maintenance costs stay the same.

[3] There is a big downside to building your wealth inside super: there’s no changing course half way. If you get 15 years into this 30 year plan and decide you would actually prefer to own a house, you won’t be able to access the super until you retire.

[4] Obviously there are lots of moving parts here. Returns could clearly be lower. Interest rates could also be much higher than 4.5%.

[5] Note that this is all separate from whatever saving you need to do to fund your ordinary retirement expenses. A homeowner is going to need something other than the house they live in to retire on, so this pot of money is just the “roof over my head pot”.

[6] I’m not a very disciplined saver. Thanks to a few successful investments, we are well ahead of schedule.

How to Retire Happy, Comfortable and Property Free
How to Retire Happy, Comfortable and Property Free  How to Retire Happy, Comfortable and Property Free  How to Retire Happy, Comfortable and Property Free  How to Retire Happy, Comfortable and Property Free

40 thoughts on “How to Retire Happy, Comfortable and Property Free

  1. A life of renting is becoming more and more feasible with technology advancement. Eg. You don’t really need a home office anymore and without much stuff it’s easy to move.

  2. Great analysis, thank you!
    We used to own our house outright but decided to sell and invest the money elsewhere. In our case our lease acts almost like a debt that needs servicing.
    All other things being equal, and using figures from your example above, the implied interest rate for the lease would be around 2.2% (2.8% yield – 0.58% allowance for costs that renters don’t pay). Not a bad rate at all!
    I don’t know if that analysis made sense to anyone but it’s been working great for us these past couple of years. Our risk is that rents spike and our investment returns crash over the long term but starting at 2.2% (or probably less, your analysis is very conservative) I’m not too worried.

  3. I have found a large industry fund which has an “indexed balanced” option (about 70% in growth assets), where the admin fees are 0.10% plus $78 per year. Being an indexed option there are also no performance fees. On $100,000 initial contribution that’s an annual fee of $178. Of course, you may wish to add life and TPI insurance which will greatly increase your costs (as it would in a SMSF).

    If you are not interested in, or don’t have the right psychological make-up to handle large share market falls, and have thirty years investment time frame, you could do a lot worse than to pick such a low cost option as this. You also would not have the compliance headaches of a SMSF.

    Certainly choosing to rent whilst home prices are so high, makes some sense.

    Of course what may happen is you reach 60 years of age and find that property prices have been stagnant for 25 years (as has happened in Japan the last 25 years), then it may make financial sense at that point to cash in some of your super or other investments and buy your home at that point.

    So after a lifetime of renting, you may end up being a home owner after all.

    The point is if you are financially disciplined, keep your rental in a neat and tidy state, and have decent landlords, you don’t need to own your own home.

      • Sorry to jump in for Peter, but I’m pretty sure he’s talking about Australian Super’s “indexed diversified” option. You may also want to check out Hostplus “indexed balanced” option, which is 0.02% p.a. plus the $78 admin. Australian Super use vanguard so some might say it’s a slightly better product but these traditional indices are rather generic. As always, pls do your own research.

  4. Agree with everything you’ve written here.
    My only practical caution is that the initial set-up years of a SMSF can’t usually be kept to that 0.5% admin cost, as the SMSF will have high relative costs to its asset base, but knowing this, do it anyway.

  5. Anyone taking the ‘rent for life’ approach as outlined above should do well.
    Particularly if the irrational property prices, evidenced by a 2.8% gross rental yield (!) ever realign with a more historic average rental yield (eg if interest rates rise), potentially allowing the disciplined renter to buy at a more realistic level with little or no mortgage needed.

    The only thing I’d add is if ones idea of ‘balanced’ is an Australian share based index, it would be worth looking into the effect that a major property downturn may have on an index which happens to be mostly made up of banks. No predictions here, just saying that a large fall in property prices is likely to have a multiplier effect on bank shares and a potential flow-on to the rest of the market. This could actually leave the renter in a significantly worse position than his home owning counterpart.

    Of course, most readers would be aware of the importance of diversifying investments globally. But I’m also guessing that many others are significantly weighted toward our local Aussie market, thereby investing in a large chunk of the debt secured by the very assets they can’t justify buying themselves!

  6. Great blog post! Reflects my thoughts exactly

    The one thing worth a mention is the cash flow benefit of doing this. Investing $200k with a dividend yield of 4% gives you an extra $8k per annum of cash. On the ownership side, you no longer have access to the $200k, and at a time in life where wages are lower, you’re paying a large mortgage.

