Yikes…Will my kids be able to afford a home?

I was recently flying back on a REX commercial prop plane from the regional town of Mt Gambier (close to the boarder of South Australia) after visiting some of our clients.

Due to this being a small aircraft, the approach into the airport was very low and I was able to obtain a great view of the land estates surrounding the airports.  I was particularly surprised to see that the house blocks consisted of a house on the entire block and no back yard.  It occurred to me that it now seems that the days of the large back yard is becoming extinct and the kids are now inside in the cinema room rather than playing in the backyard on warm summer afternoons. How times have changed!

In meetings I am often asked “How can I help my kids get a deposit together so they can buy a home?”or “How are my kids ever going to afford a home in the future?”

When I consider these questions my logical part of my brain says this is insane…we have a population of 23 million with a land mass of 7.6 million square km.  Australia globally is the 6th largest country and if we take a practical look at our country most of it is empty.

You only have to fly say 8-10 hours to Japan which has a population of 127 million on a land mass 374k square km and they manage to buy their family home and only pay around $300k for a home.  How is it that we have a problem and they don’t?  

There are a bunch of reasons why housing is so expensive, potentially however the biggest hurdle might be around the way we think about housing and what it means to us personally.  

Now I live in Beaumaris which is about 22 km from the city centre.  If I plonked my home 22km from the city centre of Tokyo would I pay the same?  Using some very crude rough estimates I would probably pay at a minimum around 3 times this cost.  I now have an affordability issue.

The reality is that at some point it is highly likely that we are going to be living in a smaller place in the future.  The idea too that we can plonk a house on a full 500 sqm block too is probably not going to be a reality for inner city. In Japan the average sized family home is 65 sqm which is located in the inner city however we call these homes an apartment! So it is likely the affordability issue will be addressed over time with a reduction in size of the home.

So how does one address the issue of affordability today for parents?  Well for young parents that have a young family they need to be thinking about this issue very early on so that it becomes incredibly easy.  It is just a case of setting up an investing plan early on and over time building to this so that when the kids turn 21,25 or 30 you can simply cut them a cheque for their deposit.

The problem starts to get more complicated when the kids are now grown up and you are trying to address this problem within the next 5 years or so.  The realities are this can be funded from a variety of sources but the important thing to consider is sometimes this time in your grown up children’s life can be a very vulnerable. For example with de-facto laws being the way they are today, it would not be too hard for your hard earn cash to end up in your child’s ex partners back pockets and possibly leaving your grown up child back at home and without a home.

There are ways to address and protect these deposits in these cases.  For young families too there are also great ways to set up investment strategies to ensure that when your kids start looking for a home you are not too worried about how this might be funded.

Like all great financial ideas though, it is important to obtain professional Financial Planning advice before running off and implementing this personally-  and we would recommend that you speak with us at AJ Financial Planning.

 

Should you rent or buy a house?

The Reserve Bank of Australia has recently released a report where they have done an analysis of average property growths and rental yields since 1955. The report is called “Is Housing Overvalued?” You can find it here (http://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-06.pdf) or you can search the name using Google and it should appear. Some of the main points to come out of the report are the following:

  • Property prices have risen in Australia by an average of 2.4% above inflation since 1955.
  • The average rental yield for a property over this time period was 4.2%.
  • The main conclusion is that house prices would need to rise by around 2.9% above inflation for buying a home to be the better financial option.

This is an interesting and thought provoking conclusion but we feel that some important considerations have been neglected that may affect the outcome. Average prices – the report looked at property prices from all over the country. Some cities have growth levels above the average such as Sydney and Melbourne, and properties in rural non-mining areas traditionally have lower growth rates. Forced saving – at least in the early years of buying a home, the mortgage payments will be higher than the rent you would have to pay. In a perfect world you would invest the difference in a portfolio of investments that would ideally achieve investment returns higher than property returns. In reality, very few people have this financial discipline, and most people will fritter away the difference on other lifestyle expenses. Improving the value – you can improve the value of your home by more than the cost by painting and making superficial changes. Stress of renting – the nature of renting means that your landlord can decide that they want to sell the property or move into the property at any time. This will usually mean moving house a lot more often than someone who buys their home, and this can mean greater stress due to not having a sense of permanency. Limited rental options – you can only rent the type of property that is available on the market. Many people buy houses that aren’t exactly as they like and then they renovate to make their desired changes. With a rented house you don’t have this freedom and you are stuck with the property in the state it comes in. So what are our thoughts? We feel that if you would buy a similar property to what you would rent then in the long run you will be better off by actually buying a home. You will have a forced saving plan when you make the mortgage payments, as many people retire with their home being their only significant asset outside of superannuation. You will also benefit from the capital growth and there is a certain satisfaction from owning your own home. Some situations where we feel that renting would be better however, are the following:

  • If you purchased an investment property and you rented. This would be beneficial as you could claim the tax benefits of negative gearing and you won’t miss out on the capital growth of the property market.
  • If you don’t plan to be too long in the one place. The buying and selling costs associated with properties are expensive and if you move around a lot these can add up to a significant amount.
  • If you would rent a smaller home than if you bought your own home. This is especially true for younger people who may live in shared accommodation and pay a relatively low rent, but if they bought a home they may share with fewer people or live alone.
  • If property prices are overvalued. This will ofter be difficult to know, but in some situations such as in the USA around 2005-2006 many people purchased homes only to find the values plummet in the following years.

If you are facing this conundrum of whether to buy or rent and would like to discuss this further with a team of experienced financial planners, please contact us for a FREE no obligation consolation.