Guest Blogger Martin Ryan Explains:
There is no denying that housing prices have increased. But does this mean that it’s no longer affordable for first time property purchasers to get into the market?
Notice, I do not use the term first homebuyers, wanting people to stay open to the idea that the property they purchase may not be one in which they live. Now, let us contrast the experience of the Baby Boomers and Gen-X with that of Gen-Y.
Since Baby Boomers and Gen-X, times have changed
- Housing prices have gone up.
- Affordability is tougher in terms of household income to debt ratios.
- Investors are very active.
- Anecdotally, foreign investment appears to be driving the market. However, economists say this is “froth around the edges”, with supply and demand remaining the key drivers in the market.
- While the term “housing bubble” has been bandied around, economists say we do not have a bubble, pointing to times when housing prices have risen by 80% to 130% in single years in Sydney, in the late eighties and early nineties. After these rises there was a correction—the bubble didn’t burst. Sydney experienced many flat years. In fact, many commentators say that recent price rises are merely Sydney playing catch-up, adding that the city is still slightly below long term trends.
- Compared to previous generations, it is much easier to obtain credit at a higher percentage of the property value.
- In years gone by, if a male Baby Boomer’s female partner was employed, the bank manager ignored her income when calculating whether or not the couple could afford a loan. In comparison, couples working today now have the ability to obtain and repay much larger loans.
- The two components of affordability are: equity contribution and loan repayments.
- I believe the question is not, have property prices become unaffordable? But rather, have people become unwilling to make the sacrifices necessary for property ownership? I.e. Saving up for a deposit, and making loan repayments.
- For Gen-Y, I see the equity contribution being more of a stumbling block.
- Perhaps Gen-Y realise that if they’re not prepared to make the sacrifices required to build their deposit, then they’re not going to enjoy a lifestyle where loan repayments take precedence over entertainment and travel.
Let’s assume that our Gen-Y’s are prepared for the loan repayments
- Typically, I find these are people who have been renting and feel that— given current low interest rates—they may as well be paying off their own mortgage, not their landlord’s. These people are used to keeping the commitment of monthly repayments.
- On the other hand, the Gen-Y’s who choose to live at home longer (and there are a lot of them) tend to save larger deposits—effectively funded by their parents indirectly—but are hesitant about the financial commitment of repayments, because it is something foreign to them.
- To a lender, those who have shown that they can meet the financial commitment of regular rent payments, and who have saved their own deposit—even if its slightly smaller—will be considered stronger applicants for a loan than their stay-at-home counterparts.
- If you are prepared to meet the loan repayments, the next step is working out where your equity contribution is going to come from. The maximum you’ll be able to borrow is 95% of the property value, so you need to save the remaining 5% plus the stamp duty and expenses. Any loan greater than 80% of the property value will require the borrower to pay a lender’s mortgage insurance premium. The bigger your deposit; the lower the premium.
- It is very common for parents to assist first time property purchases; in fact, they do so in over a third of cases. Regardless of parents assistance, I would advice people to start saving; this is well regarded by lenders.
Start preparing early to make yourself attractive to a lender
- Start saving. This is the biggest problem I see; young people enter the workforce, earn a little money, and start living beyond their means. This lifestyle—as well as the associated high interest debts that may accompany it—can severely impinge on ones ability to save.
- Since children are living at home a lot longer, their parents’ benevolence is, in some ways, enabling this lifestyle. It seems that, unless they can purchase their dream home, some would rather live with their folks. They would prefer to buy toys and go travelling than save for a deposit. But these things do not have to be mutually exclusive; there are businesses out there that help people to achieve the ideal balance between lifestyle and financial success.
- Do your best to eliminate unsecured debts—credit cards, personal loans, and “interest free” hire purchases.
You will need some equity to contribute to your purchase
- Your equity is going to come from either cash you have saved, investments you have liquidated, or (increasingly) help from your parents. Parents are now assisting at least one third of first time property purchasers. They can help is three main ways:
- A gift
- A loan
- A guarantee—this is where they offer part of property they own as security for a loan taken out by their children to purchase a property.
- If you want to take advantage of the stamp duty concessions for first homebuyers in Victoria, you need to keep your purchase price at or below $600,000.
- If you go it alone, without your parents’ help, you will need a minimum of $50,000 in your savings account. “Genuine savings” means, from a lender’s point of view, having held these funds in your bank account for a minimum of three months. What is most desirable is a regular pattern of savings in said bank account; a pattern that has led to the accrual of your savings.
Thinking with your head instead of your heart, consider purchasing an investment property where you can afford to buy; and rent where you would like to live. Affordable “stepping stone” properties do exist, and are waiting to be found.
Another option to think about is purchasing with somebody else. There are a number of businesses that specialise in contracts for people who choose to purchase property together; why not take advantage?
Regardless of how you purchase your first property, interest rates are at an all-time low, so loan repayments are not too much more than rental prices. It’s definitely the perfect time to consider taking the step.
Before you begin looking, listen to the stories of Baby Boomers and older role models, stories of how they had to scrimp and save to get into their first home. Today is seems people just aren’t as willing to sacrifice. To the modern youth, cutting back simply means going out to dinner less often. But to our parents, cutting back meant never going out to dinner at all, darning socks, and living rough. Times have changed.
To be the best prepared, automate your savings plan so your wages go into a high interest or investment account, and have a set dollar figure come to your day-to-day transaction account. If you get a pay rise under this set-up, your savings will increase instead of your lifestyle.
Yes, it’s true that housing prices have gone up relative to wages, and that some of today’s potential investors have thrown their hands up in the air, claiming that they can’t afford to buy.
While it may be true that affordability is tough these days, there are some mitigants that many choose to ignore. For those who are committed to property as an asset class, certain strategies can be implemented to ease the
But while it may be true that affordability is tough these days, there are steps that all first time buyers can take to mitigate the sacrifices they have to make. After all, owning property is an asset, and while it may not be easy, few things worthwhile are.
Aviser Finance Strategist