Have you considered the ongoing costs of home ownership? It's not just your mortgage repayment!

Housing is arguably a great utility of our money. While a noose around many of our necks, our homes are where we spend so much of our time - raising our children, entertaining family and friends and creating many of our most cherished moments. It is our safe space, providing a constant in the unpredictable randomness of our lives and the world.

If there is something that we all grapple with, it’s the question of housing. Should we live in an apartment, a townhouse or a freestanding house? Should we buy the larger suburban home in the outer suburbs or buy the townhouse closer to the city? Shorter or longer commute? It’s all questions we ask ourselves and debate with our family and friends.

To answer these questions, there is no right or wrong. We can only arm ourselves with as much knowledge as possible to make an informed decision.

‘An investment in knowledge pays the best interest,’ Benjamin Franklin.

We all know the purchase cost of a home. The sale prices of homes are disclosed online. What we don’t talk about and is absent in most of our discussions and thoughts, is the ongoing costs. What’s the month to month impact on our cash flow? Is one form of housing more expensive on our day to day cash flow than another?

We weigh up in our minds whether we should buy the newer townhouse in a more central location, or should we buy the older house in a similar suburb, or buy the newer house in the outer suburb. The purchase price is the same for all the homes, however the lifestyle benefits are likely very different for each. While weighing the lifestyle and financial impacts, it’s important you consider the ongoing costs of your housing choice. Let us do a deeper dive.

Let us consider your average home in Sydney. The median freestanding house price in Sydney is $1.6M, as per the December quarter 2023 Domain House Price report.

Estimated annual ongoing homeownership costs (not including a mortgage):

• $5,000 – council rates (depending on the value of the land this could be more or less).

• $16,000 – ongoing maintenance cost (the rule of thumb is between 1-3% of the property’s value. We have left this on the lower end of 1%.)

• $1,699 – electricity cost (average consumption for NSW households is 5,662 kWh and assuming an average cost of $0.3 per kWh, Australian Energy Retailer)

• $601 – water cost (average consumption for Australian households is 175 kL and the average cost per kL is $3.43, Australian Bureau of Statistics 2022)

• $1,715.16 – home and contents insurance (average cost for household in Australia, Finder.com.au)

• Total cost = $25,015 per year
  

The above are estimates, and the amounts will fluctuate depending on energy costs, the age and condition of your home and the council you reside, however what is important to highlight is that you can’t just look at the purchase cost and your mortgage repayments, you need to dig deeper and understanding the holding and running costs.

Many will argue that they won’t buy into a strata complex, such as a townhouse or an apartment due to body corporate fees. Body corporate fees cover everything from building insurance, maintaining common areas, building works and repairs. What people are usually discounting is the ongoing maintenance costs of a freestanding house. Arguably, a freestanding house does allow the flexibility of deciding when to pay and do maintenance, however many will delay this as long as possible which can cause issues that are more significant and end up costing more. Or, they may never do this maintenance. This can significantly reduce the sale value of their home. The argument that you are saving money because you are not paying body corporate fees when purchasing a freestanding house, is usually unfounded.

Another important consideration is the age and condition of the house. Generally speaking the older the property, typically the higher the maintenance costs and lower the energy efficiency. If you live in a more volatile and extreme weather area, such as Tasmania or Canberra, energy efficiency is something you should consider. Trust me, your energy bill will be double or triple the average yearly electricity cost if you have a low energy efficiency rating in these locations. It’s not uncommon for households to spend over $2,000 in electricity for the winter quarter!

Personally, considering the above, and the fact that we enjoy the luxury of running a tropical environment in the cold Canberra winters, we opted for a new solar passive townhouse with a high-energy efficiency. Although units over time have not had the capital growth that freestanding houses have had, a townhouse was a good option for us. Low ongoing running costs, and still the possibility of some capital growth.

When determining how much house you can afford, don’t just look at the mortgage repayment or purchase cost, understand the additional ongoing costs of your options. At the end of the day, there is no right or wrong housing option, some prefer the hassle-free apartment lifestyle with a short commute, while others prefer the larger home on a quarter acre block in the suburbs.

While you are weighing up the lifestyle benefits of each of your options, make sure you understand the numbers. As I have stressed many times before, if you are struggling to save and invest money, it’s usually because of one of two reasons. You either bought too much house, or too much car, or potentially both. Don’t get caught with buying too much house, it’s a noose around many Australian budgets.

If you think you have bought too much car, it’s worth following this link.

The Financial Poet.

The principal purpose of this blog is to provide factual information and not provide financial product advice. Additionally, the information is not intended to provide any recommendation or opinion about any financial product.

The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product. This post specifically excludes personal advice.