  7. Steve, I totally disagree with this analysis as it does not take into account human security needs. When you are buying your own home you have control of where you live. I am both a home owner, a land lord and an investor. I treat my tenants well but I can refuse to renew a lease and they have to look for another place. No one can kick me out of my home apart from some government resumption. When you own your own home you do improvements which improve your lifestyle and amenity. You can have other people stay for as long as you like. With renting your are always asking for someone else’s permission. You can’t even hang a picture without permission. Own a dog? There is no comparison if you want some sort of control over your life as we all do. Whilst you can argue over a lifetime investments may produce a better return than real estate, the later is more of a sure thing especially over a shorter term.
    Your analysis is also based on Sydney or Melbourne with ridiculous house prices. The other capitals are far better and regional areas are a breeze to own our own home if you have a reasonable income. And, not to mention having assets the bank values if you want to borrow money for an investment or even a big holiday.
    Sorry Steve. I have heard this all before and people make big mistakes. I am surprised your wife goes along with this. Women even more so want security and a place all their own to do with it as they wish.

    • I think Russell that Steve said he did not include all the other important factors which you have highlighted.
      It is helpful to look at it this way because it can be very depressing for younger people (esp. those who can’t get a leg-up with their parents wealth) to see a way forward financially.
      But it is worth noting that almost 1/3 of the population of Australia live in the two cities which you readily acknowledge have ‘ridiculous house prices’. So perhaps for those 1/3 can we say Steve’s article will resonate?

      • Brett, I know is is a difficult choice but people can move from Sydney and Melbourne. There is life out there. I know moving away from family is also an issue. But just think but saving 1/2 your mortgage repayments you can afford to pay very regular visits especially given the cheap airfares we have. Job and people go together. People moved to the Gold and Sunshine Coasts from southern sates for the lifestyle combined with less expensive housing and new they generate their own employment.
        Larger companies could experiment with more regional offices near good airports and infrastructure and give their employees opportunity to improve their lifestyle and finances.

    • Russell, those aspects will come; the rental market in Australia will change.

      In Australia, traditionally renting was the step before ownership. For the majority renting was temporary whilst saving to buy or build your home. It was only the poor and the transient that spent a lifetime renting. Of course, others, because of say ill health, divorce or death of a life partner would transition back from home ownership to renting

      That is now changing. Long-term or lifetime renting is becoming a lifestyle choice for a greater percentage of the population, and for many it makes a lot of sense.

      What needs to happen to accompany this change to to have more renter friendly legislation and leases.

      In parts of Europe the standard lease is five years, not one as it is here, and rental leases are more tenant friendly. It is harder to evict tenants and they have greater rights to make cosmetic changes to the property, to keep pets etc.

      As more of the young and middle classes choose to rent, things will have to change to with tenancy laws and leases to reflect this change.

      • Peter, as a landlord if all control was in the hands of the tenant then I would look elsewhere for investment. Rental properties would reduce in number and rents would go up. There is a synergy between both tenants and landlords/agents. Both have to be happy for it to work.

        • As a rental property owner, isn’t increased rents exactly what you are looking for? Would you expect introducing 5 year leases would cause all these rental property owners to leave their properties vacant all of a sudden?

          We are not talking about losing control, just a better balance, e.g. for on-going tenants up to 5 year leases and allowing tenants to make cosmetic changes, such as painting a room or landscaping the garden, or where a house and land is large enough the keeping of cats or dogs.. Families love properties which allow pets, and many are prepared to pay a slightly higher rent to have pets.

          These changes would have no effect on the availability of rental properties, but you may get longer term tenants.

  8. May I suggest that many women would find it difficult not to own their own home once children arrive on the scene. There is something biological/psychological of wanting to raise kids in your own home. This instinct will outweigh economic rationale for many. Hats off to Mr and Mrs Steve Johnson (children or not) for not wanting to “keep up with the Joneses” with regards to owning property. Maybe we should all be trying to “keep up with the Johnson’s”.

