Investing as an option for first home buyers

Thursday 03 Jan 2019

I have always said that your day can be split into three parts. The first is sleeping, the second is spending time with your partner/friends, and the third is working.   So, I believe that a happy life is the sum of a comfy bed, good relationships, and enjoyable work.   This was the advice I gave to our 24-year-old son when he asked what I thought made for a happy life.

Mitch has spent the last 5 years studying as an Architect.  He has been fortunate to have worked part-time in his field of work since leaving school, and in the last couple of years has worked full time.  Surprisingly, architecture is not a particularly well-paid profession, but he enjoys his work, and as I say, that’s one-third of the happiness equation.

Nevertheless, I often wonder how our son will ever afford to buy a house on his own.  It’s hard enough for young ones to pay their rent, car, insurances, and HECS debt, let-a-lone save for a deposit on a home.

I read an article written in The Australian newspaper in July 2016 where it was reported that ‘soon fewer than 50% of people will own their home’.  Given the insecurity of tenure associated with renting in Australia, home ownership is strongly associated with being invested in your local community, feeling a part of your community and contributing to it.  It is important to the social fabric.

Moreover, home ownership is the primary means by which Australians generate wealth.  This problem doesn’t just exist here in Australia.  It is also a problem in other parts of the world, such as the UK.

Let’s take a walk back in history for a moment.  At the end of the 1950s, the median house price was around $7,000–$8,000 at a time when average earnings were around $2,000 per year. At the interest rates of the time (of around 5 per cent), such an income would support a loan of more than $9,000. In other words, the house price to income ratio was around 3-4 and there was effectively no so-called deposit gap.

In the 1960s, it was possible for a household on average earnings to borrow enough to purchase a dwelling without a deposit. Just a decade later, by the mid-1970s, median house prices had increased to just over $32,000 and average earnings had increased to just over $8,000. At the then current interest rates (close to 10 per cent), this income level could support a loan of less than $25,000. This left a deposit gap roughly equal to annual average earnings and a resultant requirement on the household to save the equivalent of one year’s income before the loan they could support with their income, combined with their deposit, would be sufficient for them to purchase a median-priced dwelling.

By the 1980s there was an emergence of a very significant deposit gap, which meant that households with even moderate incomes and with no savings capacity were excluded from homeownership. Home ownership was no longer affordable for all.

Today, the deposit gap is at least four times the income of those on average earnings. This suggests that to gain the same level of access as their parents and grandparents, the current generation will need considerable assistance.

So, the advice I freely give to Mitch, or to any young adult, is to keep saving for a deposit and start with an investment property.  Property is a good long-term investment and taking a step-by-step approach can yield great results for those committed to the process. Begin by saving a deposit, then get some good financial advice and understand your eligibility for grants programmes and tax incentives. Knowing your budget, you can then shop around for competitive mortgage options and wisely choose the best property option for you as an entry point.  The result should be a steady return as the value of your investment property improves and, as a result, better opportunities become available for you to scramble up the property ladder.