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How To Win Australia’s Housing Affordability Challenge (A Step-By-Step Guide)

How To Win Australia’s Housing Affordability Challenge (A Step-By-Step Guide)
November 18, 2019 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

According to some, it’s become too expensive for a first home buyer to get a foot on Australia’s property ladder.

Auction clearance rates have consistently increased since May’s federal election result and there’s subsequently been a few consecutive months of data confirming that property prices in our biggest cities are trending north again. The cries of ‘affordability crisis’ have already started!

The good news is that, for those who are motivated and prepared to exercise the same discipline and determination as past generations, it most definitely is possible to get in and acquire your own piece of Australian real estate. With loan interest rates now lower than any living Australian has ever seen, one should make one want to get in as soon as they can.

But let’s be crystal clear, buying real estate is nothing like buying an outfit! Your property will probably be the most expensive purchase that you’ll ever make so, of course, one must expect to make some sacrifices and to allow lead time to save (say) $60,000.

Use this report as a tool to help work out your own plan. Establish a household budget framework and make it happen. It’s your future – make property ownership a firm goal!

It’s Not A Crisis!

Yes, shelter is a basic human right, and that’s why I’m a proud campaigner and participant of Vinnies CEO Sleep Out for the homeless. But, let’s not confuse the very important social issue of homelessness with homeownership.

Owning a property is an achievement, not a right!

If you’re sitting around hoping that properties will one day become significantly less expensive, you’ll be disappointed. For as far back as the arrival of the First Fleet, the cost of housing has always increased. Over time, the net result between market downturns and upswings has always been higher property values.

Related article: 111 Australian towns where house prices tripled over last 20 years

If you’re doubting whether history will repeat itself, just consider the future direction of the various real estate inputs. Do you think Australia’s population will ever shrink? Will property developers suddenly become less motivated to produce profits? What about the future costs of building materials, renovations and trade labour – are they likely to go up or down? Are property taxes likely to increase or decrease in future years?

One of the most useless statistics in real estate is the ‘median house price’ (or ‘median household debt’) to ‘household income’ ratio. The cost to buy a house in this country varies from $100,000 in outback Australia, to circa $380,000 in wonderful Armidale and $6 million in Vaucluse. Similarly, a household income will range from $30,000 to several million dollars. When it comes to housing affordability, the most relevant statistic is the house price that an individual household income can afford – just ask any bank!

If one continues to think it is impossible to get a foot on the ladder, it will remain that way for them. If one is looking for information to support a view that the cost of housing is beyond their reach, they won’t need to look far to find it.

Property ownership has never been easy. It has always required discipline and sacrifice to save a deposit, plus ongoing financial responsibility to support a mortgage. There are no shortcuts!

If one doesn’t like this brutal truth and is contemplating putting property ownership in the too-hard-basket, it would be wise to first think through how life might look in their 60’s and beyond.

Accept the challenge, folks. Take control of your own destiny.

Related article: Higher capital growth in Australia’s oldest regional city than oldest capital city

Propertyology’s core business is to buy property (the only thing we’ve got to sell is our knowledge and our skill). In addition to spending every day analysing every market in Australia for many years, our buyer’s agents have purchased hundreds and hundreds of properties. We’ve done this in 16 different cities and towns (and counting) across most states. And we’ve always paid less than $500,000 for a property, sometimes below $300,000. That’s affordable!

Right now, many of the properties that we’re purchasing (on behalf of first-time property buyers and repeat buyers) are quality houses for circa $380,000 and in locations with an exciting capital growth outlook. It’s quite common for these clients to complete the purchase using only a 10 percent deposit, and it costs them practically nothing each year to hold the property – more about ‘how’ shortly.

Lateral-Thinking Strategies

I’m certain that today’s younger generation don’t need me to tell them that the world now is very different to that experienced by past generations. Life is faster, we are living longer, and technology continues to make the impossible possible.

Today’s generation have more 2-income households than yesteryear, we’re more mobile with employment than past generations, there are greater opportunities to earn more money for those who pursue it, we travel more, and it suits many people to delay placing down a permanent anchor in terra firma for longer.

For most wannabe property buyers, the biggest challenge is accumulating a sufficient deposit. Some make the mistake of locking in high expectations of buying a property which costs a lot of money and therefore the deposit amount required always seems unachievable.

The important first-base for property ownership is saving a deposit for a good property in a good location, but you don’t necessarily need to live in it. Some will, but an increasingly big number don’t.

Today’s property buyers would be wise to embrace changes with homeownership strategies. With this in mind, you should expect some raised eyebrows from many well-meaning people around you if your strategy differs to what they did. Keep your mind open.

For those who are motivated but don’t have the war-chest buried in the backyard, here are practical strategies to consider:

1) Family Equity Loans

A finance solution wherein an agreeable family member with reasonable equity in a property might be prepared to allow it to be used to help secure your own property loan in lieu of a big deposit.

