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Bill is fantastic. His experience, ethical approach, the way he talks with people about what's important to them comes from his time helping others as a missionary. His finance packages always perfectly reflect people'...

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The Alternative to Home Ownership

David Miller is founder and Chief Executive Officer of Investment Property Solutions. He has 20 years of market research and analysis experience, and has spent more than 10 years in private property investment counselling.

Many of today's aspiring homebuyers are justifiably feeling frustrated and disillusioned. Often their borrowing capacity and debt serviceability are nowhere near the properties they aspire to own - creating either unacceptable compromises in selection or complete inability to enter the market.

For those who do purchase, the spectre of potential interest rate increases is daunting, and for this who don't, the fear of being left behind in the market is very real. For the parents of these young people it is the nagging sense of responsibility and concern that their children are not establishing a firm financial future - and this may inevitably lead to future financial and personal hardship.

But What Can We Learn From History?

Firstly, we need to be reminded that this is a cyclic event - and that history repeats itself. Both Sydney and Melbourne markets peaked in 1989, with an absolute affordability crisis. The average mortgage consumed 85% of median/average single incomes, creating both real financial hardship for existing mortgage holders, and a complete entry barrier for those who didn't own property at this time (BIS statistics (Affordability)). The other state capitals followed in the same vein in their counter-cyclic growth stages.

But interestingly, those who invested in property (rather than purchasing their own home) throughout this period had good property selection, considerably easier debt financing, and ultimately enjoyed exceptional capital growth in the subsequent cycle.

With the critical issue of mortgage debt serviceability coinciding with this last cycle peak came a soul searching on fundaments of home ownership:

  • Why do we purchase our own homes?
  • Is this the smartest use of our limited financial resources?
  • Does it in fact create unnecessary financial and social compromise?
  • Is there a better long-term financial option?
  • Does employment and social mobility have a meaningful bearing in the financial decision?

With these questions, the foundations were laid for an entire home-ownership paradigm shift. A financially effective, responsible and socially desirable alternative emerged. And this debate has received far too little display in Australia to date.

In fact, in the USA, where housing and finance trends tend to lead Australia by 10-15 years, a significantly different pattern emerged over the last twenty years in the home buying trends of many young people - whether single or partnered, and even young families.

Today's Demographic, Economic And Financial Realities

Today's young adults have an entirely different life experience from their parents' generation. And this had a fundamental influence on their home-buying decisions.

  • They form lasting relationships at a later age.
  • Education increasingly involves double degrees.
  • Subsequent career establishment often involves relocation, travel and long hours.
  • Financial independence, career path and life experience are increasingly the primary motivator over family establishment and settling down.
  • Children are either deferred, or ultimately excluded.
  • Contracting is a rapidly increasing employment type.
  • Job mobility is a fact of life.
  • Rationalisation and technology change can relocate entire industries overnight.
  • Globalisation, technology and discounted airfares offer social, employment and residential options unimaginable to their parents.
  • Housing location is increasingly focused on immediate proximity to work, amenity, service, entertainment and recreation.
  • Desirable accommodation in these locations is often out of financial reach.
  • Locational compromise is not acceptable
  • The potential cost of entry and exit makes short-term home ownership financially questionable.

The Home Ownership Debate

  • If young people can't afford to acquire and own the house in the location they prefer;
  • If they face the prospect of inevitable (whether desirable or undesirable) relocation;
  • If the spectre of rising interest rates and debt serviceability are daunting prospects;
  • If their early housing requirements are no way reflective of their longer-term lifestyle;

Why buy their own (compromised) home?

Inevitably the motivators are emotional - to keep up with their peer group, to meet family expectations, to get a foot on the ladder, to do the financially responsible thing, etc.

But Is There A Constructive Alternative?

The toughest part of solving a problem, is defining it. The problems facing first time house owners are:

  • The need to take a responsible financial position (property ownership) without having draconian effect on lifestyle.
  • The desire to live in accommodation and location appropriate to today's career, lifestyle and social expectations.
  • To feel established in the housing market.
  • To retain financial, social and locational flexibility.

The Ideal Solution

The ideal solution is to objectively take a position in the property market with an appropriately selected, funded and tax effective investment while continuing to rent in the location and property appropriate to immediate needs. This will give you:

  1. An objective, financially responsible direction
  2. Equal or better financial outcomes than home ownership (tax effective, income producing, selected for capital growth)
  3. No compromise in lifestyle (continue to live where you choose)
  4. Retained flexibility in mobility, lifestyle and cash flow (but not excluding effective forced savings and capital growth)
  5. Reduced vulnerability in an increasing interest rate environment.

In Summary

  • Without entering the property market, many young people rightfully feel locked out.
  • Home ownership for many new entrants today is either prohibitive, restrictive, or financially scary.
  • A level of compromise is involved in location, property selection and personal lifestyle; undesirable to many young people
  • Increasingly, the objective of early home ownership is financial responsibility and equity growth - rather than family necessity.
  • By investing in an objectively selected investment property, all the positives of financial responsibility and achievement are possible - without the constraint to lifestyle, potential future cash flow and location mobility.
  • The potential cash flow implications of future interest rate rises are significantly cushioned.
  • Property cycles are predictable.
  • Those who invested in mature markets in 1989 in Sydney and Melbourne and subsequent years in other capital cities have done exceptionally well.
  • Nothing has changed today. The key is to take a position in the most accommodating financial manner. Investing versus home ownership and home occupation is increasingly the viable option.
  • Historically, property investment has offered exceptional growth to Australian investors since Federation. In this time, we have seen wars, depressions and recessions, demographic and economic changes, taxation reviews, market peaks and troughs, and alternative investment offerings. The outcome has always remained constant. Investment in property rewards those who take a position and hold. The key is in entering in the market.

If you would like to discuss your options please call the office.

A Brief Indicative Comparision

Assumptions ofHome OwnershipInvesting (but renting elsewhere)
Value$350,000$350,000
Upfront costs$15,000$15,000
Mortgage$365,000$365,000
Interest7%
(principal+interest)
7% (interest only)
Rent-$300 p/w
Vacancy-4 weeks
Building allowance-$140,000
Depreciation-$30,000
Marginal tax rate-30c, 42c, 47c
Year 1 financials
Mortgage$29,500 (P+I)$25,500 (1.0)
+Outgoings$4,000$5,250
(incl. Property management)
= Total Cost$33,500$30,750
- Rent-$14,500 (4 weeks vacancy)
+ Pre-tax (loss)-$16,250
+ Taxable rebate-$7,000 (@30c)
= After tax (loss)-$9,250
Tax Rebate
Pre-tax loss-$16,250
+ Building Allowance-$3,500 (@ 2.5% pa)
+ Depreciation-$3,000 (@ 10% pa)
= Total deduction-$22,750
Tax rebate @30c-$7,000
@42c-$9,500
@47c-$10,500
Cost per week$180
(@ 30c) (or $130 @ 42c)
$300
+ alternative rent
 $650$480
  • For simplicity, all number are rounded and the assumption is for 100% funding in both options. While these figures are indicative only, they are based on current typical property offerings
  • The principal and interest (P and I) home loan is calculated over 25 years.

This article is reprinted from our quarterly published "Financial Matters" Newsletter, Summer 2005 issue.



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