Ahhhhhhhh, housing affordability. That old chestnut. It’s a topic that’s been hotly debated a million times over! And will no doubt continue to be for many years to come.
The general consensus is that property in Australia is unaffordable. The results of a recent survey seemed to confirm this, with the proportion of adults who own their own home falling from 57% in 2002 to 51.7% in 2014.
The annual Household, Income and Labour Dynamics in Australia survey, authored by Professor Roger Wilkins from the University of Melbourne, also found that the rate of home ownership is expected to keep falling, and may drop below 50 per cent as early as next year.
So, is home ownership falling because Australians simply can’t afford to buy properties due to hugely elevated prices, or is it due to other factors?
Property prices have significantly grown
It’s certainly true that property prices have significantly risen in Australia over recent decades.
The median dwelling price for the combined capital cities is currently sitting over $500,000, according to CoreLogic. But prices of course range widely between the capitals. Hobart is the cheapest at around $300,000 and Sydney being the most expensive at nearly $800,000.
This decade so far prices have risen across the board by 35%, and over the previous decade they rose by around 140% according to CoreLogic figures.
But since the beginning of 2010, it’s been the two major capitals of Sydney and Melbourne that have seen the majority of growth. Prices are increasing by around 60 and 40 per cent respectively (as at May this year). The other capital city markets have seen either little growth or have fallen in value, so theoretically, in some places affordability is actually improving.
This is especially the case when you consider interest rates; in this regard 2016 actually presents quite a good time to buy with the cash rate now sitting at a record low of 1.5%; very different from the double-digit interest rates investors experienced decades ago.
We, of course, also need to consider incomes in relation to price growth. Depending on who you ask, there can be a case to say housing has or hasn’t become more unaffordable. It’s clear, however, that house prices have risen faster than incomes, making it harder to save for a deposit.
Priorities are changing
While property prices have clearly risen, it’s also the case that priorities for more recent generations have changed.
Once upon a time – not that long ago really – youngsters left school and got a job, with their primary objective being to save for a deposit to buy a home.
Nowadays, however, younger generations seem to have different priorities. They often leave school with the intention of travelling abroad for a gap year (or two or three). Or if they go straight into a job they’re not necessarily saving, but buying the latest gadgets; in our modern society it’s about instant gratification.
So does that have an impact on affordability?
It makes sense that it likely impacts on the ability to save for a deposit.
We need to consider which is the cause and which is the effect, however. Some – including a Sydney real estate identity recently – argue that this generation is simply too selfish to make the necessary sacrifices, such as cutting back on commodities such as widescreen televisions and designer clothes, to save and get a foothold in the market.
But on the flipside others argue that priorities have changed simply because it’s impossible to save the huge deposit required for property these days. So younger generations are instead deciding to spend their money on something else because property is out of their reach.
But are the expectations of younger generations now just too high? When they complain about property being unaffordable, is that because they want to buy a flash pad in inner Sydney as their first home, rather than buying something further from the city in a price bracket they can actually afford? Essentially, many want to buy what would traditionally be their last property – often what their parents have worked their way up to – first.
Add to all this the fact that renting has also become more socially acceptable. The Great Australian Dream perhaps fading a little, and we have a little more insight into the affordability debate.
Consider your options
It’s clear that the debate around housing affordability isn’t clear-cut; there are many aspects to consider. As the debate continues to rage, demands for reform or government measures to curb price growth will persist.
While Australian property prices have risen and are unlikely to fall (despite claims from doomsayers), leading many to feel as though it’s impossible to break into markets such as Sydney, there are always more affordable opportunities within each capital city if you care to look. Consider buying further from the city, or a unit instead of a house. Scale down your expectations and buy where and what you can actually afford.
And if you don’t want to scale down your expectations, become a ‘rentvestor’. This means you choose to rent where you want to live and invest where you can afford to buy.
For investors, it’s of course better to buy where there’s more potential for growth. Chances are that’s in an area that hasn’t already seen huge growth. Yet where there are lower prices with more room to move.
Follow the Golden Rules of Property Investment
Have you ever thought about writing something down that you can hand to your kids that will help them in their property investment journey? I have.
I wish I knew at age 25 what I do now at age 45.
So I finally got around to writing that article, but you know what – it’s not a family secret and it’s worth sharing.
I’ve invested in lots of assets over the years. I’ve made good money and lost lots too (in shares FYI – never property!)
For me, successful property investing boils down to 9 key rules or golden nuggets, as I like to call them.
- Rule 1
- Rule 2
- Rule 3
- Rule 4
- Rule 5
- Rule 6
- Rule 7
- Rule 8
- Rule 9
Rule #1 – Pay the Right Price
This sounds simple – but in my opinion it’s not given enough consideration. The most successful property developers I know all say: You make your money when you buy the land.
That’s akin to saying “you make your money at the start of the project – by paying the right price”. This principle should apply to everyday property investors as well.
How many property investors know the complete sales history of all the units in a block of apartments before they buy the unit in that block? It’s pretty easy to find out these days – and you’re mad not too.
Websites like RP Data give you comparable values that were once only available to valuers, now they can be accessed by anyone, at a fairly reasonable price. So knowing the worth or comparable value is key.
Rule #2 – Infrastructure/Transport
Being ahead of the game in terms of future infrastructure can certainly put you ahead of the curve. There are many websites these days that focus on finding you the next area that may benefit from an ease in access to the city or increase in data speeds via the NBN etc.
Rule #3 – Add Value
Buying a property where you can add value has always been a pretty safe bet. Again, it’s a simple tip… but some of the best returns I see are clients who do a simple makeover to a property. New Kitchen from Ikea, new blinds, new carpet, new appliances and bingo after spending $25K their property has gone up $50k in value and the rent has increased to boot.
