29 May 2005

The Alternative to Home Ownership

Many of today’s aspiring homeowners 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 compromise in selection or complete inability to enter the mark

For those who do purchase, the spectre of potential interest rate increases is daunting, and for those 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 895% 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 the 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 cyclic peak came a soul searching on the fundamentals 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 to 15 years, a significantly different pattern emerged over the last 20 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 has 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 home owners are:

  • The need to take a responsible financial position (property ownership) without having a 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 cashflow (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 cashflow and location mobility.
  • The potential cashflow implications of future interest rate rises are significantly cushioned.
  • Property cycles are predicable.
  • Those who invested in mature markets post 1989 un Sydney and Melbourne and subsequent years in the 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 entering the market.

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

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