Breaking into the property market has become more difficult for first home buyers in Australia as of late mostly because of reasons I’ve explained in detail on this blog before. It’s not an easy problem to solve as many of the options championed by self proclaimed experts are politically charged and increasing the housing supply isn’t as simple as many people think it to be. Thus many of the measures that the incumbent government suggests are often things that don’t address any of the underlying issues directly and instead look to put more money in the hands of potential first home buyers. Joe Hockey’s recent brainwave to address this problem, by allowing first home buyers to dip into their super for a deposit, is a classic example of this and it will neither help first home buyers nor address the underlying issues that they face.
Whilst it’s not a formal policy they’re looking to submit yet (hence the lack of detail around how the actual scheme would work) Hockey says that he’s been approached by lots of young people looking to tap into their superannuation in order to fund their first home purchase. On the surface it sounds good, younger Australians get to put a roof over their heads and get their foot into the property market, something which should hopefully sustain them for the future. The main problems I see with this are two fold; firstly most people won’t have enough super to make a difference and, secondly, it will likely set most people back meaning their retirement will likely not be fully funded by super.
On average your typical superannuation balance at 25 is on the order of $10,000, not a whole lot in the grand scheme of things. Even the most generous loans that let you get away with a 5% deposit would only see you able to get a loan for $200,000 with that amount of cash, not exactly the amount that many now first time home buyers are looking to finance. That figure doubles by the time they reach their 30s but that’s still not enough to finance the home on its own. Indeed first home buyers are likely to need double or triple that in order to buy their first homes which means that they’ll need to have at least $20,000 in savings for those meager amounts of super to help push them over the line. If they’re able to save that you’d then think that bridging the gap wouldn’t be outside of their reach, at least within a reasonable timeframe.
This then leads onto the conclusion that the opposite situation, one where someone couldn’t save that much and required their superannuation to bridge the gap, is the least preferable scenario for a first home buyer. You see a savings track record proves that someone will be able to cope with the repayments that a mortgage requires whilst at the same time still being able to afford everything else they need to live. If you don’t have this and are looking to get into property diving into your super isn’t going to help you, instead it’s going to put you in the unenviable position of having even less money available to you, eradicating any chance you had at getting ahead. You’d hope that the last batch of lending reforms would prevent most people like this from getting a loan in the first place but I think we’ve all seen people get themselves into this situation before.
On top of this using most or all of your super would essentially put you back 5 or 10 years in planning for your retirement. That might not sound like much when most people will have 50+ years of working life but a lot of the power of super comes from compound interest. When you take an axe to your initial savings it resets the clock, pushing back the compounding rate significantly. That means you hit the high growth part of your super much later in life, leaving a lot less than you’d expect for retirement. This would mean more people getting onto the aged pension sooner, something which the whole superannuation system was designed to avoid.
I’ll hold off on any other criticisms until I see an actual policy on this but suffice to say the idea is rife with issues and I think the only reason that they’re entertaining it is to win back some favour with the youth vote. If they do put a policy before parliament though it’ll be interesting to see how they address criticisms like this as I know I’m not the only one to find fault with this policy. Heck I’d love to see more people getting into property since it’d bolster my investments but honestly I’d rather see the underlying issues, like lack of supply and the owner-occupier CGT exemptions, tackled first before they start looking towards trashing people’s futures for short term gains.
I’ve gone on record in the past about how the median house price is unaffordable for the median income earner in Australia. In the same breath I also explained how rare that this kind of situation was due to the number of assumptions made when you just equate median income with median house price. Still it seems to be a sticking point for many people of my generation that housing prices are just too damn high for them to be able to afford something, even if their incomes are above the median. While I’ll admit that it is harder in some areas rather than others (like Canberra for instance, which I explain below) the generalization the property is straight up unaffordable for our generation just simply doesn’t hold water and the reasons are far more likely to be ones of desire than affordability.
