A Financial Planner Told Me I Can't Afford a Single House in Melbourne or Sydney
"We call it the generation squeeze. Thirty years ago someone your age could actually buy a nice house in a reasonable suburb on one income."
While I've never been one to fantasise about the white picket fence, I admit it would be nice to escape sharehouse purgatory before I enter middle age. But right now I'm stuck renting a fairly dismal room in a central Melbourne suburb, where even my rat-infested terrace would sell for $1.4 million at auction.
And not only are houses crazy expensive, but first home buyers have to compete with older investors who already own a bunch of investment properties they can use as equity. Even the Prime Minister is out of ideas, telling us: get your parents to buy the house for you.
But that just seems like a terrible idea, a 30-year excuse for my parents to "check-in"—a conversation that invariably leads to questions about what the hell I'm doing with my life. No, I needed to do this on my own.
To get some professional advice on entering one of the world's most terrifying property markets, I called up certified financial planner Michael Abrahamsson to talk about the logistics of first home buying. I was also keen to hear his thoughts on how I can use negative gearing to get one of those sweet second income investment properties you hear so much about. Turns out, unless I inherit a tonne money from a mysterious relative, I'm pretty fucked. But there are some workarounds.
VICE: Hi Michael, thanks so much for helping me. Is there any way I can buy a house in the next decade?
Michael Abrahamsson: Look, dealing with young people who are battling the skyrocketing prices in Melbourne and Sydney is a real challenge. But there are strategies to make sure you're not locked out of the market in the long term.
Michael, I'm flexible. I'd even be prepared to buy a house somewhere a bit outside of the city and commute to work.
Sure. Your first option is casting the net a bit wider, so considering those outer suburbs that are a little more affordable. Because taking on a huge amount of debt is a huge amount of stress. You can't afford holidays or to go out to eat, and you need those releases if you're working 50 or 60 hour weeks to pay off a huge mortgage debt.
Unless it's HECS, which I choose never to think about, I'm kind of terrified of being in debt. What's a reasonable amount to take on?
We've found if your mortgage repayments don't exceed a third of your after tax income, that's ideal. You lose a third on tax, a third on living expenses, and use the other third to pay off the mortgage.
But even houses that are an hour away from the CBD are super expensive. I'd probably be taking on more than that.
Well, another solution is continuing to rent where you really want to live, and buying an investment property in a regional area. You live in Melbourne, so say a $400,000 house in Geelong, Bendigo, or Ballarat. You can repay the regional house and use it as a launching pad and to then buy into the market where you really want to live. It's a two step process.
Is this where negative gearing comes into play?
Yes. But unfortunately there are a lot of people who use negative gearing. As a first home buyer, you compete with older people who are using negative gearing and who are borrowing out of their self-managed super funds. These investors are collecting suites of properties across the country. Interest rates have never been lower so a lot of people are buying way more than they probably should.
So baby boomers are buying all these extra properties, and I can't even buy one.
This is all very depressing.
Keep in mind stamp duty as well. The Victorian state government is rolling in money because every time a property is sold they collect stamp duty, typically 5-6 percent of the property value. If you're buying a $500,000 home, which is essentially impossible in Melbourne, you pay $25,000 to the state government.
Would it really be so bad if I just rented forever?
Yes. The disadvantage is that you probably won't be able to save. Plus, aged pensions favour homeowners dramatically. If you're a renter, when you get to aged pension age, which is 67, it's very difficult. Because you'll be assessed more harshly than a homeowner. If you own a $2 million house in Melbourne, for instance...
That'd be nice.
Yep, and you have $200,000 or $300,000 in super, you get a full pension. But if you are a renter and have say, a million dollars of assets but don't own a home, as a renter you probably wouldn't qualify for the pension. The family home is exempt from Centrelink testing.
Guess I'd better start saving up for that house.
It's hard. Moving back in with your parents is a sound strategy, but it isn't always worth it. Work out how much you need to spend to still have a reasonable existence and budget as much as you can. But unfortunately in Melbourne it may still take you a very, very long time to save the required deposit. Which is why it makes sense to buy in a regional area first instead.
Even if I had the deposit, which I don't, I'd still have to compete with all those investment property buyers. How can I do this?
You're at a disadvantage competing with them, but you can put yourself ahead of other first home buyers by showing banks a good savings history. Show them you have discipline. Don't have debts from credit cards, car loans or personal loans. You also want to show that you've been in a secure job. For contractors or casual workers, it's very difficult to get a loan. Banks will ask you for a larger deposit or outright decline your loan.
Well, my entire generation is working those kinds of jobs right now.
Yep, it's pretty incredible how unfair it is. We call it the generation squeeze. And 30 years ago someone your age could buy a nice house in a reasonable suburb on one income. Try naming a place where you actually want to live where you can do that now. It used to be that home loans were 15-20 years. Now they're 30 years. It's interesting that the parameters keep moving.
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