2) Rentvesting

An increasingly popular best-of-both-worlds strategy wherein one elects to rent the property which most suits their personal lifestyle while investing in property in strategically-chosen locations that have good capital growth potential. As with everything, there will always be narrow-minded critics of this strategy, but it works. Propertyology has dozens of clients who achieved more using this strategy than they could have the traditional way. Some people use this strategy as a stepping-stone for later acquiring an owner-occupier property, others do this longer-term as a means of accelerating wealth creation. Propertyology have used our skill to help first-time property buyers with deposits as small as $35,000 (plus transaction costs), to buy a low maintenance house as an investment – the rental income covers 100 per cent of loan interest and all other annual costs. There is no catch!

3) Relocation

Yes, it’s a big decision to pack up and leave town. But our communities are not built behind electric fences; relocation is always an option. At least think about it! Every year, tens of thousands of Australians do this. In doing so, they have been pleasantly surprised by the high-quality lifestyles and employment opportunities. Relocation is most prevalent for people leaving an expensive city (last year alone, 27,000 people left Sydney) to the many great Australian locations where a good house costs between $350,000 and $450,000. That’s affordable!

Related article: Australia’s tier 2 and tier 3 cities winning the popularity contest

4) Combined Resources

While logistical and legal issues need to be carefully considered, one option is to combine the financial resources (deposits and cash flows) of multiple parties to purchase property together.

5) Earn More, Save More

In most walks of life, the genuine achievers all have one thing in common: if it’s meant to be, it’s up to me! There is no sixth option!

Related article: How to enjoy a good lifestyle today while planning for your future

For those with the deposit saved, finance options have never been more competitive than right now. There are now dozens of lenders collectively offering a gazillion loan products. It’s common for people to buy property with a deposit smaller than 20 percent and record-low interest rates means that loan repayments have never been lower.

More Opportunities Than Most Realise

Those who live in one of Australia’s most expensive cities naturally need a bigger deposit if they want to buy an owner-occupier property in that expensive city – but that’s their choice.

Of course, one option is to compromise from a detached house to an apartment purchase. Buyer beware though – Propertyology’s conclusion from a recently completed research project is that there are a few significant downside risks associated with owning an apartment in most Australian cities.

Related article: How well has your apartment performed?

Those with a genuine interest in exploring the best long-term option for them to acquire real estate will start by considering 100 percent of their options before making the biggest financial decision of their life.

Australia’s 25 million people are housed within 10.3 million dwellings and disbursed across 8 states and territories. In addition to the 8 capital cities, there are 178 individual regional cities and towns with populations over 10,000. From $945,000 in Australia’s most expensive city, Byron in New South Wales, to $255,000 in beautiful regional cities such as Burnie in Tasmania, the median house varies widely.

12 percent of Australian suburbs have a median house price of $1 million or more. It’s hard to have sympathy for someone pouting the bottom lip because they can’t afford to be in this top echelon as a first-time property buyer.

Of all of the suburbs across Australia, 60 percent of them have a median house price below $600,000. Most of the suburbs above this threshold have apartment options at a more affordable price.

35 out of Australia’s 50 largest towns and cities have a median house price of $550,000 or less.

Propertyology has helped clients to purchase low maintenance houses in good locations within capital cities such as Brisbane and Hobart for under $450,000. Don’t tell me it can’t be done!

It is highly unlikely that the Australian location with the best potential for one’s hard-earned money is their hometown. In the words of the meerkats, ‘compare the markets!

Having formally studied Australian real estate history and as full-time students of property markets nationally, we know that ‘big city’ does not mean ‘safer’ or better growth potential.

Mindset Matters Most

I’ve never known anyone to achieve something significant with a bad attitude. Property ownership is a big achievement – it requires a positive attitude.

Those who sit around waiting for a handout will become their own worst enemy. Get in the driver’s seat!

In my own case, being raised in a modest household by loving parents who never managed to buy a property of their own, was no reason for me not to own property. Everyone has the ability to set goals, map out a plan, work hard, make sacrifices, and pursue things important to them. I became a first-time property buyer at the age of 22; it resembled nothing like my dream home.

My end goal was always to work towards one day having the dream home plus an investment property portfolio that would provide my family and I with a more comfortable lifestyle than what a taxpayer-funded aged pension and employer-funded superannuation would provide.

Instead of expecting to strike a home run with my first hit, I did what it took to get to first-base. I cut discretionary expenses, earned more money through working longer hours, and I compromised on my property expectations.

One who refuses to learn how to save and / or earn more money can’t ever expect to get to first base. This isn’t rocket science, but it amazes me how few people are prepared to do it.

The process of saving a deposit taught me the importance of living within my means, the value of budgeting, and the power of compounding. That initial small deposit on my first property grew in value at a rate larger than what I could otherwise save.

That first experience enabled me to then focus on getting to second-base, then third-base, and eventually getting all the way home.

Over the years, I’ve used my analytical mind and my interest in economics to become a full-time student of property economics. As pioneers of a unique business model, Propertyology has been helping everyday Aussies to buy properties in strategically-chosen locations all over this country for many years.

