patrick.net

Congrats on having your act together.

I almost never talk to anyone this organized about finances.

This is the same thing I do - people cannot believe I track things down in a spreadsheet and review it occasionally it to meet my goals.

I would also recommend you track other aspects of your life on separate tabs to force you to better yourself/meet goals in any category of life:
relationships (keeping in touch with friends/family, etc)
recreation
career goals
physical fitness
personal health
spiritual (if applicable)
child raising stuff?
bucket list

good luck!!

I boil it all down to one simple statement:

At the end of the day we're all going to wind up in a retirement home- which in all practical sense of the word is renting.

Most of the reasons I hear from people who buy over renting are pretty dumb:

1: They can't "Paint the walls" whatever color they want.
2: They just got married
3: They are going to have a kid
4: Fear of the landlord selling out from under them
5: Its "Not theirs"
6: They are "throwing money away"

I could go on and on. Do I want to buy a house someday? Sure- but not in the Bay Area. Besides- my primary goal is to save for retirement because you'll need that money... when you decide what retirement home you're gonna' live in...

edvard2 says

6: They are "throwing money away"

Dumbest argument - without doing any MATH. Do the MATH.

it sounds more like fear of buying but in any case good luck with your plan...

More like a rational analysis of the situation... :-)

As a fellow INTJ, I also say that logic is the way to go. I did the math back in 2002 and concluded that buying was insane and that the bubble was going to leave many people insolvent.

Now, I rather had bought a starter house in 1998/1999 before the bubble began, but there was no sign that the largest equity bubble in the history of the world was about to start. And at the time I was fresh out of college and was not sure where I wanted to live -- hell, I was only 23. Normally, it's not prudent for a 23-year-old to jump into the housing market since you're still trying out different areas to live and you should plan to stay put at least 5 years in a normal market before buying.

However, I was unfortunate enough to be smack in the middle of the bubble when I was settled down enough to know where I wanted to live. And I have no regrets not buying during the bubble because I know I am better off having rented.

Of course, I would be financially better off if there had been no bubble and I could have bought at a reasonable price years ago -- that's why I am rightfully upset at all the speculators since their gambling did cost me opportunity and quality of life. However, I am quite certain that I'm still better off having rented rather than bought during the bubble.

I suspect that the long-term consequence for me will be that instead of having bought a starter home and upgraded 15 years later, I will simply buy the upgraded house as my first house having saved and invested over the bubble years. I suspect that many patient, rational buyers will have similar situations.

Why do buyers always use the argument "Its mine". Its not yours until your last mortgage payment in ~30 years. Until then you would be lucky to build equity in 10.

Buy low sell high everything. Anything. Real estate or stocks or investments. You can do amazingly well one way or another. But don't follow the herd to the slaughter. Everyone copied everyone in the bubble years. It's not exactly stocks are better or re is better.

The Melbourne housing market has never before seen a bubble as large as this as you can see from the graph posted. The risk is very much to the downside. As you can see - it took 110 years for a peak buyer in 1890 to recover his money in real terms! Now have a look at how big the bubble is from 2000 to 2010. It's incredible.

The one thing we know about bubbles is they all pop or slowly deflate. Logically it is correct to assume that it is only a matter of time before the Melbourne housing bubble pops or slowly deflates as well. Anyone who buys now is making a long term gamble on real house prices increasing even more. That seems like an incredibly risky and foolish bet to me given the last 130 years of history.

Bubbles seem to have a habit of being roughly symmetrical - if this is the case then Melbourne is looking at falling real house prices until the year 2024. If this is most probable - Why would we be worried about house price inflation when it is obvious that deflation in the housing market is much more likely? Why would we take on debt to buy a depreciating asset?

I remember looking at the case shiller graphs and noting how big Americas bubble was and the fact I would not buy if I lived in the US. I look at the graphs now and think it's an absolute bargain compared to Melbourne.

Here is an example of how bad it is - I rent an old Victorian house in Melbourne in the inner suburbs for $415 per week. The house is valued at $900,000! That's a 2.39% return to the landlord. If thats not a bubble price I don't know what is.

So inflation - I do worry about inflation but I worry more about just how large our housing bubble is. My bet is that saving & investing my money whilst renting will get me ahead because the risk is so large to the downside for the Melbourne housing bubble. If history repeats then I will have avoided losing a great deal of leveraged money. If the bubble doesn't pop or deflate I will likely come out even as I should have been able to have built up in my retirement and index funds around 10 times my salary (by age 45). If house prices get back to a reasonable multiple I could pay cash (by withdrawing from my index fund account) and still have almost 7 times my income saved in my retirement fund. That doesn't take into account my partners savings either which would make it even easier for us.

Time of course will tell what happens with our bubble!

Glad to know there are more reasonable sensible people out there who know how to save for retirement.

Biggest fear for us always has been to end up old and without enough savings to support our old age. Not like Social Security will be there long enough, they'll probably axe that in the next 10 years.

interesting thread. i like how you mentioned:

"The key is writing it down physically in the ledger," "print it out and stick it on the wall,"

and how you

"found this has made me extremely disciplined in actually saving that money and has developed a habit which I could now never break."

have you had to compromise on any part of your quality of life, though? for example, splurging a bit, buying some nice things, taking nice (or enough) holidays?

postscript - the median melbourne house price in 1890 was ~300K? criminy!

It's nice to have a plan that tells yourself you are doing the right thing.

The one thing you planners forget is that you may not make it until retirement age. Meanwhile you live in a rental. And yes, you cannot break down walls and remodel to your liking. And yes, you are at the mercy of a landlord. We got kicked out twice because landlord needed to sell. And yes, when the A/C breaks you can wait on your landlord's response to fix it. Also, when he calls you for a rent increase there is nothing you can do.

