The affordability gap facing young home buyers
A New Year often brings new resolutions, and according to a recent poll, home ownership is high on the list for many Australians in 2016 with some 40% of poll participants indicating that their New Year’s resolution is to save to purchase their first home or investment property.
Without wanting to rain on anyone’s parade so early in the New Year, I suspect for many, these resolutions will be carried over to 2017 (and possibly beyond) as the “great Aussie-dream” of home ownership stands to become the great Aussie “pipe dream” owing to the growing issue of housing affordability confronting us right now.
House affordability generally in Australia has become, and will continue to, be a significant issue for local property buyers, in particular those looking to buy in the Sydney and Melbourne markets both of which are recognised as two of the least affordable major metropolitan markets in the world according to Demographia International Housing Affordability Survey (2014: 3rd Quarter).
Boasting median house prices almost 10x greater than the gross annual median household income in each state, first-home buyers in Melbourne and Sydney are being pushed to outer-suburbs which often require 90 minute travel times to and from their place of employment each day, or into tiny apartments without natural light or ventilation – not exactly the Aussie-dream we were looking for.
But it’s not just Melbourne and Sydney; when we look at Housing Affordability Ratings by Nation, Australia is now one of the most unaffordable countries for local residents to buy real estate in the world with the large majority of local markets rating property in the “severely unaffordable” category.
Home ownership rates in Australia have been in gradual decline for many years now, however the rate of decline has occurred much faster in younger households (such as the 25-34 year old age bracket) beginning back in the early 1980s and continuing through to today, with the Melbourne and Sydney markets significantly contributing in recent times as rapidly accelerating house prices significantly outstripped household income growth, simply meaning a bigger deposit is required
Source: CoreLogic RP Data Hedonic Home Value Index, December 2015
According to Lenders Mortgage Insurance (LMI) provider Genworth, more than 50% of first-home buyers say property prices generally and a “bigger deposit”(along with related costs such as Stamp-Duty and LMI) are the prohibitive barriers to home ownership - not serviceability, and actually loan repayments on new housing loans are currently well under the 10-year average.
So what is the solution?
There have been calls for the government to intervene in order to address this pressing issue, either through stamp-duty concessions or by perhaps relaunching another First-home Buyers program designed to bridge the widening “gap”, however this is unlikely to take place anytime soon and an immediate solution is required for many.
To date, the most common solution (around 70%) for young buyers has been to turn to their parents or family members for assistance by way of a loan or a non-repayable gift to enable them to climb the property ladder.
Whilst this often works well for the young buyer, it can be problematic for the parent or family member providing the assistance if they are expecting the loan to be repaid at some stage (as it often isn’t), or worse, the home buyer endures a relationship breakdown, the asset is sold, and half their “loan” or “gift” walks away never to be seen again.
There is another way
Parents or family members may wish to consider a Parent-to-Child (P2CTM) loan which not only helps young buyers by:
- allowing them to borrow up to 105% of the property value (perfect for those with limited deposit),
- not requiring them to pay LMI premiums (which can run to several thousand dollars),
- allowing them to borrow at better rates than those offered by the bank,
but also properly secures the family members contribution by lodging a registered mortgage to secure their investment, and by utilising the skills of a professional finance company to collect monthly repayments on their behalf in a timely manner.
For more information, click on the link below to watch a short video clip which explains how this innovative product can not only help you and your clients bridge the affordability gap, but it allows you to play a part in addressing what is a significant national issue affecting many Australians.