Perth home buyers are paying twice the initial price tag and spend decades breaking even, expert warns

House hunters are being urged not to overpay for property amid new research showing a home will likely cost about twice the original price-tag over 25 years. New research by the Capital Property Advisory shows an $830,000 home, purchased with a 20 per cent deposit, will end up costing $1.595 million over 25 years, when all costs are considered. CPA boss Matthew Hughes said relatively few people understood the full financial commitment of a home, which includes upfront transaction costs of about $40,000, holding costs, maintenance and hundreds of thousands of dollars in interest. “It is absolutely reasonable to conclude the total cash outlay over that period can approach, and in many cases exceed, twice the original purchase price,” said Mr Hughes, a board member of the Property Investment Association of Australia. Mr Hughes said house-hunters needed to consider value for money more than ever now that homes are selling for $1m or more in historically affordable suburbs such as Balga and Westminster. “Some of this is explained by supply shortages, population growth and construction constraints, but some of it is simply speculative, emotional or competitive buying,” he said. “When you factor in about $40,000 in upfront transaction and loan cost and selling costs on exit, the reality is that property is illiquid. “It becomes very clear that property is not a short-term trade. “If you buy poorly, or overpay significantly, it can take many years just to break even.” Mr Hughes said buyers needed to consider the quality of the location, land content and scarcity when making a house purchase. “The danger isn’t the cost itself,” he said. “The danger is paying too much for the wrong asset, and only realising it years later, when the transaction costs make it very hard to unwind.” Using variables provide by the PIAA, the data reveals that an $830,000 purchase price and a 20 per cent deposit requires a loan worth $664,000. Assuming a 5.6 per cent interest rate over 25 years, interest alone will cost $576,264. There are also $37,834 in one-off costs for a house and the establishment of a loan, which includes $33,860 in stamp duty, as well as fees for mortgage registration, land transfer, conveyancing costs, transfer of title, utility connections, building and pest inspections. Annual fees for water and council rates and minor maintenance comes to $6050, which would be worth $151,250 over 25 years. But Mr Hughes said buying a home was a worthwhile long-term investment. If an $830,000 home increased in value by 6 per cent a year, it could be worth about $3.5m to $3.6m in 25 years. At 7 per cent that figure moves closer to $4.5m. The break-even point is 2.6 per cent annual growth, which would make it worth $1.598m. “Even allowing for more modest outcomes, the underlying point is that the asset value typically grows far faster than the nominal dollars paid in interest and costs, particularly when inflation is factored in,” Mr Hughes said. “Importantly, those loan repayments are being made with future dollars, not today’s dollars — which are worth less in real terms over time. “However, this doesn’t mean any purchase at any price is justified.”