Investment Analysis: "Buy or rent?" Assignment
Renting versus Buying over the Ten Years from May 2017 to May 2027
You've entered the workforce in Perth and you're debating whether to buy or rent your accommodation. Your disposable income (i.e., what's left of your salary after meeting food, clothing, travel and other cost of living expenses) is $500/week, you have $20,000 in a savings account and you are eligible for a first-owners grant. You undertake an analysis to estimate the difference in your wealth if you buy as opposed to rent over the next ten years (to May 2027). To make the comparison fair, assume you will buy or rent an equivalent house within the same suburb. Your monthly mortgage payments will be based on a 30-year loan. It is likely you will have greater disposable income if you choose to rent. For simplicity, assume that this disposable income can either be invested in an index fund, Australian government bonds, or a term-deposit. The choice is yours. You may invest in a combination of all three. All other assumptions including: mortgage rates, income growth, investment returns, capital gains on property, ownership costs and rental price growth should be based on your own research.
Whether you will be financially better off buying as opposed to renting depends in large part on what the state of the overall housing market. In general, the common factors pushing up or driving down house prices are more influential than changes in the demand for particular houses. The first part of the assignment therefore requires you to undertake a general analysis of the housing market. The second part of the assignment requires you to consider all the relevant cash flows in buying or renting a house, using Excel (a template is provided).
Specific Requirements
a) Discuss the demand and supply factors that will cause housing and rent prices to change within the next 10-years. Guidance on demand and supply factors you might consider are listed below. This is not a comprehensive list. You are strongly encouraged to research additional relevant factors. You should approach this section unbiasedly, so that you appreciate the validity of the arguments for house price appreciation, depreciation and stagnation.
b) In this section of the assignment you are to integrate your discussion in Part A to calculate the difference in your wealth after 10-years between buying and renting a house. This section should include analysis of how sensitive the outcome is to changes in interest rates and house price appreciation (or depreciation). An Excel spreadsheet template is provided.
c) To conclude, you should explain your decision to either buy or rent with reference to your discussion in part a) and your analysis in part b) of the assignment.
Guidance -
Reasonable well-informed people differ on the question whether Australian housing is overvalued, under-valued or just right, as even a cursory review of recent financial media reports shows. Your assignment will be assessed not on your final decision but on the quality of discussion including the evidence you present and reasoning for your decision to buy or rent. Your analysis should be based on financial grounds only. There are non-pecuniary considerations in buying a house but these are irrelevant for the purpose of this assignment.
It is expected your analysis in part (a) will be consistent with that in part (b). Higher quality assignments will be even-handed and as thorough as reasonably practical in evaluating both sides of the debate over house prices.
You will not suffer from a lack of information and analysis about house prices. Some news-reports and other material will be placed on the LMS site but this is intended only as a guide. The next few lectures will also include points relevant to the assignment. You will be expected to do additional research in identifying other relevant material.
Your challenge will be integrating all the available material, weighing up the sometimes contradictory evidence, and providing a well-reasoned conclusion as clearly as possible. Talk with as much people as possible. Probably the best persons are your peers doing the unit. The more you engage with the material and the earlier you start writing (and revising) the assignment, the more benefit you will get out of it. What you should aim for is a clear, well set out piece of analysis that is easy to read with a well-argued recommendation or decision. Don't confuse certainty for clarity. You may be tempted to downplay some evidence against your decision because it makes your final decision less obviously the right one. This is a mistake. Recall the point about being even-handed and thorough as reasonably practical in your analysis.
Below are some assumptions and constraints relevant to your assignment.
Assumptions and constraints:
House and rent prices - You need to find data for house prices and weekly rents within the same suburb. You can get this data from www.realestate.com.au. The suburb and size of the house you choose is at your discretion. However, as previously mentioned, both the bought house and rented house must be equivalent sizes and within the same suburb.
Loan size and mortgage rate - The size of the loan should take into account your savings, first home-owners grant and buying costs. The mortgage rate used should include the source you've quoted the rate from.
Buying, selling, maintenance and depreciation costs - These may be considered 'hidden' costs to owning a home. To improve your understanding on the viability (in terms of affordability) of owning a home, it is important to include these costs into your analysis. Provide the sources and any reasoning behind the assumptions you have used.
Lease fees and rent bond - Provide sources and any reasoning behind the assumptions you have used.
Property and rent growth - You should try to offer a mixture of historical trends, the market's expectations and, based on your discussion in part a), your own expectations of future growth in property and rent.
Investment return - The costs associated with renting are significantly less compared to the costs of owning a home, it is assumed that the difference in this disposable income will be invested. You can choose to invest in an index fund, Australian government bonds, or a term-deposit. You need to provide reasoning for your selected investment. Try to offer a mixture of historical trends, the market's expectations and, your own expectations based on your discussion in part a).
You do not need to consider costs for utilities, food, health insurance etc., as you can assume that these costs will be incurred regardless of whether you buy or rent.
Questions:
Part a) Evaluate the factors of demand and supply that will cause house and rent prices to fluctuate over the 10-year period.
Rent:
- Demand -
- Supply -
- Summary -
Buy:
- Demand - Interest rates, lending conditions, demographics, immigration, government policies, home-owners grant, investments.
- Supply - Land release, apartment versus housing, sub-division, micro-lot property.
- Summary
Part b) Use the excel template provided. You should have 4 sheets in your workbook labelled accordingly:
- Sheet 1 - "Assumptions". You are required to explain your reasoning and cite any sources you have used.
- Sheet 2 - "Appreciation"
- Sheet 3 - "Depreciation"
- Sheet 4 - "Stagnation"
Part c) Integrate your discussion in part a) and your calculations in part b) to explain your decision to buy or rent, given that you are looking at a 10-year analysis. In this section, you should explain the reasoning behind your assumptions made in part b), with a particular emphasis on: property capital gains, rent price growth and investment returns. Take the opportunity to explain your opinion regarding the future of the Australian housing market, and how this ultimately impacts the value of your decision.
Attachment:- Assignment Files.rar