We all have goals. Beach body by December (any year will do). A pair of red-soled Louboutins (paid for by someone else). Squat twice my own bodyweight. (Oh, is that just me?).
And many of us want to buy property, and wonder if it will ever be within reach.
So, can you buy your own home?
I don’t know. But I can ask you a bunch of questions in response. This is a pretty long post, but it’s really important, so please stay with me. There may be cocktails and topless waiters at the end*.
What it comes down to is this: why do you want to buy a property?
Is it because your parents told you that you should? What, like they told you to stick at the job you hate, to always have safe sex, and to stay away from that bad boy despite his amazing biceps? Some parental advice is definitely sound, but often unheeded.
And some advice is based on a time when there were four TV channels, seatbelts were optional, university was free, and houses cost 4 times the average salary, not 20 times. So unless they pony up with a deposit for you, your parents’ advice should be taken with a grain of salt. They mean well, but they built their wealth in a different era. What worked then may not work now.
Do you hate ‘throwing away dead money’ on rent? Sure, your hard-earned cash is heading into the pocket of some landlord (probably a babyboomer with a free uni degree).
But here’s the thing: you can afford to rent a nicer place than you can afford to buy. I live in a sweet inner-city apartment with my flatmate who is an interior designer. It looks like a Vogue magazine. My rent is exy but not ridiculous. And I estimate it’s a third of what I’d be paying to actually own the place.
If you’re happy to live somewhere less fancy (i.e. outside a capital city) then the maths of buying can stack up. Go nuts in Wagga Wagga. I won’t be joining you though.
Interest costs money. A lot of it.
Home ownership is seriously expensive. Not only are there maintenance costs (ever replaced a hot water system? See ya later $2000), or strata fees (at least $500 a quarter, up to a couple of thousand) or council rates (starting around $1500 a year). There is the eye-watering cost of a mortgage itself.
Say you borrow $500,000 over 25 years. You will actually pay nearly $300,000 in interest (at 4%, which is a record low rate in this country). For the first years of a mortgage you pretty much only pay the interest (on minimum repayments). The value of the home is (hopefully) increasing over that time, but when people say ‘I doubled the value of my house’, that usually doesn’t include the cost of the mortgage. The graphic below (from the MoneySmart calculator) shows the interest payable in light pink – it comes to $294,755.
If you are living in the home, then of course you saved on rent and had somewhere to crash. Just bear in mind that the numbers aren’t as simple as property-obsessed parents/real-estate agents/taxi drivers would tell you.
Is it because you have a burning desire to renovate?
Well here is my experience. Renovation sounds fun, and those bastards on the reno shows make it look so easy and cheap. BUT they have a team of tradies who do the real work and actually charge at least $50 an hour to people like you and me. And also, living without a functioning kitchen for ages is a grind.
Renos have their pluses, but being inspired to renovate by The Block is like being inspired to diet by The Biggest Loser. I.e. It’s fun to watch on TV but hellish IRL.
Is investing the answer?
Perhaps you aim to buy an investment property somewhere you can afford (but wouldn’t live). This is fine, but just make sure that you RUN THE NUMBERS first.
At the end of the day, buying a residential property is nothing more than an investment. And there are lots of ways you can invest your money. Owning a share in a property (where the bank owns the rest) is just one option in the exciting world of finance. However, it’s very popular. (So is dub-step, Pokemon and the Kardashians; the world is a confusing place).
But here are some reasons why it’s so beloved by Australians:
– People get it. You can drive past your property and think ‘yep, there is my wealth’. If you own shares, you can pull out some pieces of paper and look at them, but it’s not really the same. (Although you could listen to Beyonce on this one: “Always stay gracious, best revenge is your paper”).
– Negative gearing is a thing. If you spend more on repayments and other costs than the you receive from rental income, you can deduct that loss from your taxable income. Say your repayments cost $20,000 but you only get $15,000 rent. The amount the tax man can slug your salary now goes down by $5000. Also, the interest you paid on the loan can be tax deductible. (It’s pretty complicated, you can learn more here).
But the thing to remember on negative gearing is that whatever costs you can write off on tax, they are still costs. That is, you still had to put your hand in your pocket and find that money. The $5000 came from your pay. It’s a deduction and not a refund. It’s not all magical free money, just because you get some of it back.
– FOMO. Another driver of our property addiction is that Australians see how much ‘other people’ have made on property. Well, I am sad to say it, but if you’re buying in the next five years, the big gains in the market have probably all been had – prices are likely to grow much more slowly after the recent go-nuts boom. (Millennials and Gen-X get screwed by old people again!)
Yes, you will get rental income. However, right now (July 2016), RP Data says, “gross rental yields for houses are currently at 3.2% and unit yields are 4.1%, both of which are record lows”.
Yield is the rental income as a percentage of the property’s value. It’s low right now because the property is sooo expensive to buy in the first place. (This could be a whole separate discussion, so let’s park it for now and say property is doing ok, but not amazingly, as an investment).
The other thing about tax
There is one last point about buying property that nobody every really explains to novices: Capital Gains Tax (CGT), where the government takes a cut of any great investment you make. Say you make $100,000 profit on an investment. They will take a share of that (based on a complex calculation best explained by an accountant) once you sell the investment and reap the profit.
This applies to shares or property investments – but there is one big exception to this rule: you don’t pay CGT on the home you live in. So the $100K you make on an investment property gets taxed, but the hundred-G’s are all yours if you lived there. (This is why people downsize when they retire – they take the tax-free profit and bank it as their nest egg).
So what’s the answer?
I know what you’re saying. “Just tell me whether to buy a house already!”.
To be honest, if we take all of these facts together, the best option is to buy your own place in a cheap, unlovely area and live there for 20 years til it gentrifies. That is actually what many of our parents did. The suburb in southern Sydney, where I grew up in a red-brick 1960s bungalow, now has a median price of close to $1 million. I can’t sufficiently convey to you how far away and unexciting that place is, and yet if my folks had stayed there, they would now be millionaires, just by sitting on a house they bought for $100,000 in the 1980s.
But for fierce girls like us, it’s harder. We like our comfortable lifestyles. Many of us have credit card or university debts. It’s hard to save the $50K deposit we’d need for even a modest property.
So I am not saying a property is a bad investment. I am not saying you shouldn’t buy your own place. I am just saying it’s not the ONLY way to make money, and it’s not the magical route to untold riches that it was for our lucky, once-in-a-century baby boomer parents.
And if you don’t buy anything for the next decade, or ever, THAT’S OK. You aren’t a loser. You aren’t on the path to homelessness. That is, as long as you do this one thing… SAVE AND INVEST. (Ok, that is kinda two things).
Please make sure that just because you don’t have a mortgage, you don’t piss away every dollar you earn. Take the money that you’d be spending on a mortgage, and do something useful with it. Save it. Put it in super. Buy shares, buy REITs, buy bonds, buy a managed fund … there are plenty of other ways to make money.
Just make sure you have a plan to build your assets over time – which is essentially what home ownership is all about. That, and choosing homewares, obviously.
*Subject to availability.
Part II: Still want to buy a property? Here’s what you need to do.