Jason Round

HARDER BUT NOT IMPOSSIBLE: HOW SAVVY INVESTORS ARE STILL ENTERING THE HOUSING MARKET

Housing affordability in Australia declined in the December quarter 2020. Affordability looks at average weekly loan repayments as a proportion of average weekly earnings. What this means is property prices have been increasing but salaries have lagged behind. Fortunately, there are several options available to would-be investors.

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Australian home values continue to rise, but pace of growth eases

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FEATURE ARTICLE

Jason Round

HARDER BUT NOT IMPOSSIBLE: HOW SAVVY INVESTORS ARE STILL ENTERING THE HOUSING MARKET

Salaries can’t keep up with house prices

Housing affordability in Australia declined in the December quarter 2020. Affordability looks at average weekly loan repayments as a proportion of average weekly earnings. What this means is property prices have been increasing but salaries have lagged behind. As prices increase faster than incomes, saving for a deposit becomes harder.

Waiting not a viable solution

Given the disparity between house prices and incomes, how much of the housing market remains accessible? CoreLogic data shows middle-income households could attain 57.1% of residential properties while low-income earners could afford just 17.6% of all Australian dwellings based on income. To add to the disappointment, a small interest rate increase – just 1% – could see buyers more than $200k worse off if they wait 5 years to enter the market.

Incomes aren’t rising but house prices are soaring; waiting and hoping is not a financially attractive option. It’s not all bad news though: Unaffordability didn’t worsen during the pandemic, thanks to the cash rate.

house price growth vs income

Wage growth at lowest

However, housing didn’t suddenly become easily attainable either. Real home prices have gone up by 150% since 2000. Meanwhile wages grew by less than a third. Domain senior research analyst Nicola Powell said Australian wage growth “has hit the lowest rate in 23 years.” Under such conditions, how can an investor enter the market?

Fortunately, there are several options available to would-be investors:

Pay Lender’s Mortgage Insurance

It’s understandable that many people want to avoid paying Lender’s Mortgage Insurance (LMI). It’s just another cost that the banks throw at everyday Australians, right? In fact, LMI provides certain advantages to investors. In this video, I explain how you can use LMI to your advantage.

Typically, you need to deposit 20% of a property’s value to avoid paying LMI. For a $400,000 property, you would need an $80,000 deposit. On top of which, you would need money for stamp duty, solicitors fees etc. Effectively you would need $100,000 saved or in equity for the deposit. You might have that $100,000 ready to go but there are a few considerations:

Firstly, you’re not leveraging – one of the greatest advantages of how property investment functions in Australia is the ability to leverage. That is, using borrowed funds to invest. Adopting this strategy, you are able to build wealth, without having to inject as much of your own money.

The second consideration is you are limiting yourself to a $400,000 property. When you might be able to attain a better property, in a superior location, by paying the LMI. Thirdly, it’s a risky move. You want to put in as little of your own money as possible. The less money you put in, the more you have left over as a financial buffer in the event of tenant vacancy or other unforeseen circumstances. This left over money – $32,000 in the scenario above, if you pay the LMI – could also be put toward another property, to build out your portfolio and diversify. 

While it’s often seen as protection for the banks, LMI provides certain advantages to investors. In this video, I explain how paying LMI in the short-term can get you $70k ahead over a few years.

Get parental support

Another way that individuals can get into the property market sooner is with a bit of help from Mum and Dad. If you are a parent, you can develop a joint venture plan with your kids. I go into detail about why you might consider this option and how it can be mutually beneficial in this free guide, How To Help Your Kids Get Into Property.

You can go guarantor on your child’s loan but as a general rule you don’t want your kids’ property cross collateralized with your home. As always, a buffer is best. Better to release some of your equity which the children can use as a deposit with standalone finance for the investment property.

Target the right properties 

If you try and invest in Sydney, you may find you are priced out. The median house price is $1,112,67 as of April 2021. I delve into the situation in Sydney more in this post here. In the graph below, you can see that Sydney and Melbourne properties are forecast to be the least affordable in Australia. 

forecast median house price 2018 to 2021

But if you target the right properties in the right locations, you may find you can afford to be a lot closer to the CBD, with lower vacancy rates and greater potential for capital growth. Knowing where to invest is important, second to developing the right property wealth plan to begin with.

Getting clear about your financial goals (which might include a secure retirement, mortgage reduction or additional income) and your pathway to achieving these is the first step to growing your wealth.

For many people who are time-poor or confused by the data, speaking to a property investment specialist can kickstart a successful journey. If you’d like to have a 1 on 1 strategy session with an experienced Property Wealth Planner, please submit your request below.

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