Looks like we'll have a 2-tiered property market - those who can and those who can't

By Michael Yardney | 28 Sep 2020

It seems as though there are always stories about housing affordability in the media.

And this seems to be dividing us into a nation of those who are property owners and those who believe property will always be unaffordable.

During booming market conditions it was all about being priced out of the market by greedy property investors and foreign buyers.

Then when the market slowed, the conversation turned to negative gearing and how it was keeping the rich richer, and stopping others from stepping onto the property ladder.

Now that our housing markets have slowed during COVID, we still hear the trials and tribulations of first homebuyers who are struggling to save a deposit.

So what’s the real story about property in Australia?

I keep hearing cries that the Baby Boomers had it easy when they were looking for a home, but that’s not really the case.

Bank lending criteria were just as strict back them and interest rates were usually in double digits, even reaching 17% in 1989.

And Baby Boomers could rarely rely on the bank of Mum and Dad as their parents lived a frugal life, with many of them having learned their money habits during the depression.

This meant Baby Boomers had to learn the art of delayed gratification realising that ‘once it’s gone there’s no more.’

But society has changed, and the younger generations are living in a much faster world and have different expectations.

Evidence points toward their inability to delay gratification, sacrifice lifestyle and save.

They’ve grown up in a world where instant coffee isn’t fast enough and email now looks like snail mail.

They want it now, meaning that many have not learned to save because their addiction to credit simply won’t allow them to.

And when it comes to housing, many first home buyers want the type of home located in a lifestyle inner suburb of one of our capital cities that it took their parents 30-40 years to afford.

But despite all this, the proportion of FHBs in the market at present is higher than it has been for a long time with over 20% of new home loans being taken out buy first timers.

These FHBs realise their first home won’t be their final home and many see it as a steppingstone to a bigger family home and building a portfolio of investment properties in the future.

Having said that …there will always be a two-tiered property market in Australia.

On the one hand will be those who have the ability to buy properties and enjoy the benefits and wealth creation that comes with home ownership, and those who feel they are locked out of the housing market.

But it doesn’t really have to be that way, so I’m going to run through some of the biggest “blockers” to property ownership in Australia today.

Access to finance

In the new finance environment difficulty getting finance is a growing issue for both home buyers and property investors looking to grow a portfolio

These days, it is harder:

  • for beginners to get a loan, with banks enforcing stricter lending criteria
  • for established investors to grow a substantial portfolio, because of tighter loan serviceability criteria
  • to live off the equity in your properties when you retire, as you'll need a much bigger asset base and much lower loan to value ratios
  • to manage your investments year to year, as rental yields are lower than they have been in the past

Does this mean getting on the property ladder is no longer an attractive proposition?

Far from it!

Owning your own home has always been aspirational. It’s hard, but the achievement is worth it.

And building a portfolio of investment properties to give you security in your golden years is more important than ever today considering we can’t count on the ability of a government lumbered with more debt to look after us.

So what is that first step?

Getting a deposit together

In Australia we have property prices that are considered to be among the highest in the developed world, with residents in our biggest cities forking out more than $1 million for modest family homes.

With lenders requiring a 20% for a property deposit (to avoid extra charges such as lenders mortgage insurance), this means some buyers need to save $200,000 to buy their first home.

Or do they?

First of all, higher loan-to-value ratio products are available.

You may need to pay for lenders mortgage insurance (LMI) -which protects the bank, not you the homeowner - but by paying for this premium, you may be able to buy a property with a 10% deposit, or sometimes even a 5% deposit.

First homebuyers can also access the government’s First Home Loan Deposit Scheme, which allows you to buy a home with a 5% deposit, without having to pay LMI.

And recently the NSW government has given stamp duty exemptions for first home buyers purchasing a property up to $800,000 making the initial hurdle a little easier to jump.

Then there’s always the Bank of Mum and Dad – many first home buyers get a leg up form their parents.

Educating yourself about how finance works

Saving the deposit is the first hurdle to overcome.

The next hoop to jump through is serviceability – something that has become a little trickier in the wake of the Hayne's Royal Commission into banking.

For property buyers, proving they can afford to repay a loan depends on two things – their actual budget, consisting of income versus expenses, and the standardised figures lenders use to calculate typical living costs, the HEM and HPI.

This is where other debts and liabilities come into the picture.

Lenders consider all of your available credit limits as debt, so if a borrower has a $10,000 credit card with a zero balance, it’s still considered as a $10,000 debt.

HECS and HELP loans will be factored in, as is your superannuation balance.

Borrowers can get head start here by cancelling credit cards (or at the very least, reducing the limits on them), paying out personal loans and car finance, and keeping a clean transaction record that doesn’t show too many non-essential purchases in the three to six months prior to applying for a loan.

In contrast, accomplished investors with a successful portfolio may be able to draw on existing equity or use their rental income to show serviceability.

As the saying goes, buying your first property is much harder than buying your second, fifth or eighteenth.

It’s the “getting started” part that is often the hardest – but once you clear this hurdle, the sky is the limit.

What is your end goal?

Interestingly, although the first property is where most people place all of their focus, the best place to start is actually with your “end goal” in mind.

Most property investors I speak to have a vague goal to build long-term wealth.

But what does that really mean for you?

Do you want an asset base that will grow steadily and can be sold so you can live off the growth in value if need be?

Are you planning to live off the rent from 10 properties in retirement?

Do you want to create and leave a legacy to your kids – or if you’re really successful, retire early and lay on the beach watching your profits roll in?

Deciding your goal upfront can help you plan the steps you need to take to reach your goal.

And the reality is, anyone can do this.

I know this for a fact – because I have coached and mentored thousands of everyday Australians, and I’ve helped them step from the “I’ll never be able to afford it” camp into the “growing my wealth through property investing” pile.

So, where to next?

If you’re a hopeful property buyer reading this blog, and you feel like I’ve cemented some of your fears about ever getting into the property market, please don’t be discouraged.

There are a number of strategies you can use to get ahead in property and your first purchase doesn’t need to be your “forever home” – in fact, it’s better if it’s not.

You could buy in conjunction with someone else to get on the property ladder sooner, or “rentvest” in a regional area, with a plan to cash in on the capital growth for your own home deposit down the track.

There are always options out there; some just involve thinking a little outside the box.

There’s an old saying – the best time to invest is 20 years ago, the second-best time is today.

There’s no doubting that buying your first home or investment property in 2020 is hard, far harder than it may have been for the generations who came before you.

But it’s not impossible.

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Michael Yardney is CEO of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.


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