Suffice to say, get that deposit saved, get your loan sorted and approved and get ready to take advantage of this rare opportunity to get on the property ladder. No one can be sure how long the current lull in house prices will last, nor what will happen to your household income and indeed, interest rates set by the Reserve Bank of Australia and those charged by the banks and other financial services companies offering owner-occupier mortgages.
But 100 years and more of history suggests house prices tend to rise over a 10+ year time frame, as do incomes. These trends should overwhelm any issues with interest rates, if indeed any rate rises come to pass over the next few years.
Owning the house that you live in is one of the best things you can do for your long run financial security and mental well being. Once you save the deposit, got the loan approved and have your offer for that house accepted, it’s yours! No longer will there be the pesky landlord failing to answer your calls about the leaky hot water service or kicking you out with a few week’s notice. This peace of mind is worth a lot and are an addition to the financial benefit that accrue to homeowners.
Even if we were to have an unusual period with little or no house price growth, having your own house with a mortgage and paying it off is a forced saving that uses your hard earned money to build an asset, dare I say it, using money that would have otherwise been spent on smashed avocado on toast, café lattes or a personal trainer.
If you have been putting off buying a house, for whatever reasons, look now to get your financial affairs sorted out and get ready to buy – before prices find a floor and then start to rise.
Part 2: Buy your house to live in – before it’s too late
With house prices falling around most parts of Australia since about 2017, there are great opportunities for first home buyers and upgraders to make up for lost time during the prior house price boom. I say “about 2017” because the Australian property market is not a single market.
Differences in price peaks and troughs and growth rates are evident and obvious between States, cities, towns, postcodes and even streets. This means that prices rose, peaked and have fallen at different times and at different rates according to the State, city, town and postcode. In broad terms, the Corelogic data base shows house prices peaked in June 2014 in Perth, May 2014 in Darwin, July 2017 in Sydney and November 2017 in Melbourne. Prices in other cities have shown little or no growth over the past year or are in the very early stages of decline.
Be that as it may, houses are now are more affordable now than even a few years ago. This news may shock some people, still working on the false assessment that affordability is simply the interaction of prices and incomes.
‘Affordability’ must include interest rates in the assessment of buying because, quite obviously, paying around 4 per cent on a mortgage of $400,000 is easier than paying 9 per cent on a mortgage of $350,000 and very few first home buyers buy their house without a loan. There is often a misunderstanding of what affordability actually is and this confusion has seen some potential buyers discouraged from entering the market.
Using the example of a household with the median income, buying a median priced house, with a 20 per cent deposit and a variable mortgage interest rate over a 25 year term as a benchmark, affordability is more favourable now than the average of the last two and half decades. For someone in these circumstances, around 23 per cent of your income is now needed to service a standard mortgage.
In the period around 1987 to 1991, it was above 25 per cent as it was again for the bulk of the time from 2003 to 2008 and again from 2013 to 2017.
And if house prices drop another 5 per cent by the end of the year, incomes rise 3.5 per cent and interest rates drop just 25 basis points, housing affordability will improve to its best since 2001. It should be clear that for everyone who missed out on buying during the recent price boom, the opportunity to buy is strong. Any time from now and over the next year or so is likely to be the chance of a lifetime to buy a house.
In stepping into the home ownership market, there are a few things to consider.
The time frame for judging the financial reward for buying a house is at least 10 years.
There are not too many buyers of houses in Australia who have lived in and held that property for more than a year who regret it.
Indeed, the higher rate of home ownership for older age cohorts is a source of animosity for younger generations, who indirectly are venting their envy at those who bought a ‘cheap house’ many decades ago, even at the time of the peak “bubbles” in the last 1970s, late 1980s, early 2000s.
I reckon in 20 years, even those who bought at the price peak around 2017 in Sydney or Melbourne will be laughing at their good fortune.
No one can be sure where house prices will be in 10 or 15 years, but if history is any guide, they are very, very likely to be up either moderately or a lot. And of course it will depend on the city, suburb or town in which you have purchased your house, but suffice to say, the only argument in the longer run is an inevitable grind upwards in house prices. And you must also be aware that even in an economic environment of only moderate wage increases, the average annual increase in household incomes is probably going to be around 3 to 5%, so that in 10 years, your household pay will be up at least 40% on what it is today and probably 50% or more if you manage to get a few promotions along the way.
So even if the house price is unchanged (which will not happen), the ratio of your income to the price will be so much more in your favour simple because your wage has risen. And recall also that in the house you live in, all of the capital gains are tax free! There are not many assets that have the rare status.
While the tax arrangement for investors and negative gearing are certain to change, not just in the near term but over time, the owner-occupied house – the one you live in on other words – has tax free capital gains. And those tax free gains include the value you add by doing landscaping, growing trees and a gorgeous garden and even things like painting and maintenance. Renovate your bathroom and kitchen and not only do you enjoy using it while you live in the house, it adds value to the house for the day that you sell it.
