I previously wrote about the upfront cost of houses. Australia has some of the most expensive housing in the world and just getting into the market is tough. Add to that, one in five of us feel the need to buy a bigger house than our friends; extending and renovating is a national obsession; and bigger is considered better. All this amounts to homeowners ending up in their private debt and deficit disaster.
That’s the upfront cost. The glamourous part where you get the nice house and all you have to do is pay a small weekly, fortnightly or monthly instalment for 30 years. The bit we never talk about is the small weekly, fortnightly, monthly or annual instalments you have to cough up regularly or unexpectedly direct from your cash stash. Yes, where talking about running and maintenance costs. Boring, I know, but this part really makes a difference to the lifestyle you have and how nice your home is 5, 10 or 25 years down the track.
Keeping it cool or warm: Running costs
Houses are expensive to run and the bigger the house, the more it will cost. Research has found that a household living in a more energy efficient house is one third less likely to default on their loan. That’s how significant running costs are. While houses these days are more energy efficient, their sheer size has wiped out most of those gains in efficiency.
Running costs don’t start and end with electricity and gas. Insurance premiums on a big house are also larger as you have more to replace should the house ever need to be rebuilt.
There’s also cleaning to consider. It’s not my favourite job in the world, but at least I can get to most nooks and crannies within a few hours a week. Double the size of the house and suddenly the cleaning time goes up. Should you wish to get a little help with the job, the bigger the house, the longer it takes, the more it’ll cost you.
Making your home a home: Furniture and fittings
And then there’s the furniture and fittings to consider. Many years ago, my boss ‘downsized’ from a large family home to an inner city apartment after the kids moved out. While it had fewer rooms, the spaces in the apartment were much larger and most of the furniture my boss had in the family home were just too small. The total cost of furnishing their new home with appropriately sized pieces was in the range of $20,000. In their circumstances it was an act of whimsy they could afford, even if it smelt strongly of midlife crisis. When you’re just starting out, the story is quite different.
Furnishing a four bedroom house with both formal and informal living spaces is going to cost a lot more than a more modest sized abode. In fact, it might not even be affordable when you first move in or the extension is finished. Despite how easy we think the baby boomers had it when they bought their first houses, not all of them could afford furniture and their houses were about 30% smaller.
There’s also another trend with large houses that can set you back significantly. The bigger the house, the more storage space you have. Which means you can buy more stuff, because there’s always a room or a cupboard where it can be stored. With a small house you have to stop and think where that gorgeous mushroom poof/stool will live. If the answer is nowhere, you just don’t buy it which in the long run is a good savings tool in itself. Even if it means living without cute foot stools, which is hard, but doable.
As an aside, when you’re young, insurance companies assume that your contents value rises by about 17% per year.
Keeping it looking great: Maintenance and renovation
Finally there are the maintenance and renovation costs. My favourite part of body corporate payments are the sinking fund. Since learning the term I’ve renamed our house to “The Sinking Fund”. Money keeps disappearing into it. Mostly at Bunnings. Things keep breaking or need to be repaired, improved or repainted and it seems like there are never ending withdrawals from our cash stash.
Strata title buildings have projected expenditure tables prepared by quantity surveyors that list the expected maintenance for the building over a 15 or so year period. This is a planning tool to have some certainty over when big outlays are going to occur and how much needs to be in the sinking fund to cover them.
When you’re in a new house it’s hard to imagine how much work will need to be done to it. Unfortunately nothing lasts forever and in fact the projected lifespan of many fitout items are surprisingly short. Many items will need replacing well before the 30 year loan is paid off. For example, carpet only has a projected lifespan of 8-10 years; decking is only 15 years; and kitchen appliances a measly 9-15 years. Add to that the cost of repainting every 10 years, landscaping and general improvements and your house can feel like a major money drain. For a great maintenance table, check out page 9 of this ‘Cost Efficiency Booklet’ prepared by the Queensland Government)
A couple of years ago we had a valuation done on our house. Surprisingly the valuer commented that it was refreshing to see a small house. He’d been to many big new houses recently with high quality finishes that looked great (what a great job peeking inside people’s houses!). Apparently future expenditure is taken into account for valuations where a loan is on the table. While many a star struck new homebuyers couldn’t see it, he often felt they wouldn’t be able to afford to upkeep the house they had just bought.
So if you think the upfront cost is high, then consider how many thousands of dollars need to be set aside for ongoing costs. You might just be surprised at how big your sinking fund needs to be for the biggest purchase of your life.
Have you found the perfect zero maintenance house?