The fear of missing out. How to cope with the sudden increase in the property market
FOR HOMEOWNERS ACROSS SYDNEY, THE LAST COUPLE OF YEARS HAVE SEEN SOME AMAZING GROWTH. CORELOGIC NOTE THAT THE PAST 12 MONTHS HAVE ONCE AGAIN SEEN PROPERTY PRICES SURGE 19%, THE HIGHEST ANNUAL GROWTH RATE SINCE 2002.
To give an example, the median house price for Sydney is now $1,068,303 compared to just $773,669 for our neighbours in Melbourne.
Such strong price growth has led to an ever increasing cohort of Sydney’s population, namely couples in their 30s looking to start a family, feeling they will never achieve the quintessential Australian dream of owning their own home.
If you are thinking about both starting a family and buying a home over the next 12 months, I have three things for you to consider that may help dial down your fear of missing out just a little bit…
1. Which is more important, having a child or buying a house?
Recently I sat down with a couple who had $200,000 saved and were looking to buy a three bedroom terrace for $1,100,000. One of the couple was earning $115,000 and the other $120,000.
Taking into consideration all costs, buying a home for $1,100,000 would leave them with a loan of $992,550 with $10,000 left over as a buffer.
Working on an interest rate of 5% (which is very low compared to the historical average) they would be looking at repayments $5,300 per month.
Given their current net monthly income of $14,000 this is likely to be manageable however what happens if either wanted to stop working to raise their child?
Suddenly their net monthly income would reduce to $6,850 (based on the lower of the two incomes figures) and would leave just $1.550 per month available for all other living expenses after their repayment cost.
Unfortunately the reality for this couple was that having a child and dropping down to one income in addition to buying a house wasn’t a financially sustainable option at this stage.
If you are a two income family considering reducing to one income, having a suitable savings buffer is absolutely critical in order to manage your stress levels.
As a minimum prepare to have AT LEAST six months joint living expenses saved in order to feel comfortable.
2. Housing prices won’t keep going the way they’ve been going
I know many will disagree with me but I just don’t believe that the upward trend we’ve been seeing in housing prices will continue in years to come.
For me, this can be justified when looking at average wage earnings compared to housing prices over the years.
To provide some perspective, in 1984, the average full time employee brought home around $19,000 a year, and the average house cost under $150,000. That means that for a couple, the average house back then would cost 3.9 times earnings.
Today, the average employee is earning $73,000. Factoring in the current median Sydney house price tag of $1,000,616 this represents 6.8 times earnings!
Housing prices are largely linked to affordability and call me crazy but I don’t think the recent housing boom happening at the same time that interest rates have been at record lows is merely a coincidence.
Do I think that the Sydney property market is going to slump any time soon? Not necessarily, but I do think that the market has reacted to a low interest rate period and unless rates get even lower, it is likely Sydney property will either flatten out or even reduce if rates increase.
3. Consider alternative solutions
There’s an old saying that rent money is dead money. However, so is interest to the bank!
Using the earlier example, if our couple ended up proceeding with the $992,550 loan and taking 30 years to pay it off, it could cost $1,918,160 in total repayments including interest of $925,610.
There are also the extra costs of property maintenance, rates and levies.
An alternative to buying your own home may be to continue renting and instead invest in either the share market or investment properties.
This is exactly what our couple decided to do. We crunched the numbers and they decided to use $150,000 of their savings to purchase an investment property for $700,000.
Factoring in all the deductions, the holding costs for this property would be $100 per week while leaving $50,000 in savings to help cover any extra costs incurred when they have their child.
Summary
Having a child is the best and hardest thing you will ever do in your life! In order to be able to cope with the challenges of parenthood, it’s really important that you limit the amount of financial stress you might experience in the early years.
Yes house prices have significantly increased over the last few years. However, history shows that an upward trend doesn’t last forever. I believe it is likely a flat period could be just around the corner and so disagree that if you don’t buy now you’ll never be able to get your foot in the property market.
Finally, if after crunching all the numbers you think that it will be at least 5-10 years before you can buy the home you really want, an alternative could be for you to purchase an investment property instead.
By taking advantage of the numerous tax concessions available to you, you’ll find that your holding costs can be minimal so it is possible you can have your cake and eat it to!
Kind regards,
Tim Russell