You know it makes sense.
Part 3: How many Australians regret buying a home? None
The previous two articles on housing have highlighted the medium to long run financial benefits of buying a house and how the current house price weakness has seen affordability improve. If you don’t believe me, ask some people who own their own house and who bought it 10, 15 or 20 or more years ago.
While I cannot prove that everyone who has bought their own house to live in and owned that house for 10 years and more is completely happy with that decision. But over the past month or so, as I prepared to write these articles, I made the effort to informally ask friends, families, colleagues and associates who had bought and lived in their house for a decade or two what they thought about it.
The verdict? Universally terrific!
The best thing they ever did, financially at least.
Zero per cent of them – that is none, zilch, zip, not one – regret their decision. The financial gains have been obvious, but many also relayed the non-financial benefits that were outlined earlier. The fact they could improve and renovate it with their hard work and a bit of spending, the stability and security it delivered were a clear positive.
Sure, many mentioned it was tough to take the first step into the housing market. Sacrifices in spending, saving every dollar, borrowing what at the time was a mountain of money, often with high interest rates and with expensive family commitments, were all mentioned.
And there were plenty of stories of tough times. Unexpected interest rate rises (how many of the oldies mentioned those 17 per cent mortgage interest rates!), the hit to the household budget from an unexpected expense or a jolt from having a family were all mentioned as problems to negotiate despite the universal positive experience. But now, some 10 or 20 or 30 and more years down the track, there was the acknowledgement of the price gains, the ease over time in making the mortgage payments as wages rose and for the older folk, at or near retirement, they noted the fact they had some additional financial security without the drain of having to pay rent in retirement.
Indeed, some even mentioned how fantastic it was for them that they had downsized, selling their original family home for a small fortune, had bought a smaller home to live in in retirement with a chunk of tax-free cash left over from the transaction to spend on some of the nice to do things in life.
Europe here we come!
Part 4: Why you should buy a house then HOLD IT for 10 years
Buying a house to live in must, and I repeat, MUST have a timeframe of at least 10 years.
Experience and financial prudence determines this is the minimum time frame to realise the gains. Importantly, it also means that some of the costs incurred when buying, such as stamp duty, legal fees, moving costs and the like will be amortised over an extended period. It also means that any price movements over 6 months or a year or even 2 years in your new house are all but irrelevant to your emotions and self-assessment of financial wellbeing.
You should, for example, try to ignore the fact that a few years after you bought your house its price has risen sharply, if indeed that happens.
Shrug your shoulders and say “so what”?
Presumably you are not going to sell it and, what, move into a tent? And any bigger and better house is likely to have risen sharply in value so that idea of upgrading isn’t yet realistic. What’s more, you are unlikely to have paid down much of the principal in the first few years of home ownership meaning the improvement in your equity in your house is handy, but not yet a life changing event.
What you should do is merely keep up or even accelerate your repayments, keep maintaining and improving the property and enjoy living in your new abode. The same is true if house prices drop in the year or two after you buy.
Again, “so what”?
You have a plan to live there for 10 and more years, and you can continue maintaining and improving your house and living in it. Again, try to ramp up repayments and chip away at the principal.
After 10 years, the financial robustness of your house purchase will be tested. The gloom merchants of housing and house purchase have a shopping list of why it is always a bad time to buy a house. They often mention mountainous risks and difficulties saving for a deposit, getting a loan, borrowing so much money and on and on it goes. Exaggeration works wonder in terms of the profile many of these noisy and melodramatic property bears gain.
Sure, some of those risks have some validity, but there is also a risk your wonderful new house will be hit by a meteorite and smash into your newly renovated kitchen. The issue in buying a house is being aware of those risks, judging just how realistic any of those risks are and having some backup and contingency plans in case they happen.
One of the most obvious risks in buying a house is a rise in interest rates. Falling interest rates are obviously good news for those with mortgage debt, but it is rising interest rates that hurt, especially in the early years of a mortgage.
No one with a mortgage would welcome higher interest rates. To service that same sized loan, higher rates means diverting cash flow from other areas of saving or spending to meeting the extra interest costs.
This is why lenders now require the loan they are preparing to give you to be framed with an interest rate at least 200 basis points – 2 percentage points – above the rate being charged at the time you apply for your loan.
If you put those numbers into your mortgage calculator and can still manage, you have little to worry about.
In all, buying a house to live in is immensely satisfying, financially beneficial and is life changing. When home ownership rates have been falling, for a raft of reasons, it would be disappointing not to see current market and price moves as an opportunity for home ownership rates to increase as cashed up first home buyers use the rare cocktail of falling prices, rising wages and entrenched record low interest rates to buy their first home.