The Canberra Times ran an article yesterday that showed Canberra’s cheapest house prices were $100,000 more than the cheapest places in other capital cities. The cheapest suburb Charnwood (where I just so happen to live) had a median price of $382,000. In comparison to the other 2 suburbs listed in the article this seems kind of ludicrous but there are some pretty good reasons for this discrepancy. Firstly the suburbs that Canberra was compared to aren’t exactly identical with Charnwood being only 20 minutes to the CBD of Canberra and the other suburbs being around double or triple that distance. In that respect it’s more apt to compare property in Queanbeyan and the surrounding region which has several areas with a substantially lower median. There’s also the fact that Canberra is disproportionately affluent thanks to the high concentration of public service jobs and low population which skews the median further. That doesn’t change the fact that property in Canberra is more expensive than it would be elsewhere but it does show that straight up comparisons like the one in the Canberra Times aren’t exactly apples to apples.
Whilst the zeitgeist around the property market for my generation might be “it’s too expensive” a recent survey showed that a large majority of my generation are considering buying property within two years. Unfortunately only 30% think of it as a good investment (although what investment vehicles they consider good doesn’t seem to be included) which makes me then wonder why so many are intending to buy. The biggest challenge according to the survey is saving the required deposit for the house, not financing the loan as you’d expect. The article then references the high median price in Sydney as a source of this barrier which, in my mind, isn’t a barrier at all.
The first folly here is to assume that a first time home buyer should be buying at the median. For starters a good 50% of the housing market will be below that price range, especially if you consider some of those cheap suburbs that the Canberra Times article alluded to. This reduces the “required” (more on that in a sec) deposit from $110,000 to something more like $60,000~75,000 still an non-insignificant amount but a lot less than what the article insinuates. There’s also the assumption here that you need to get a 20% before considering buying which I can tell you is misnomer.
For starters the 20% threshold is usually just to avoid paying Lender’s Mortgage Insurance (LMI). Now this isn’t insurance for you, it’s for the bank in case you default on the loan. What a lot of people seem to think is that this is either some astronomical one off cost or a recurring charge that’s tacked onto the loan. For both of the home loans we currently have we had little more than a 5% deposit and the LMI charge was a couple thousand dollars, much less than the amount of cash required to get the 20% deposit. Of course your choice of loans might shrink a little as well but we never struggled in finding a suitable loan at a decent rate, even when we had such a small deposit. Put this all together and cracking into the property market doesn’t seem as bad for my Generation Y cohorts but you wouldn’t read that in the papers.
Realistically it all comes down to a lack of information and understanding which is unfortunately fuelled by articles like the ones I’ve linked to. Whilst I know that many won’t do the research and then continue to lament their position I’m hoping that at least a few will see articles like mine and start doing some investigation for themselves. Knowledge, as they say, is power and the Australian property market is no exception to this.
Buying a house is an experience of many varied emotions, from excitement to confusion to being overwhelmed and finally the ultimate reward of having a place to call your own. I’ve been through the whole process twice now and suffice to say I’ve had my share of trials and tribulations along the way. Today I’m going to walk you through a rough outline of the process (note that this will be Australian centric, sorry overseas readers!) so that those aspiring property owners looking for a bit more information on the process will hopefully come out feeling a bit more confident when they start looking for a place to call home.
First of all before you start looking at any houses you’re going to have to know what kind of budget you have to work with. At this early stage I’d highly recommend seeing a mortgage broker as they can look at your financial situation and find a loan that’s appropriate for you. They can also teach you how to build business credit, which can be useful to you in the long term should you be short on capital. I have personally used Aussie Home Loans as my brokering agent every time I’ve looked for a property and have never been recommended the same loan twice (nor any of Aussie Home Loans products either). There are of course dozens of firms around and none of them charge any fees so I’d wholeheartedly encourage you to talk to a few of them if you’re not completely happy with any one of them. At this point you can also get pre-approval for a loan, meaning the bank is ready to finance you and will make the whole buying process a lot faster than if you’d found a house then had to get finance.
With your finance sorted you can now go about looking for a place to call your own. In my experience this is a whole lot of fun for the first couple weeks as you get to see many great houses (and some not-so-great) but it can be exhausting if the process drags out over a long period of time. Whilst I said before you shouldn’t bother looking before you’ve got finance it can help to do a little market research in the months prior to fully committing to getting a house. This will let you know how the market is doing and which properties have been on sale for a while. A rule of thumb is that the longer a property has been on the market the more likely that the seller will be flexible regarding the price (although it could also mean the property is overpriced, in need of dire repairs or has something else preventing it from selling).