    • My wife is not Mrs Johnson … and certainly not Mrs Steve Johnson! (really hoping she doesn’t read this …)

  9. This is a great article Steve. Very helpful. You gave the caveats about all the other factors involved in buying a home, and are looking at from the financial perspective.
    It gives cause for encouragement I suggest to children (mine included) for whom it can llok very bleak when reading of the house prices in say Sydney.
    Clearly they need to be disciplined with their savings, but that is achievable whereas the alternative to actually buy a house may seem almost beyond reach.
    Three other supporting factors are that you can live in a rental property in a ‘better’ suburb or location which would be way out of reach of purchase, which can be a major factor with children, education etc.
    Also the stress of buying a home and keeping up the ‘over the top’ repayments in the early years when the normal stresses of life are heavy (children, working longer and harder etc). Our parents did it when loans were much smaller in amount. It is a totally different game when the loan amounts are so much bigger – the risks and stresses are much greater. I appreciate as a % of income it may be similar (although every indicator I have seen is saying they are a larger % of income) but it is the sheer quantum of the loan and the interest that provides a subtle stress that is hard to bear if work or career are threatened in any way.
    The third factor that someone mentioned above is that we have not yet experienced deflation in house prices. But house inflation is not an absolute economic principle, and the risks are very great in Australia where something like 60% of bank loans relate to property. We can even learn enough from Ada Smith to know that property itself is not a very productive asset. It is businesses that generate more stable and sustainable income and wealth. I’m sure that is arguable but I think that house deflation is a very real danger in Australia currently.

  10. Two comments:

    1.
    Superannuation creates an unquantifiable legislative risk. If the government becomes desperate for revenue then superannuation savings will be the prime target. Unlikely, but possible. Just think what is the certainty of the pensions for retired Chicago city employees.

    2.
    Once you have a pool of money at the age of 60 gathered from saving and investing the difference between costs of rent and home ownership and you still rent, then you have all flexibility to decide what to do next. This, by itself is worth a lot.

  11. Steve, I commend your analysis and it is certainly something that people need to consider. It would be interesting to extend the analysis to include a period of higher interest rates as 4.5% is unlikely to be the mean over such a long period. On the flip side, what is the likely growth in value of the $1.1m property Vs the capital growth of the investment portfolio starting with $200k and the tax implications of both growth scenarios (currently!).

    • Interesting and valid point. I’ve only ever rented, but have lived and worked in many countries. I think owning a house would have made it difficult to impossible to have taken up a number of these relocation opportunities.

  12. Steve,
    You’re probably in the Top 1% of income earners and therefore, you have a lot of financial freedom to make these choices. In addition, you are very financially literate and can many large sums of money – both for yourself, your family and clients.

    Most people are financially illiterate – incapable of managing a multi-million dollar stock portfolio that generates a 7 figure income. This is evident here http://www.smh.com.au/interactive/2017/retirement-racket/the-price-of-freedom/ and on last night’s Four Corners “Betting on the house” http://www.abc.net.au/4corners/stories/2017/08/17/4719901.htm.

    I think rent money is dead money. Whilst paying home loan interest to the bank is also dead money, over a 30-50 period of living in your home, you have the opportunity for a tax-free capital gain to recoup that dead money.

    Like all investments, buying quality and with a margin of safety is critical. Paying $1.5M for a McMansion in a new estate in Blacktown NSW or $1.5M for 1 bed unit in Bondi Junction NSW is asking for trouble.

    What’s wrong with a young couple buying an older style 1 bed unit in the inner city of Sydney or Melbourne for $500K – $600K? Or an older house in Sydney South West for $600K-$700K?

    The suggestion for a 30 year old to invest all their $200K savings into super is crazy! There’s too many lumps and bumps in life to lock your money away for 25 years plus. People change and circumstances change.

    Lastly, if it’s good enough for Buffett, it’s good enough for me. He could have poured more money into his partnership funds or buy more of Berkshire stock later on. Instead, he used some funds to buy a house and a few more properties later on. Nothing like home sweet home. The great Australian dream.

  13. Steve
    stop trying to be too smart for your own good (like R.Montgomery) by providing a thesis on the housing market like you are still going for your MBA or analysing property to death like you do with a company. -no-one can guess the outcome of property or shares.

