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No it doesn't work like that at all. I bought a house at the end of 2020 for $430k with a loan of $337k. I can't borrow more than that now, my real income has

by dools 3y ago

No it doesn't work like that at all. I bought a house at the end of 2020 for $430k with a loan of $337k. I can't borrow more than that now, my real income hasn't increased, I still have the same sorts of liabilities and expenditures that I had then. So even though my house is now worth maybe $700k, if I want to move, I have to find a house that I can buy for $700k. I have paid off something like $20k, so maybe I could find a house for $720k and move into it. Thus the only way I can move into a bigger/better house is to move somewhere that $720k gets you something bigger/better than in my current location. But guess what? House prices are up everywhere. You might be able to find some lucky arbitrage opportunity, but you're not going to get any sort of noticeable increase in quality and size. The advantage of owning a house versus renting is therefore not that you benefit from the rising price of houses, but that your buying power moves with the market and your "rent" is limited to the interest you pay on your loan (because you're paying down the principal as well). When you're renting, you're flushing your money down the toilet plus trying to save enough for a deposit relative to a market price that accelerates well beyond almost everyone's capacity to save.

dataflow 3y ago
> your buying power moves with the market and your "rent" is limited to the interest you pay on your loan (because you're paying down the principal as well). The "because you're paying down the principal as well" seems like a red herring, no? If you bought a house for $10.00 and paid $100.00/month, it'd still be worth it even if none of that went to the principal. Heck, even if your house became worthless too, it'd still be worth it! > When you're renting, you're flushing your money down the toilet plus trying to save enough for a deposit relative to a market price that accelerates well beyond almost everyone's capacity to save. How do people make such a broad generalization without looking at any numbers? Shouldn't the costs and benefits of this depend on factors like the mortgage/interest rates? Is there a reason to believe that it's a net benefit regardless of the interest rate?
- dools 3y ago
  > If you bought a house for $10.00 and paid $100.00/month, it'd still be worth it even if none of that went to the principal. Heck, even if your house became worthless too, it'd still be worth it! Paying off an interest only loan on a property may well be better than renting but it’s more like renting than paying principal + interest. When you pay off an interest only loan your “rent” costs are your entire mortgage payment. When you’re paying principal + interest the “rent” is still only the interest portion of your payment. In both cases you keep pace with the market better than if you’re renting. If the only way you could avoid renting were to get an interest only loan then that’s certainly a better option. > Is there a reason to believe that it's a net benefit regardless of the interest rate? Yes renting is objectively the worst possible financial situation regardless of interest rate (definitely true in Australia, possibly true elsewhere as well).
  - dataflow 3y ago
    Aren't you still assuming that the monthly payment is the same for mortgage vs. rent? When they're the same, obviously buying is better. But the entire point I was making with my example was that those aren't necessarily the same, so you can't just say "renting is worse" without comparing the numbers...
octodog 3y ago
House prices increasing are "good" for homeowners because you can potentially tap into the equity to leverage for another investment. The typical play in modern Australia is to buy an investment property and then use negative gearing to reduce your personal income tax bill. Continually "upgrading" your primary place of residence is not something that anyone does. Unless you live in the ACT you would be forced to pay stamp duty again too.
- dools 3y ago
  Yeah but you can only do that if you can borrow more money. You have to show capacity to pay even if you’re using equity as collateral and expect rental income. I think maybe the “use equity to buy investment properties” advice was popular when lending was super loose prior to the GFC and maybe some dodgy brothers mortgage brokers are still getting them through but without an increase in income you can’t just ratchet up your leverage (at least not anymore, I know 10-15 years ago everyone said that you could do this but I didn’t own a house at the time so I don’t know if it’s actually true or just hype sold by investment gurus flogging overpriced Gold Coast apartments).
  - octodog 3y ago
    That's true, you're completely correct that income is still a constraint. However, there are a few other factors that can increase borrowing capacity significantly. First, personal incomes tend to increase over the course of your lifetime as you get promotions. Second, when in a falling interest rate environment your borrowing capacity is increasing at the same time property prices are being pumped up. This is exactly the time when people tap into that equity. Third, you can get a slightly better rate at lower LVRs, which can help a little bit as well. Finally, a lot of the people who use this strategy have very high incomes to begin with and their borrowing is constrained by their available capital, not their incomes. This is why every neurosurgeon has a negatively geared property by the time they reach 30. The reason this has been a popular strategy for a long time is that interest rates have been falling for the last 30 years. It's not so attractive right now as interest rates are increasing.
solumunus 3y ago
The mortgage market must work differently in your country. Where I live, deposit size relative to property value absolutely increases your buying power, they don’t just look at income and outgoings.
- ffgjgf1 3y ago
  What’s the difference? If housing prices all go up at the same pace you’re still pretty much were you started. Yes you can afford an X% higher deposit but prices have also increased by X%.
  - solumunus 3y ago
    House prices might increase by 20% but your new deposit compared to the deposit for the initial house you bought could easily go up 100-200% (or more). Your equity has grown disproportionately to house values. That’s the massive difference and what allows people to “climb the ladder”.

