Generation “Why Buy?”

As a parent to two young adult children (as well as a third teen) and, as is common amongst those of us who are mums and dads, I worry about their future. School, uni, jobs, partners, happiness, security… it goes on and on.  Living in Australia’s most expensive capital city, however, there’s another major concern and that is the cost of housing. How are they going to afford to buy their own place?

First home buyers have it tough right now and I do feel deeply for them.  Along with record low interest rates, which should be making it easier, we have very high entry-level costs to buying in world-famous Sydney.  Not only do you need a minimum 10% deposit to purchase the current median house price of $654,000 but then there’s the huge cost of stamp duty at approx $25,000 for a purchase here (not to mention other buying costs including legals, inspections, moving etc) as well as the extra LMI costs incurred on most loans if you’re borrowing more than 80% (this often-unaccounted cost alone can run into tens of thousands of extra dollars). Though there are still concessions and grants if you’re buying brand-new or off the plan property most first home buyers here in Sydney are limited to being able to only afford established property, due to location and a lack of affordable supply.  The previous $7,000 FHOG for established property ceased in Oct 2012 and any stamp duty concessions were removed back in Dec 2011, making it increasingly more difficult for first home buyers to get that first rung on the ladder.

Hence we have a young population crying “Why buy?” Though most of them are still prepared to sacrifice, save and join forces to afford real estate, it can be despondent to know that it’s going to take an average of $100,000 worth of savings to get there for the median house price. Yes, we have a record-low interest rate environment, which should assist, but those of us who have “been there and done that” know that these rates won’t last for 25 years.  The smart mortgage holders who are feeling the pinch have fixed their rates to avoid surprises in the next 3-5 years, whilst home owners get busy paying off as much of the loan in the shortest time possible (not an easy task to do in an expensive city like ours) during this environment.

Renting is seen as the only outcome for some, and indeed, it quickly becomes that way as home ownership in one’s area of choice can often be unaffordable.  However, therein lies part of the problem.  Buying your first place in a suburb that you’d love to live in takes time, money, savings and persistence in a big city like Sydney.  If Roseville is your preference but you can only afford to buy in Ryde, Paddington appeals but Parramatta fits the bill, then have a rethink. Real estate isn’t going to necessarily get any cheaper (despite what scaremongering authors from the US say!) and the old adage “Buy when you can afford” certainly rings true in many parts of our fair city now.  Renting may well be seen as the safer, cheaper alternative, and whilst we certainly all know (and remember) how tough it was to sacrifice and save for a number of years to obtain our first property deposit, it is worth it in the end.  So, my responses to Generation “Why buy?”

* The security of owning rather than renting means no-one can tell you when you’re moving on except you. Ownership provides stability and the freedom of choice to make decisions regarding housing.

* Even though renting may currently be the cheaper option, rents will rise in line with the cost of living. Currently rents are increasing at an average rate of about 7-8% each year. Further, you never stop paying rent, whereas most people will pay off their mortgage within 25 to 30 years. Basically, renting costs you money whilst home ownership makes you money.

* Creating equity can only be done with assets you own, that appreciate in value, whilst being paid down. Real estate is the best known asset class for providing this, and thus the reason so many Australians use equity to leverage into further investments, property or otherwise.

Of course it’s all about buying well and at the level you can afford.  This may mean initially staying with parents, sharing with friends, buying with a sibling or taking on a second income/part time job to make the short term pain turn into eventual gain.  Getting a foot in the door of the world of real estate is hard, but not impossible. This is what I’ll be encouraging my children to do as soon as possible when they’re ready, despite the doom and gloom that is out there.