While the longer term effect of the current pandemic on property prices remains to be seen, home ownership forms the financial foundation of most Australians’ lives. Residential property is usually their most valuable asset and, given it is not counted as part of the Age Pension means test, it also underwrites a comfortable retirement.
However, skyrocketing property prices mean the dream of home ownership is slipping away for many working families. Home ownership levels have fallen from a long-term average of around 70% of households to about 66%, according to the Australian Bureau of Statistics.
A property slump has quickly disappeared with Sydney and Melbourne property prices surging more than 10% over the 12 months ending in February 2020, according to CoreLogic. Both cities have now almost regained their peak values.
|
|
Change in dwelling values |
||||
|
|
Month |
Quarter |
Annual |
Total return |
Median value |
|
Sydney |
1.7% |
4.6% |
10.9% |
14.4% |
$872,934 |
|
Melbourne |
1.2% |
3.9% |
10.7% |
14.3% |
$689,088 |
|
Brisbane |
0.6% |
1.7% |
1.9% |
6.5% |
$503,265 |
|
Adelaide |
0.1% |
0.8% |
0.4% |
4.9% |
$439,453 |
|
Perth |
0.3% |
0.4% |
-4.0% |
0.1% |
$442,691 |
|
Hobart |
0.8% |
1.9% |
5.0% |
10.5% |
$488,968 |
|
Darwin |
-1.4% |
-1.8% |
-7.8% |
0.1% |
$386,345 |
|
Canberra |
0.8% |
1.1% |
4.1% |
8.9% |
$631,862 |
|
Combined capitals |
1.2% |
3.4% |
7.3% |
11.1% |
$637,710 |
|
Combined regional |
0.7% |
1.9% |
1.4% |
6.3% |
$391,460 |
|
National |
1.1% |
3.0% |
6.1% |
10.1% |
$549,918 |
Source: CoreLogic
The long road: start saving
Saving for a first home requires many lifestyle sacrifices. The more people can cut spending and save, the faster they can save for a deposit. Online spending trackers and apps are a great place to start given the popularity of paying using cards and other digital means rather than with cash. They can quickly reveal where money is going, allowing for targeted changes instead of wholesale cutbacks.
The government’s First Home Super Saver Scheme can also provide a tax-advantaged way to boost savings. It allows first home buyers to make up to $15,000 in annual voluntary super contributions to save for their first home. The benefit is that contributions are taxed at a concessional rate of just 15% and receive the deemed rate of interest (calculated as the 90-day bank bill rate plus three percentage points), which is higher than the interest that most banks pay.
The scheme has a number of caveats and other requirements so it is wise to speak to a financial adviser to ensure eligibility.
Building a deposit
Saving a deposit can be slow going given the median dwelling value is now almost $900,000 in Australia’s most expensive capital city, Sydney.
Interest rates have fallen dramatically as the Reserve Bank of Australia has cut rates to record lows in an effort to stimulate economic growth and fight the downturn prompted by the coronavirus. While that provides relief for people with a mortgage, it’s bad news for those trying to get a foot in the door.
Savers can expect no more than 0.75-1.5% a year from the best high-interest online savings accounts – and even those rates are continuing to fall. Whether people can realise higher investment gains comes down to their individual timeline.
For example, if a person only plans to buy a house in the medium to long term (5-10 years), then investing in a balanced portfolio can potentially deliver higher returns. However, higher- returning assets such as shares are also more volatile, which is why they need a long-term perspective.
The cost of mortgage insurance (which protects the lender, rather than the borrower, in case of default) is another hurdle when saving a deposit. Home buyers are slugged with it when their deposit is less than 20% of the purchase price.
For those who are struggling to reach that target, the government’s recently-launched First Home Loan Deposit Scheme may help. The scheme guarantees 10,000 low-deposit bank loans each year for eligible low or middle-income earners, who may have saved a deposit as little as 5%.
It could cut around four years and three months off the time it takes to save for a deposit on a $400,000 property, and save up to $30,000 in mortgage insurance, according to Canstar.
Unsurprisingly, this Scheme has proven to be popular. Almost two-thirds of the available places in the scheme for this financial year had been filled before the end of February, following its launch at the start of the calendar year.
Like the First Home Super Saver Scheme, there are restrictions that apply. These include caps on the property value which, while they vary by region, are all below median prices.
Should you help your children get into the housing market?
Many parents are rightfully concerned about whether their children will ever be able to afford their own home. The ‘bank of mum and dad’ is increasingly relied on by adult children to buy their first property.
However, it’s important to keep in mind that retirement can last for decades, with Australians enjoying some of the longest lifespans in the world. While home ownership is difficult for first home buyers, an increasing number of older Australians either don’t own their own home or are retiring with outstanding mortgage debt.
The cost can be enormous. A retiree renting a one- bedroom unit in Sydney would require more than
$500,000 in extra superannuation savings to fund the same lifestyle as a homeowner, according to actuarial firm Milliman.
Meanwhile, almost half of older Australians say they plan to leave the family home to their children, which will represent a significant tax-free wealth transfer, according to the Productivity Commission.
Some retirees may want to unlock the value in their home sooner for themselves or their family, whether through choice or necessity.
The government has recently made it more attractive for older Australians to free up capital in the family home through its Pension Loans Scheme (a type of reverse mortgage) or, if they sell the family home, they can use up to $300,000 of the proceeds to make a “downsizer contribution” to their superannuation.
Are you concerned about buying a first home for yourself or your family?
Your adviser can help you formulate a strategy to make home ownership a reality. Please call us on P: 08 8268 5160 to discuss.
www.aph.gov.au
https://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4130.0Main+Features12017-18?OpenDocument
https://www.corelogic.com.au/news/corelogic-february-2020-home-value-index-results-released-today-confirmed-nationally-housing https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/first-home-super-saver-scheme/
https://www.nhfic.gov.au/what-we-do/fhlds/
