Stepping on the Property Ladder
Apr 03, 2018
They may be young, but are they dumb? Gen Ys trying to get a foot on the rungs of an increasingly slippery housing ladder may feel like the task is insurmountable.
While both the Federal and the State Governments have implemented policy changes to improve the unaffordability crisis for Gen Y, it is yet to be seen if they are actually working.
Recently there has been significant improvement in the number of first home buyers, however, there are still major concerns regarding the declining rate of home ownership in Australia.
CoreLogic analysis based on ABS data shows the overall trend of a continuous reduction in home ownership. This has led to a greater proportion of young people renting.
What can young people do to get a foot on the property ladder? When drastic circumstances arise, we need drastic action.
Housing prices have increased steadily for decades, but the last two years really blew the socks off real estate punters.
RiskWise Property Review CEO Doron Peleg reckons a housing boom and a huge share of investors in the market propelled property prices skyward, particularly in the steamy real estate ‘hot houses’ of Sydney and Melbourne.
And the fallout of the price explosion has been far-reaching.
When the Australian Prudential Regulation Authority (APRA) stepped in and introduced tighter lending criteria in an attempt to curb domestic and overseas investor activity, the collateral damage was the first home-buying generations (Gen Y and Millennials) saving for their ‘white picket fence’.
Factor in rising prices and poor wage growth, it seems increasingly difficult for the younger generation to purchase property particularly in the desired areas closer to employment hubs.
Peleg says complicating the crisis is that young people are getting married and having children later and therefore are less likely to move to outlying suburbs where prices were generally lower.
But all is not lost. The younger generation is smart and savvy and they are keen to put measures in place to get them through their own home door. And the first is The Bank of Mum & Dad.
A recent survey by Mozo (as reported by Australian Financial Review) showed “around 30 per cent of parents, or more than a million families, assisted their children to buy a home, lending more than $64,000 per family on average. Two-thirds of them don't expect to be repaid, even in part, let alone in full”.
“Of course, the issues there are obvious … not everyone’s parents are in a financial position to bankroll their child, let alone multiple children, and it still may not address the issue of servicing the loan long-term,” Peleg says.
“And, if we peek at the future of this family-based lending system, we have to wonder how it will affect the parents – the Baby Boomers – as they move into retirement having funded multiple deposits without repayment or a share in the asset.”
Another clever strategy gaining popularity among young people is Rentvesting, a method of buying a cheaper investment property in a location they can afford, then renting where they want to live.
This provides the opportunity to enter the market whilst still being close to amenities, nightlife and employment.
“Negative gearing, tax deductions and rental income also boost their ability to afford their first home on an ongoing basis,” he says
However, it’s worth noting some lenders have ‘black listed’ loans for areas where oversupply is a potential issue while others have restricted or discontinued interest-only loans and investor refinancing.
Ironically, it means the restrictions that have been put in place to control price growth and give owner-occupiers a bigger share of the market have also made it difficult for young people to use this creative strategy to buy and afford their first property.
“Perhaps that’s for the best though, as the risks associated with buying an investment as your first property are higher, particularly due to poor cash flow and poor or negative capital growth risk,” Peleg says.
One other possible way (and a controversial one for sure) of getting into the property market could be to vote for Labor at the next Federal elections. The party has announced it will limit negative gearing to new dwellings only, which could have a flow-on effect to housing affordability.
Peleg says RBA data reveals complete removal of negative gearing could increase the average homeownership rate from 66.7% to 72.2%.
In particular, the paper states that the changes are greatest for ‘young and mid-aged households’. Homeownership rates for low income people under 35 is expected to increase by 26.4%, while under-35s with higher incomes are expected to increase by up to 104%.
“To create sustainable change that improves property acquisition for generations to come, and close the gap between the ‘haves’ and the ‘have nots’, we must look at revolutionising the negative gearing machine that has made it so easy for investors to contribute to our escalating housing values,” he says.