Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 179

Home ownership struggles will drive changes

Last month, I explained that without making any extra contributions, a 30-year-old couple would run out of super at age 75 if they needed a combined income of $59,160 a year after retiring at age 64.

But this isn’t the only problem facing many couples today. The cost of housing means that not only will they struggle to make extra super contributions, they will have real problems buying a home. Based on my experience with clients, it’s a major issue for almost every Australian under 30.

Who can afford a Sydney house?

A measurement of official house price data and mortgage costs by comparison website RateCity looked at the salary required for a single person to afford repayments on a 30-year loan. The main criterion was that the individual could not spend more than a third of their income on housing costs. Here are the results for Sydney:

  • Median House Price: $825,000
  • Loan Size: $660,000
  • Interest Rate: 4.74%
  • Monthly Repayment: $3,439
  • Annual Income Needed: $137,556

Are these figures an accurate reflection on what is happening? I would suggest not. First, few single first home buyers earn $137,556. Secondly, the median house price in Sydney is now a lot more than $825,000.


Source: Macquarie Equities, APS and UBS

Thirdly, people are clearly spending more than one third of their income on loan repayments. As you can see from the chart below, property prices are more than seven times average income levels.


Source: Morgan Stanley and Macquarie Equities

What caused the surge from 1996 to 2003? Consumer confidence, immigration and housing shortages are possible reasons, but I suspect rising wages and dual household income earners were the key factors.

Whilst not many 30-year-olds earn $137,556, it’s quite possible that a 30-year-old couple can be jointly earning $120,000. Given the lower tax rates that two incomes generate over the single person, a 30-year-old couple could generate sufficient income at today’s interest rates to make the necessary mortgage payments listed above. However, home ownership in Australia has fallen from 71% to 67% in the last 20 years, and more significantly, for Australians aged between 25 and 34, the proportion has fallen from 39% to 29%, and for ages 35 to 44, from 63% to 52%. First home buyers now make up only 13% of new home loans.

Other buyers and finance sources

Obviously, there are far more people buying properties than only 30-year-old couples. Overseas buyers and investors appear responsible for much of the post-2010 surge, and favourable tax concessions are pushing homes out of reach for a high percentage of younger Australians.

Anecdotal evidence from clients suggests that the desire to get a foothold in the property market is causing many people to adopt strategies that are increasingly risky.

Living with parents is a popular solution to the housing problem, but that becomes strained after a while. Many parents now use equity in their home to finance a mortgage for their children. A major bank recently confirmed that 10% of its property loans were guaranteed by people other than the purchasers.

This is fine if the debt is not too large and the children can pay it off quickly. But the risks with this strategy are high. If the debt repayment becomes difficult due to unemployment, interest rate rises, a property downturn, divorce or an unexpected pregnancy, both the parents and the children could suddenly have a major cash flow problem. It wouldn’t take much for both to lose their homes.

Buying an investment property whilst living with your parents or renting is another popular strategy. This has some positives if the rent covers the loan interest and expenses while benefitting from a rising property market. Negative gearing allows an offset of the excess loan interest and costs (above rent received) against other income tax.

However, many investors underestimate the costs involved, especially if they never live in the property later. Land tax, capital gains tax, stamp duties, council rates, strata levies, repairs and maintenance, etc could render the whole venture uneconomic. Many people look to maximise deductions by taking out an interest-only loan, but this can backfire if the property is worth less than the loan when it comes to sell.

Policy inequity will lead to change

The idea of renting somewhere before buying and hoping for a significant decline in the housing market is not popular with my clients. The overwhelming feeling is that rent is dead money and pays off someone else’s mortgage. The reality is, though, that the vast majority of people under 30 have little choice but to adopt a ‘wait and see’ approach. Despite the inequality, the Federal Government appears to have little desire or perhaps ability to rectify this imbalance. Tax policies such as negative gearing and capital gains tax concessions favour those with capital or access to it, and even the Reserve Bank has admitted the tax breaks encourage investors to increase the prices they will pay.