My plan - lock in my monthly payment and live happy NOW and later while enjoying my home and saving more money than renting.

The entire plan you have is great but why can't you do that if you buy and pay the same or even less than renting??

Imagine on top of your charted out plan you would have all the money from your funds + a home that is free and clear. If you end up in a retirement home, so what - you rent out your house and that pays for the retirement home, don't have to use your 401k for that. On top of it, if you have kids...you can give them a head start in life when you leave them a house that is paid off when you croak. They can rent it and have fixed income for the rest of their lives.

Just food for thought. In the end everybody has to find the right solution for their personal lifestyle, right? So, there is no perfect answer.

Financially speaking though, I think you would regret renting a lifetime. Everyone that is 65 and is still renting does regret it because in 30 years you will be looking at what you pay in rent every month and shit yourself knowing that in 2012-13 you could have locked in a payment that will be 1/3 of rent. (as an example)

Statistically it is likely I will make it to age 75. It is interesting to check out the life tables here: http://www.ssa.gov/oact/STATS/table4c6.html

What monetary value should one place on annoyance? My conclusion is that a little annoyance is worth it for the large ongoing cash savings we can make by renting the house instead of renting money. Also - a small rent rise is fine with us because if rents rise it is likely as a result of an increase in the money supply (general inflation) so that means our pay will rise as well to compensate for it.

The problem with buying is always the fact that the loan has to be paid off in full - with interest. The house we rent now for $415 per week would cost us $900,000 to buy. That would cost us $1,100,000 in interest over 30 years - compound interest working against us and for the bank! It would increase our housing cost from $415 per week to $1324 per week and all the interest we would pay would be mostly in the first years of the mortgage - we would have a locked in payment yes but a very high one! It would mean we couldn't invest any money in our retirement accounts as it would all have to go to the mortgage for at least the first 10 years - time we will never get back. The worst case scenario for us following my plan will be $2,800,000 or 40 times the average wage in other investments. There is no way whatsoever that we could achieve that with buying the house and paying a mortgage. I look at the older generations around me and am amazed at how little they have accumulated for retirement. Yet they all own a house. Could it be that owning the house has cost them having a very large amount of other investments like index funds, retirement accounts etc? I say it has. Much better I think to end up with a large amount of other investments and then simply pay cash for a house if we want to. We will still most likely beat the home owner path.

Regret renting a lifetime? Let's see - 40 times the average wage at age 60 and without a house. Worse case scenario - we take out 14 times the average wage or $900,000 in today's money and pay cash for a nice house like the one we rent or we take out 5 times the average wage and buy a flat. We would still have between 26 to 35 times the average wage in other investments. Compare that to the small retirement account balances most people have. Statistically we will not be different if we follow the path the masses take.

If you google 'average 401k balance' or 'average superannuation balance' you will see how little most people have accumulated. That will not be us. To be different we have to live our lives differently.

Thanks for your input though - I appreciate it.

Check out how high Australia is compared to the US & Japan. Logically I think it is reasonable to assume that Australian house prices will go down in real terms for the next 15 years until we get back to the trend line.

This Australian housing bubble has made me a very, very patient man and also a very disciplined man. I know I can wait another 15 years if I wanted to buy then. It will be fun - a game of waiting, investing in other assets and enjoying the show! I will be 44 years old.

That graph says it all really. That's the bottom line. Now if that red line was even half way down then I would reevaluate.

I'm just a huge skeptic when I see and hear everyone around me saying a house is the best investment without ever doing the math at these ridiculous prices!

clarket says

The house we rent now for $415 per week would cost us $900,000 to buy

Hm...if that was really the case then its obvious. Why would you buy a house if you can rent it for 4 times less the monthly payment. I don't think it takes a brainiac to figure that out.

I am very skeptical that you are renting a million dollar home for $1660. I don't know where you live or what the situation is but it sounds fishy my friend.
How do you know its 900k?

For $2000/month mortgage you can buy a pretty nice house in CA at this point. Rents in my neighborhood for a 3bed/2bath are all between $2000-2500/month - you can buy them for less.

Renting money? Well, yes, its called a loan but you can pay it of at any time. What do you mean "in full"? You can also write checks principal only every month and pay the house of quicker and save a shitload of interest.

Also, have you figured in the tax write off that you get for "renting" money?

:)

check them out - the situation here in Melbourne is ridiculous!

houses for sale:

http://www.realestate.com.au/buy/property-house-in-port+melbourne%2c+vic+3207/list-1?activeSort=price-asc&includeSurrounding=false

rental prices:

http://www.realestate.com.au/rent/property-house-in-port+melbourne%2c+vic+3207/list-1?includeSurrounding=false&activeSort=price-asc&source=refinements

and here you get zero tax write off when you buy a house!

I am in Melbourne, Australia. The suburb is Port Melbourne.

Now - the situation in the US I have been watching with interest. The prices have fallen and houses are a much better buy than what they were. The price to rent ratio has improved considerably in many areas.

toothfairy says

t sounds more like fear of buying but in any case good luck with your plan...

you sound like a realtor but good luck

KILLERJANE says

Some markets are clearly undervalue. Right now it's the stock market that is falsely govt inflated. Sure, there are deals in there but it's a bit freaky there right now.

there is a floor under both stocks and housing

FortWayne says

Biggest fear for us always has been to end up old and without enough savings to support our old age.

nah, don't sweat it. life expectancy is going down in the US. You will probably eat dust from the big C before you reach 55.

clarket says

The price to rent ratio has improved considerably in many areas.

its still totally out of whack. I am guessing most on this board simply have not been alive long enough to see and under stand that like I have. I am making some good gravy from it tho.