If there’s one thing I can’t stand, it’s bad attitudes. Especially those with a ‘poor me’ mentality and / or the tall-poppy bashers. That includes those who take a swipe at one for investing in their future. And those who make ill-informed statements such as ‘property investment is a greedy tax rort.’

Motivated by a goal of wanting to provide a reasonable lifestyle for my family without being financially dependent on others, I recently purchased this low maintenance house in a central part of the beautiful city of Launceston for an affordable $375,000.

To those who claim property investment is a tax rort, consider the facts of this property purchase. I paid $13,000 in stamp duty (tax) to purchase the property, I pay $550 each year in land tax (a tax which an owner-occupier wouldn’t pay), I’m charged a 0.5 per cent higher interest rate by the bank for the ‘privilege’ of investing in my future, I pay tax each year on the modest profit that the property produces, and I’ll be liable for capital gains tax whenever I sell the property (again, something that an owner-occupier doesn’t pay). Rort?

Related article: Myth versus facts – the average Aussie property investor

A positive attitude and a drive for financial independence is more than a personal achievement, it is also making an important contribution to society. In addition to adding rental stock that provides shelter for others (something which governments clearly can’t afford to fund), it also minimises the annual cost to taxpayers for funding aged pensions (currently $50 billion per year and growing fast).

Sadly, society will always contain a group of people who aren’t prepared to make small sacrifices for greater gains. Those who partake in toy throwing will never find their way out of the cot!

There will always be those who think it’s acceptable to criticise investors while they themselves think it’s a God-given right to wander through life expecting the taxpayer (aged pensions) and superannuation (a tax on their employer) to pick up their personal tab for every year beyond 65 years. As brutal as that sounds, tell me which part isn’t true!

Some of the best attitudes that I’ve seen in people are from some overseas migrants who’ve become Propertyology clients. One of the strategies that I previously listed for property ownership was to consider a relocation to another town – overseas migrants have relocated to an entirely different country. They are outstanding examples of members of the human race who are prepared to pursue a better lifestyle, to think laterally, and taking control of their own destiny.

If one has got the will, there’s always a way. If one doesn’t know the way, there’s always going to be trusted others to show one the way.

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Governments Have A Role To Play

Property ownership is the responsibility of the individual, not governments. But governments can be a positive influence by providing good leadership and guidance.

It infuriates me when governments and their various associated departments devise national policies using a broad-brush, all-roads-lead-to-Sydney approach. Yes, Sydney is a big city and home to 5 million people, but many of the challenges associated with Sydney (house prices, mortgage sizes, congestion etc) are no where near as bad (if at all an issue) in most of the other 200-odd cities and towns in this diverse country.

The simplest and most effective thing that every state and territory government could (and absolutely should) do is to (through digital media) produce annual marketing campaigns that illustrate the amazing lifestyles available in dozens of non-capital city locations within their respective states.

The perception which most capital city folk have of life beyond their own concrete jungle is so far from reality – I’m a witness to this inaccurate perception every single day. I’ve spent good chunks of time in every capital city plus more than twenty regional towns and cities. In many ways, a lot of these locations are superior to some capital cities.

Campaigns need to focus on selling that great story. The story about clean environments, beaches, national parks, wonderful food, great schools and universities, sport and recreation, affordable housing, smaller mortgages, shorter commute times, stronger community values, great environments to raise children and better employment opportunities than most capital city folk appreciate.

Good campaigns will help those whom are frustrated about not being able to afford property ownership in expensive cities like Sydney, Melbourne, Canberra and Wollongong to think laterally, while it will also do wonders for tourism and the broader economy.

Another important role for governments to play is to incorporate financial literacy into our education system. Help the next generation to be better than past generations with financial decisions which, of course, include property ownership and financial independence. This report alone contains lots of topics that all high school students will be better for learning.

And, finally, governments must ensure that all property-related policies put the interests of the consumer ahead of industry. The current attitude for policy settings invites consumers to follow a flawed decision-making process. The system supports the construction sector more so than the property buyer.

From first home buyers to repeat buyers, from owner-occupiers to investors, whether state or federal government, most property-related policies are based around providing financial incentives for one to buy a brand-new property. Why? Who is that really helping?

A clear decision-making process begins with considering 100 per cent of the options. In Australian real estate, that means 10.3 million dwellings. We build circa 200,000 new dwellings each year. It’s impossible for a government to claim that they have the consumer’s best interests at heart if their policy objective (stamp duty, grant or rebate) is to incentivise consumers to buy brand new properties. In other words, exclude 98 per cent of choices from the decision-making process and only focus on the 2 per cent that are new.

There’s a big bunch of evidence proving that the financial performance of new properties is significantly inferior to the majority of established properties. Similarly, there’s an alarming body of evidence about the appalling quality of much of Australia’s newly constructed dwellings. Federal and (particularly) state governments are part of a sick system that’s made worse by manipulating the consumer’s decision-making process down a path of disappointment.

Propertyology is Australia’s premier property market analyst and award-winning buyer’s agency. Every capital city, every non-capital city, we analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.

Here’s an example of some of our work for a client.