    Why not use the KISS principle – rent a property while buying an investment property so the tenants can pay for it while you get neg gearing benefits then at same time salary sacrifice into a great superfund like QSuper and then go about your life like normal people for the next 30 years !
    That way you are well diversified and can move into the house whenever you want all the while your super is building up while the experts grow your balance…(QSuper charge much lower fees than Forager or Montgomery and still achieve 8-10% pa)

    Then you go off and lead a normal life for the next 30 years not worrying about property prices or share market crashes and only worry about your debt-free millions age 70 !!

    simon

    • Not sure that renting a home and negatively gearing an investment property would be considered keeping it simple for the majority of the population. I also doubt being “well diversified” is achieved by being highly leveraged into a single asset. Then again, the cynic in me believes you’re only here to plug QSuper.

  14. Thank you Steve, an excellent in depth article supporting a current view, which some of my (and wifes) young adult children also support. Everyone’s comments are also of very high quality, which were quite absorbing. It is so good that we live in a country where we can all express our individual thoughts.

    Previously, my thinking was that we always should spread ourselves, including owning your own home, especially buying the worst house in the best street and doing it up.

    Therefore, ownership of a house, apartment or land is normally advisable. But is it advisable to purchase in Sydney or Melbourne this year? Could house prices rise further or fall in the next 12 months? Could Labour win the next election and overturn the status quo on negative gearing? Is a recession around the corner? Who knows?

    My current thoughts somewhat align with Steve’s, but with the variation to rent and save for now, but when house prices go down, as they surely will at some time in the future, I would then suggest take advantage of the distressed market and buy your home, and I refer to all the positive reasons mentioned above by previous comments.

    The world is somewhat upside down to previous normal markets. Now the following are my thoughts only, not backed up by research statistics. Quantative Easing has been the necessary elephant in the room, which has distorted economies. Plus, Australia’s mining boom, Australia’s building boom, plus large migrant intake per annum, plus no recession for many years, plus government borrowings which have not been all for infrastructure. House prices have risen exponentially in all major cities, but not necessarily elsewhere in the countryside in any country.

    In the past, cash is normally king in a low inflation environment, which we currently have. Borrowing is king in an inflation environment, as prices for everything are in a race to the top, but we have no inflation currently in the 5-10% range? The current financial situation is topsy turvy to previous normals to my mind.

    I am getting on a roll. What other information can I add for your information, as to the fact that the house price pendulum will swing back.

    Well, over the last 50 years of mining and properity booms, and then recessions, house prices to my recollection stayed flat for 7 poor years, then rose with inflation for 7 good years (if you owned), and just continued on in this pattern. Yes, many financial situations were different back then to now. The big difference now is the mortgage exposure. In the poor/good/bad old days, in a recession, families where just about able to hold on without selling, hence prices stayed flat, during this time. I doubt in 2017 that families could hold out with reduced incomes with a say 3 year recession, without selling out at a loss.

    I am 70, and I have personally experienced much higher interest rates prior to 2009 onwards, as well as an inflation rate much higher pre 2009. So I am from the generation with the aim of always buying your own home, and paying off the mortgage. For reference, our first home in 1970, a 2 bedroom tin and weatherboard, did only cost $10,000 with an interest rate of 8% calculated monthly, with repayments over 10 years from memory. 10 years to repay because the house was almost a knock down. That was all we could afford on my gross salary of $6,000 per annum as a CPA company accountant. Take home pay I guess at $4,500 at 25% average tax rate. A new Toyota Corolla (equivalent) in 1964 cost $2,000 (1,000 pounds).

    All the very best with your own decisions. In 10 years time we will all be wiser.

    • Mr & Mrs Heslop,
      After reading “Rich Dad, Poor” Dad 20 years ago, I’m a big fan of good debt (instead of bad debt) and property. I’m also a fan of the board game Monopoly and the lessons it teaches. With age and experience, I’ve learnt of wrapping all these ideas with Buffett’s wisdom of buying assets with a moat, a margin of safety, Mr Market and not selling/trading.

      If you’re asking or curious about whether you/one should buy into Sydney or Melbourne in the next 12 months, you outta read “The Intelligent Investor”. Pay extra attention to the chapter about Mr Market. If you are unable to read the book, it can be summed up by Buffett’s quote… http://www.investopedia.com/articles/investing/012116/warren-buffett-be-fearful-when-others-are-greedy.asp

  15. I think Steve is right to analyse it like he has.

    We are talking about an asset purchase that will consume a massively disproportionate amount of peoples lifetime earnings compared to any previous generation.

    As dedicated value investors we’re obliged to steer clear of anything that looks like a bubble or a ponzi scheme. One might argue the obligation extends to suggesting others do the same by providing the rationale for not purchasing and coming up with a realistic alternative.