by dools 3y ago

dataflow 3y ago

> your buying power moves with the market and your "rent" is limited to the interest you pay on your loan (because you're paying down the principal as well). The "because you're paying down the principal as well" seems like a red herring, no? If you bought a house for $10.00 and paid $100.00/month, it'd still be worth it even if none of that went to the principal. Heck, even if your house became worthless too, it'd still be worth it! > When you're renting, you're flushing your money down the toilet plus trying to save enough for a deposit relative to a market price that accelerates well beyond almost everyone's capacity to save. How do people make such a broad generalization without looking at any numbers? Shouldn't the costs and benefits of this depend on factors like the mortgage/interest rates? Is there a reason to believe that it's a net benefit regardless of the interest rate?

dools 3y ago
> If you bought a house for $10.00 and paid $100.00/month, it'd still be worth it even if none of that went to the principal. Heck, even if your house became worthless too, it'd still be worth it! Paying off an interest only loan on a property may well be better than renting but it’s more like renting than paying principal + interest. When you pay off an interest only loan your “rent” costs are your entire mortgage payment. When you’re paying principal + interest the “rent” is still only the interest portion of your payment. In both cases you keep pace with the market better than if you’re renting. If the only way you could avoid renting were to get an interest only loan then that’s certainly a better option. > Is there a reason to believe that it's a net benefit regardless of the interest rate? Yes renting is objectively the worst possible financial situation regardless of interest rate (definitely true in Australia, possibly true elsewhere as well).
- dataflow 3y ago
  Aren't you still assuming that the monthly payment is the same for mortgage vs. rent? When they're the same, obviously buying is better. But the entire point I was making with my example was that those aren't necessarily the same, so you can't just say "renting is worse" without comparing the numbers...

octodog 3y ago

House prices increasing are "good" for homeowners because you can potentially tap into the equity to leverage for another investment. The typical play in modern Australia is to buy an investment property and then use negative gearing to reduce your personal income tax bill. Continually "upgrading" your primary place of residence is not something that anyone does. Unless you live in the ACT you would be forced to pay stamp duty again too.

dools 3y ago
Yeah but you can only do that if you can borrow more money. You have to show capacity to pay even if you’re using equity as collateral and expect rental income. I think maybe the “use equity to buy investment properties” advice was popular when lending was super loose prior to the GFC and maybe some dodgy brothers mortgage brokers are still getting them through but without an increase in income you can’t just ratchet up your leverage (at least not anymore, I know 10-15 years ago everyone said that you could do this but I didn’t own a house at the time so I don’t know if it’s actually true or just hype sold by investment gurus flogging overpriced Gold Coast apartments).
- octodog 3y ago
  That's true, you're completely correct that income is still a constraint. However, there are a few other factors that can increase borrowing capacity significantly. First, personal incomes tend to increase over the course of your lifetime as you get promotions. Second, when in a falling interest rate environment your borrowing capacity is increasing at the same time property prices are being pumped up. This is exactly the time when people tap into that equity. Third, you can get a slightly better rate at lower LVRs, which can help a little bit as well. Finally, a lot of the people who use this strategy have very high incomes to begin with and their borrowing is constrained by their available capital, not their incomes. This is why every neurosurgeon has a negatively geared property by the time they reach 30. The reason this has been a popular strategy for a long time is that interest rates have been falling for the last 30 years. It's not so attractive right now as interest rates are increasing.

solumunus 3y ago

The mortgage market must work differently in your country. Where I live, deposit size relative to property value absolutely increases your buying power, they don’t just look at income and outgoings.

ffgjgf1 3y ago
What’s the difference? If housing prices all go up at the same pace you’re still pretty much were you started. Yes you can afford an X% higher deposit but prices have also increased by X%.
- solumunus 3y ago
  House prices might increase by 20% but your new deposit compared to the deposit for the initial house you bought could easily go up 100-200% (or more). Your equity has grown disproportionately to house values. That’s the massive difference and what allows people to “climb the ladder”.