Owning a home – is this the death of the Great Australian Dream?


Jason Prowd  |  6th June 2018  |  5 min read

Key points:
  • Property prices have been on the rise since the 1990s and now many find it hard to afford a home or pay-off a home before they retire.
  • If you are intent on buying a home, there are some smart steps you can take to get on the ladder.
  • You don’t have to buy a home in order to secure your financial future.

I don’t know about you, but it seems to me that property has become a staple topic of conversation at almost any catch up with friends. It’s not at all surprising given the rate at which property prices have sky-rocketed in recent years. The Great Aussie Dream of owning a home is under threat. People are worried and it’s fair enough.

Rising property prices wouldn’t be such a problem if our incomes were keeping up. But they’re not. Indeed, average property prices in Sydney are now about nine times the average disposable income1. In Melbourne, they are 7.5 times incomes1. Ouch.

This leads to another problem – we’re taking on more debt than we can manage. So much so that household debt is now almost twice annual disposable household incomes.2

The fallout isn’t pretty with more and more Australians finding themselves in mortgage stress. What does that mean exactly? Well, you’re considered to be in mortgage stress if you spend more than 30 per cent of your disposable income on mortgage repayments.

Large debts are impacting the Aussie way of life. For example, many people are retiring with mortgages and adult children are staying at home longer in order to save a deposit. Plus, one in three first home buyers are turning to their parents to help them afford their deposit.3

 

How did we get here?

To understand why prices are so high, we need a quick history lesson. And I promise it will be quick.

Since the 1960s, property prices have trended upwards. Largely it’s been due to a growing population, often low interest rates and economic growth. But supply didn’t keep up with these strong drivers of demand, pushing prices up.

Government policies have also played a role. In particular, negative gearing in 1987, reductions in capital gains tax in 1999 and the introduction of the First Home Owners grant in 2000. Add on the historically low interest rates of recent years and you’ve got a perfect recipe for high prices.

 

‘But prices are softening’, I hear you say

It’s true that property prices have come off this year. Data shows that the value of housing fell for its seventh consecutive month in April 20184. This is a natural part of the property market – with cycles pushing prices up and down. Indeed, during the last 15 years there have been three corrections of close to, or over, 5 per cent.

You may view these corrections as windows of opportunity to get into the market. Indeed, it certainly makes sense to buy when prices are low rather than high (if you can time it). But I think you still need to ask yourself whether it’s a good investment overall?

Personally, I think Australian property is significantly overvalued. It’s why my wife and I choose to rent. We believe there are better buying opportunities that will enable us to build financial security over time.

If you agree with this view, and you’re an experienced investor, you could opt for a portfolio of direct shares. Or, if you don’t have the time or expertise to pick and choose stocks, you might opt for a professionally managed, diversified portfolio. With this approach, you need to do the upfront work to choose the right manager and investment strategy. Then, you can then sit back and relax whilst the manager gets on with the day-to-day investing of your money.

I know, of course, that some people don’t like the idea of renting. For many, owning a home is important – and not just for financial reasons. So, what can you do if you are determined to get on the property ladder?

 

Three tips to help you buy a home

  • Invest your savings before you buy
    Saving up your money for your home deposit is great. Earning some decent returns on that cash whilst you wait is even better. Instead of stashing your cash in a low-interest bank account, why not consider investing it into a managed fund with an appropriate level of risk? The money you earn could help your deposit grow even more while you wait to buy.

 

  • Rent where you want to live and invest where you can afford
    You might have heard the saying “rent where you want to live and invest where you can afford”. It’s not a silly strategy. It means you can buy a property that better suits your budget and get onto the property ladder sooner. Buying a property as an investment might also deliver potential tax benefits from negative gearing. The first property you buy doesn’t have to be your ‘forever home’.

 

  • Make the most of government concessions
    If you’re a first-timer, you only have one chance to access government concessions so make the most of it. Schemes offered by the Australian government and your state government could get you buying property sooner. In NSW, for example you could save $24,470 in stamp duty on a $650,000 home.

— Jason Prowd leads Morningstar Next: ready-made investment portfolios. Discover more here

 

© Morningstar Investment Management Australian Limited (‘Morningstar’) and any related bodies corporate that are involved in the document’s creation. Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third-party providers accept responsibility for any inaccuracy or for investment decisions by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment.  Any general advice has been prepared without reference to your investment objectives, financial situation or needs. You should consider the advice in light of these matters and if applicable, the relevant disclosure document before making any decision to invest. Refer to our Financial Services Guide for more information.


Sources:

  1. CoreLogic affordability data. As reported in: http://www.abc.net.au/news/2018-01-22/australian-housing-unaffordability-experts-disagree-on-extent/9349796
  2. Reserve Bank of Australia Chart Pack Household Sector https://www.rba.gov.au/chart-pack/household-sector.html
  3. Mozo Bank of Mum and Dad Survey, September 2017. https://stat.mozo.com.au/images/more-on-mozo/media-releases/MOZO-MEDIA-RELEASE-the-bank-of-mum-and-dad-final.pdf
  4. CoreLogic Monthly Housing & Economic Chart Park. https://www.corelogic.com.au/reports/chart-pack
  5. Australian Bureau of Statistics 6416.0 – Residential Property Price Indexes: Eight Capital Cities, Dec 2017

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