    There are too many households overexposing themselves to interest rate rises or a change in employment circumstances. When unforeseen events hit in the past, it was at most 20 years of ‘doing it tough’. Now, most households starting with a 30 year mortgage, later in life, and paying higher income multiples for their property to begin with, we have a right to be concerned.

    One of the findings that exacerbated falls in recent property crashes around the world was that 50 years ago, if the husband lost his job, either the husband or wife could pick up some part or full time work (sounds a bit sexist but that’s mostly how it was). The family would do it tough for a while but they could get through it.

    These days, with mortgages requiring up to 40% of combined incomes, if one partner loses their job, there is no alternative buffer. Income is halved. Renegotiating the term with the bank isn’t an option when you’re already maxed out to begin with.

    I think it was Gerard Minack who raised the question on Four corners last night. What are we doing wrong when so many households are suffering mortgage stress in a country that has experienced 25 years of a strong economy with no recessions?

  16. Thanks for the great post!

    I’m just pondering from a perspective of just the average person, whether they will be able to achieve that 6.5% returns, in terms of human psychology. They may get spooked out to sell on a down cycle and enter back at the wrong times when it is high. Even for those who think they are buy-and-hold investors, media instilled fear can be powerful. I think there’s an article about how despite Peter Lynch’s amazing returns, the average investor in his fund actually lost money due to buying and selling in his fund at wrong times. Mortgages on the other hand, like you said, provides the discipline and consistency while also less chances of selling out on a down cycle since it is your family home.

    Would you also be able to do a part II series of your analysis in a scenario where there is a property price correction and so with property prices being lower at time 0 whether there will be any difference in outcome?

  17. Great article Steve, Thanks
    It has given me a lot to think about as have the above comments, I am approaching 30 and believing house prices are to expensive am saving by investing in shares and your international fund to get getter exposure away from the Australian economy. I am also considering going overseas to work & renting gives me greater flexibility to move overseas or around Australia to follow work I also avoid the large stamp duty costs, if I were to buy a house how many times would I buy & sell in the next 40 years ??.

    Further being concerned with the future of the Australian economy being so reliant on mining and China (I remember being in school and 1 big thing I remember about John Howards time as PM is the tax cuts either increasing the threshold or lowering the rates and I have always associated this with the mining boom and asked myself what happens when that income slows down will taxes go back top the mid 90’s level??) I am happy to sit back invest with you and wait either for a crash or house prices to stagnate and allow incomes to catch up before buying in which case I have a larger deposit and pay less interest.

    Also Steve I understand that with bank lending they are not lending out deposits but actually create money out of thin air to lend to home owners is this correct and if so how can banks have bad debts
    Regards
    Anthony

  18. The new super rules do not allow after tax contributions to be added to super once your balance exceeds $1.6m. This would change the long-term after tax return.

    • True , and that is an issue, but perhaps not as big an issue as you may think.. As an example for a couple it is $3.2 million i.e, $1.6 million each.

      Even putting $30,000 to $40,000 a year into super, it would take a long time to reach that $3.2 million. You also need to remember that the $1.6 million each is indexed to C.P.I. so in thirty years, that $3.2 million could be closer to $5 million or $6 million rather than $3.2 million.

      By the way, the average pre-tax wage in NSW is about $80,000 and $75,000 in Victoria and the median average are even lower, so there may be very few people who can contribute that $40,000 after taking into account that you are also paying rent.

  19. My parents were refugees. In their previous country/town, they lived in a wooden shack built with discarded building materials and no on-site toilet or bath. The roof was made of banana leaves and tree branches.

    For many of us Battlers, owning your own home is beyond numbers, tax deductions, and depreciation schedules. It’s a place to call home. A place to bring up kids and sleep well at night – without fear of some landlord wanting to sell, jacking up the rent or move back in.

    If you’re curious about the ending… yes, my parents did achieve the Great Australian Dream. So did the kids.

  20. I always thought the slogan “rent money is dead money” to be a load of BS as there is no difference between paying interest or rent. My only caveat to this sound analysis is that given the high price of houses in markets such as Sydney, to have an acceptable standard of living (unless you are happy to live in a dump), you end up renting somewhere more valuable than what you could buy. In this case the rent-mortgage investment arbitrage is somewhat diminished.

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