And here’s the kicker – on that $25k reno – Washington Brown will provide you with a depreciation schedule that allows you to legally write off half of it as an immediate tax deduction.
To get a free quote on your own property depreciation schedule, click here.
Rule #4 – Do the Opposite of Everyone Else
Now this is not a simple tip, but stay with me. I personally get nervous when all my friends (whom I haven’t heard from for 10 years) start ringing me up and asking me for property advice. It’s a sign the market is heating up. Be it shares or property, I hate following the crowd. But if you do trade shares – you will know that “the trend can be your friend”.
And that’s true….but things can turn quickly and that’s partly due to the media. Think about it – headlines sell papers. Examples.
Gloom: “Buyer Rides Property Wave: $200K profit in resale after 3 months.”
Doom: “Buyer Faces Bankruptcy: Bought apartment for $700K off the plans, forced to sell for $500 by settlement.”
That sells papers. This one doesn’t.
Average: “Buyer makes median rental yield and achieves steady capital growth.” BORING.
So in my view – be wary of the media and the general “spin”. Try to remain independent.
I don’t think Warren Buffet makes his decisions based upon what’s written in The New York Times – do you?
If you’re enjoying this article and want to find out how I’ve saved thousands of investors millions of dollars, take a look at my free book below!
Rule #5 – Follow the Leader
Now I know I’m about to contradict what I just said, but sometimes it pays to follow the leader – especially if they’re a knowledge one you respect with a proven track record.
On October 16th, 2008 – Warren Buffett wrote an article titled ‘Buy American, I Am’
If you followed his lead your stock portfolio would have increased by 212% – not bad!
From a property point of view, some of the wealthiest and most successful property developers I know are Lang Walker and Harry Triguboff.
If I followed their lead and bought in areas when they started developing there, I’d be far wealthier too. These guys have a gut feel for areas and employ rather smart people too.
Rule #6 – Have a Strategy
Have someone look at your current financial situation and your goals and work together to ensure a sound strategy is in place.
Here are two simple tips you might want to ask an advisor:
a. “How much are you making on this transaction?” Simple but effective and make them show you. How much is vested in their interest compared to yours?
b. “What is the best structure to buy this property in and why?” This should always be asked before any transaction. Depending on the phase of your life, it may be that a Self Managed Super Fund is the better alternative, in other circumstances it could be that owning a property personally will be of more benefit.
The decision making should also consider land tax, negative gearing and CGT implications. I can’t stress the importance of this more. Once you buy a property in a certain entity it’s pretty hard to change without ramifications/significant costs.
Getting a depreciation schedule could save you hundreds of thousands of dollars over the life of your property, so we think it’s pretty important! Work out how much you can claim on your property by using our free calculator.
Rule #7 – Do the Numbers
You should have a good understanding of the financial impact of any property transaction before you enter into it.
Do you know how stamp duty is treated in tax terms on your investment property?
How does claiming depreciation affect my capital gains tax when I sell it?
When I sell my property – how are the selling fees treated for CGT purposes?
These are tricky questions – but I reckon you should know this – before buying an investment property.
Rule #8 – Don’t Believe the HYPE
Property doesn’t always go up. That’s one of most often touted lies. Sure – if you’re not forced to sell in a downturn, then you can always hang on and claw your way back, but that isn’t the case for everyone.
The banks will lend you more on an off-the-plan property investment than they will on Woolworth or BHP Shares for instance.
So if you can gear into a property with a 5% deposit…remember – all it takes is for that property to go up 5% for you to double your money BUT if it goes down by 5% you LOSE all your money.
The above excludes all exit and entry costs… which is quite silly… but I’m making a point.
Sadly, this is where most investors don’t do the math.
Rule #9 – Buy the Land Free!
I review thousands and thousands of purchases every year. And when I see a client buying a property at close or below the original construction cost – I smile.
And it does happen. Post GFC we have released many reports where the original construction cost exceeded the purchase price paid by our client.
If you ask me – it’s very hard to lose money in property when you get the land free.
Yes it may take a while for that property or area to grow again. But eventually it will.
Personally, I’d rather buy at the low point of the market than when a market is surrounded by hype.
I want to pass this onto my daughter… but I’m keen to hear what you would add, so please leave a comment below.
Or if you’re looking for a depreciation schedule and wondering how much you could save on your tax bill, use our free calculator to find out!
Rental Property Tax Deductions
Claiming On Your Rental Property
In any rental business, the expenses don’t stop upon acquiring whatever it is that you are renting out. In car rentals for example, the owner of the car rental business continues to pay for other costs to keep the business running, such as maintenance costs, mechanical and cleaning services, and the like. The same goes for the property rental business.
Rental property owners are well aware that whether they are renting out a studio flat, a three bedroom apartment, or a house, incurring additional expenses is inevitable in times when the property is rented out or is made available for tenants. What are these expenses to begin with?
Of course, when you put up an advertisement to reach interested tenants, there is a cost. The ongoing insurance payment that you shoulder as the property owner is an obvious cost as well. Aside from that, you have to pay compulsory charges such as taxes, interests on loans, legal expenses, and fees for the property manager. Then you have the cost of maintenance and repairs. Yet, there is still a multitude of miscellaneous expenses that can be incurred in renting out a property for business.
Why is this knowledge important? No one enters a business venture without the intention of gaining profit while putting out less, and if you agree with this, then here’s some good news for you: There are certain rental expenses that you can claim a tax deduction for! This means that you earn more savings in taxes. Now, isn’t that a good thing?
You are probably excited by this information and want to find out more on how to go about claiming deductions for these expenses as well as the type of expenses eligible for deduction claims. Our next posts will discuss that in further detail. Stay tuned for more updates!
If you want a quote for a depreciation schedule click here – or use or free online tax depreciation calculator to estimate your savings.