Investment Analysis: “Buy or rent?”

FINA3324 Investment Analysis: “Buy or rent?” Assignment 25 March 2017
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FINA3324 Individual Assignment
Due Date: Electronic submission via LMS, by 12 noon 10 May Wednesday 2017 (noon)
Weight: 20% of final grade;
Length: 8 A4-pages maximum, excluding the cover page and excluding up to 4 pages of appendices and
references. Font size: 12-times Roman (or equivalent), line and half spacing. Referencing required (see guides
below). Plus Excel spreadsheet for part (b). Your Excel file should be named studentno_FINA3324.xls
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. (60 Marks)
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 (30 Marks)
FINA3324 Investment Analysis: “Buy or rent?” Assignment 25 March 2017
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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. (10 Marks)
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 newsreports 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.
FINA3324 Investment Analysis: “Buy or rent?” Assignment 25 March 2017
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Property and rent growth – You should try to offer a mixture of historical trends, the
markets 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 markets 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:
o Demand –
o Supply –
o Summary
• Buy:
o Demand – Interest rates, lending conditions, demographics, immigration,
government policies, home-owners grant, investments.
o Supply – Land release, apartment versus housing, sub-division, micro-lot
property.
o Summary
Part b)
• Use the excel template provided. You should have 4 sheets in your workbook
labelled accordingly:
o Sheet 1 – “Assumptions”. You are required to explain your reasoning and cite
any sources you have used.
o Sheet 2 – “Appreciation”
o Sheet 3 – “Depreciation”
o 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
FINA3324 Investment Analysis: “Buy or rent?” Assignment 25 March 2017
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future of the Australian housing market, and how this ultimately impacts the value of
your decision.
Due Date: Electronic submission via LMS, by 12 noon 10 May Wednesday 2017 (noon)
Weight: 20% of final grade;
Length: Part (a) and (c) should be 8 A4-pages maximum, excluding the cover page and
excluding up to 4 pages of appendices and references. Part (c) need not take more than one
page so you will have seven pages for part (a). Font size: 12-times Roman (or equivalent),
line and half spacing. Referencing required (see guides below).
This is an individual assignment. The assignment should be written by you alone but you
may discuss it with others. In the cover page, include the list of all fellow students with
whom you have discussed the assignment. It’s OK to discuss the assignment so you won’t be
disadvantaged by writing a long list of students with whom you have talked about the
assignment. Smart people try to get as many different points of view as they can before
arriving at a decision.
Referencing
Book – http://guides.library.uwa.edu.au/c.php?g=380288&p=2575700
News article – http://guides.library.uwa.edu.au/c.php?g=380288&p=2575706
Journal article – http://guides.library.uwa.edu.au/c.php?g=380288&p=2575702