Once you’ve found a place that’s within your budget the next step will be to make an offer¹. This process is wholly dependant on the agent selling the property and can be as informal as a telephone call to the agency or could involve multiple forms in order to register your intent to buy the property. It’s at this point you can negotiate the price for the house if you so desire and it’s quite possible that the house will go for below or above the advertised price. Should someone else make another offer you will, most of the time, be notified by the agent should the offer be higher than yours. Strictly speaking agents are not meant to tell you how much other people are offering for the property but inevitably most do. Depending on the instructions given to the agent by the seller there might be predetermined sell point or they may leave the property open for offers until they’re satisfied with the price. Should you be lucky enough to place the accepted offer you’ll be contacted by the agent and will usually have to supply a $1000 deposit to confirm your intentions to buy the home (this is counted towards the asking price).
According to Think Conveyancing’s website, at this point its time to bring in the lawyers or a conveyancer, as part of the formal offer acceptance you will have to nominate one such agency to deal with the legal paperwork required by the sale. Just like if you were seeking the aid of an injury attorney in Orlando for example, you have to do your research. In my experience you will be better served by an actual lawyer rather than a conveyancer as they will be able to provide qualified legal advice in the event something should go wrong. They can also help with explaining some of the legalese and add provisions and protections into the sale contract should they be required. Once you’ve nominated the agency the agent will send them the required paperwork and you’ll be required to sign a few things in order to get the process going. Soon after (usually before 10 business days) your and the selling party’s lawyers will then exchange contracts, allowing both sides to inspect them prior to agreeing to continue with the sale. Again at this point you’ll be required to sign the paperwork to say that you’re happy with the terms of the sale. At this point you have a financial interest in the property so it’s recommended to take out insurance on it at this point.
Once the paperwork is completed the next major event will be the settlement, the formalisation of the sale contract that both parties have agreed to. Before this happens however there are usually a few things that need to be sorted out. Probably the largest of tasks is the payment of stamp duty which has to be done either directly to the Revenue Office or through your lawyer’s trust account. There are also things like arranging financing for paying out rates or water bills (usually paid to your lawyers who hold it in trust for use at settlement) and having one last final inspection of the property to make sure you’re still happy with it. The bank will also send out a representative at this point to do an evaluation on the property to make sure the property isn’t worth substantially less than the loan they’re giving you. Once they have been completed (can be anywhere from 2 weeks to months, in my experience) then both party’s legal representatives convene to complete the sale. Shortly after this you should be contacted by the agent who will hand over the keys and you’re officially a home owner.
This scenario does not mention anything that might go wrong during this entire process. Should all things go well the time from accepted offer to moving in is usually around 4 weeks however this can easily balloon out should any part of the process be delayed. The most common problems are finance related, usually either delays in sending out appraisers or not releasing the funds for settlement. There can also be issues at settlement like unapproved structures or disclosure of required sale information (like if it’s a flood plain, for example). However if you have a good lawyer behind you most of these problems will be made clear to you and options presented for remediation.
So in a nutshell that’s what the process is for buying a house in Australia. I’m sure there are details I’ve missed or haven’t given enough attention to but if you were wondering what’s actually involved in securing property than this should give you a good insight into what’s required. It can seem daunting at first but realistically it’s really just a whole lot of talking, walking and sending money to people in the right places. If you have any questions about a particular part of the process feel free to ask in the comments below and I’ll do my best to ask.
¹I’m deliberately writing this from the perspective of buying a house through a negotiated price rather than at an auction. Buying a house at auction is an inherently more risky scenario due to emotional involvement and the removal of many buyer protections. The process before and after the auction is identical however.
The advice provided here within is general advice and should not be considered professional financial advice. It does not take into consideration your personal circumstances and can not be used in any financial decision process. No party should take action or refrain from action based solely on the content of this post or any other contained here on The Refined Geek. Please seek professional financial advice before proceeding with any investment.