Unlike in the US with the rise of Donald Trump, in the UK with Brexit and throughout Europe with the growth of right-wing parties, in Australia any middle-class resentment is still largely hidden. Although real wages and salaries have not increased much in recent years, the substantial rise in property prices has made large sections of the population feel much wealthier. However, negative gearing is the enemy of most Gen Y and Millennials wanting to find their own home, as they are outcompeted by investors. In my opinion, the days are numbered for negative gearing and the 50% capital gains tax discount in their current form.

 

Rick Cosier is a financial adviser and Principal of Healthy Finances Ltd. This article is general information and does not consider the circumstances of any individual.

 

3 Comments
Paul
October 28, 2016

Thank you Rick for this concise summary of the problems facing first homebuyers. The spiralling of house prices relative to wage increases over the past 20 years has been caused by a number of factors (including low interest rates, relaxation of bank lending requirements and a surge in foreign investors) however it is the taxation disparities that appear to be hitting first homebuyers the hardest.

As you point out, "....negative gearing is the enemy of most Gen Y and Millennials wanting to find their own home, as they are outcompeted by investors." This is grossly unfair and (as a Grattan Institute Report earlier this year pointed out) it is out step with housing and taxation arrangements with most other countries. Successive Governments have done nothing to address this issue for fear of upsetting vested interests. It will deservedly be a 'voter issue' for prospective first homebuyers (and their parents) going forward.

Bruce
October 27, 2016

The main reason that house prices surged between 1996 and 2003 was the change in Capital Gains Tax. As Peter Martin points out in an article in the SMH, In September 1999 the government halved the headline rate of capital gains tax, making negative gearing suddenly an essential tax strategy. Whereas before, renting out a house at a loss for tax purposes had been mainly an exercise in delaying tax, because the eventual profit made selling the property would be taxed at close to the seller's marginal rate; afterwards, with the profit taxed at only half the marginal rate, it became an exercise in cutting tax.

The Government knows that if it raised the headline rate for capital gains tax, even on future purchases, it would cause a slump in home prices because investors would leave the market. However, this change may divert investment into small and medium size businesses who still benefit from CGT exemptions when the money is paid into the superannuation fund of the owners. It would definitely make it easier for first home buyers to enter the market.

Ashley
October 26, 2016

First home buyers don’t buy the 'median' house, they buy in the bottom. Half of all houses cost less than the median, so they buy in the bottom quarter or lower! Now do the numbers and the story is far less pessimistic. If they’re whingeing with mortgage rates at 4%, wait till rates are 7% or 10%.

 

Leave a Comment:


RELATED ARTICLES

New strategies to fix the housing crisis

Australian housing is twice as expensive as the US

Three ways to match housing affordability with good returns

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

Welcome to Firstlinks Edition 583

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Latest Updates

Planning

What will be your legacy?

As we get older, many of us start to think about how we’ll be remembered by those left behind. This looks at why that may not be the best strategy to ensure that you live life well and leave loved ones in good stead.

Economy

It's the cost of government, stupid

Australia's bloated government sector is every bit as responsible for our economic worries as the cost of living crisis. Grand schemes like the 'Future Made in Australia' only look set to make it worse.

SMSF strategies

A guide to valuing SMSF assets correctly

SMSF trustees are required to value all fund assets, including property, at market value when preparing the fund's financial statements each year. Here are some key tips to ensure that you get it right.

Economics

Australia is lucky the British were the first 'intruders'

British colonisation's Common Law system contributed to economic prosperity, in contrast to Latin America's lower wealth under Civil Law. It influenced capitalism's success in former British colonies, like Australia.

Economics

A significant shift in the jobs market

The expansion of the 'care sector' represents the most profound structural change to Australia's job market since the mining boom. This analyses how it's come about and the impact it will have on the economy.

Shares

Searching for value in tech stocks

Just because a stock is cheap doesn't necessarily make it good value. This uses case studies in the tech sector to help identify when stocks trading on 30x earnings may be inexpensive and when others on 10x may be value traps.

Investing

Are more informed investors prone to making poorer decisions?

Finance Professor Michael Finke recently discussed the double-edged sword of taking an interest in your investments, three predictors of panic selling, and why nurses tend to be better investors than doctors.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.