Homeownership is looking further out of reach for anyone without family wealth, as over the last few years property prices kept growing and wages fail to keep up.
Is it really harder to get into the property market today than it was a number of decades ago?
That’s what I discuss today with independent financial adviser Stuart Wemyss.
And even if you already own a home, I’m sure our discussion will be valuable because it will help you understand what we believe is ahead for our housing market.
Even though property prices are a bit lower today than they were a year or two ago, with rising interest rates, lower borrowing capacity, and inflation eating away their household budgets many people are suggesting it's much harder to buy a property today than it was years ago.
They’re telling us that Baby Boomers don't really understand how hard it is.
My guest today, independent financial advisor Stuart Wemyss, believes it's actually easier to buy a property today than it was many decades ago.
Now I know some people listening to this one disagree so I'm looking forward to hearing his views.
Millennials are telling us that buying a house today is far harder than when their parent got into the market because the rate by which property prices have soared is well beyond that of wage growth.
At first glance these arguments make sense, but there’s more to it than that.
I would like to suggest that in many respects, buying a property today is easier than it was many decades ago.
- Abundant access to information, knowledge, strategies, advice, and so forth
How do you get ahead financially?
One solution is to get the best advice so that you make the most of your financial opportunities.
Often people learn by trial and error, but that can be expensive and waste valuable time.
You can fast-track your financial success by learning the best way to use your money.
- There is an absolute abundance of information that is available on the internet.
- Most of it is accessible instantaneously at no cost.
- Blogs, forums, podcasts, books, websites, software, and so on.
It cannot be underestimated how valuable that is.
25 years ago, no such information was available.
There were a few books about property investing, but not many.
The only way to learn about borrowing strategies was by meeting bank staff, but they weren’t particularly knowledgeable or helpful.
Therefore, unless you knew a successful property investor, it was hard to access knowledge.
As the saying goes, “knowledge is power”.
- Much higher borrowing capacity
Thirty to forty years ago, borrowing 3 times your gross income was seen as very high risk.
Today, the banking regulator (APRA) classifies a high-risk borrower as anyone that borrows more than 6 times their gross income.
Therefore, by this measure, borrowing capacity has increased by 2 to 3 times over the past few decades.
In addition, 30 years ago, it was not possible to borrow more than 80% of a property’s value.
Today, owner-occupiers can borrow up to 95%.
- Higher earning capacity and more employment opportunities
The internet has made it very easy to connect with people around the world.
This means people can explore a lot more job opportunities.
In fact, given the increased acceptance of working from home, it is not even necessary for you to live in the same country as your employer.
Whilst these advancements might make the job markets more competitive, for some occupations it opens (literally) a whole world of opportunities.
Therefore, first-time property buyers can proactively explore many opportunities to increase their income, thereby increasing their borrowing capacity and purchasing power.
In addition, incomes have increased in real terms over the past few decades, especially for many professional white-collar occupations.
There are some young people earning 2 to 3 times more than what was possible in their occupation decades ago.
I discuss this further below.
- Family guarantees & the bank of mum and dad
The biggest impediment that delays first-home buyers getting into the market is saving enough for a deposit.
First homeowners need a minimum deposit of at least 12% of a property’s purchase price (a 5% deposit plus 7% for costs including stamp duty and legal fees).
That can take a long time to save.
The most effective way to alleviate a lack of deposit is to get help from family.
This might come in the form of providing a family guarantee.
Alternatively, parents might prefer to provide their children with a gift or a loan.
Most baby boomers have benefited greatly from higher property prices over the past few decades and are in a good position to help their children.
- Cash flow budgeting/management tools
It is critical that young people establish good cash flow management practices as soon as they enter the workforce, as these habits tend to stick with you over your lifetime. Establishing a strong savings pattern will serve two purposes.
- Firstly, it will help a prospective home buyer save a larger deposit, sooner.
- Secondly, it will demonstrate (to themselves and a bank) that they have the necessary surplus cash flow to service a loan.
There is a huge array of tools available to people today to help them improve their cash flow management.
- Ability to invest outside of your domicile location.
The internet has made buying a property outside your domicile location a lot easier.
For example, if you live in a regional town, it probably makes financial sense to invest somewhere else.
It is relatively easy to accumulate over $1 million in equity in a property if you (1) buy well and (2) hold it for a couple of decades.
Of course, this is a function of borrowing more i.e., property costs a lot more today than it did decades ago.
But if you can afford a higher loan and you hold a property for the long term, the wealth effect can be substantial.
One downside to this is that borrowing more means that you either must generate substantial income to be able to repay the loan or downsize the property at some stage to reduce/repay debt.
The average median house price in Melbourne and Sydney in 1980 was almost $53,000.
Adjusting for inflation, this equates to $268,000 in today’s dollars.
The average median house price in Melbourne and Sydney has increased to $1.2 million (Sept 2022).
Therefore, house prices have increased 4.5 times in real terms since 1980.
Borrowing capacity has more than doubled since 1980 and professional salaries have risen by more than 30%.
This means buying power has increased by a factor of 3 to 3.5 times over the past four decades.
It can be more challenging to be a first-time buyer today.
But a lot of the advancements over the past few decades have gone a long way toward mitigating the impact of higher prices (or, more correctly, driving prices higher).
Most importantly, it is easier to make the right decision today.
Mistakes can be very costly.
If I knew what I know today before I purchased my first home 25 years ago, the financial outcomes would have been a lot different.
This knowledge allows younger people to make a lot of money from property if they have the motivation and desire to do so and they are prepared to work hard and sacrifice.
Links and Resources:
Stuart’s Book – Rules of the Lending Game & Investopoly
Some of our favourite quotes from the show:
“I think one of the other factors that have changed over time is there are more people to get advice from, which is good in some ways, but it’s also hard to work out who you should take advice from.” –Michael Yardney
“There are a number of state government and federal government initiatives that are helping first home buyers get into the market.” – Michael Yardney
“A lot of people are rentvesting now. They realize that they can’t afford to buy where they want to live, so they rent where they want to live and buy in another state.” – Michael Yardney
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