28 October 2020

Is buying a house really a sign of financial success anymore?

| Zoya Patel
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Home in Canberra

Is homeownership really the path to financial security? Photo: Supplied.

The dream of homeownership is one that is written about often. There’s an obvious reason for housing security through ownership being a major goal for many people – having a roof over our heads is important, and the rental market can be insecure.

In Canberra, renting can also be more expensive on a day-to-day basis than paying a mortgage. That was certainly my experience moving from a relatively old two-bedroom rental in Downer into a brand new three-bedroom townhouse in Watson where our mortgage comes in at just under our rent payments.

But on a more philosophical level, does owning a home signify the same level of financial success as it once did? We all know that buying a house was a somewhat easier proposition for previous generations, purely in terms of the median house price in comparison to the average salary.

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For my generation, putting our predilection for avocado to one side, the same equation has a much higher gap. Even on high salaries, my partner and I would have been a long way off saving a 20 per cent house deposit on our own while paying rent and living costs in Canberra, and were only able to buy with the help of my parents, which I gratefully accepted.

Every millennial I know who has bought a home has done so with parental support, either through the gift of a deposit or by living at home into their 30s without paying rent, and therefore saving a deposit. I’m not casting any aspersions on this, given I took free money in order to fund our house purchase, and I’m also aware that there must be people my age who live frugally and did save their own deposits (it’s possible, just really, really hard).

But what I want to know is, does owning a house genuinely say anything about your ability to manage your finances anymore? Or are there other, more achievable investments that are a smart way to get a return from your savings while still renting?

Had my parents not offered us a house deposit, my partner and I planned to continue renting and ethically invest our savings into the stock market instead. Renting could be frustrating at times, especially because we have pets, but we were comfortable with the fact that homeownership was way out of our reach in the immediate future, and we didn’t see buying a house as the only way to be financially secure.

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In fact, with the changing climate, the difficulty getting house insurance in certain areas or for environmental risks, and the uncertainty around where we might end up choosing to live, renting seemed a smarter option in terms of flexibility and risk management.

The cultural pressure to focus on homeownership, though, was immense. As we hit our 30s, this increased, with people regularly asking if we owned the house we lived in, or if we were intending to buy together, and a few comments from well-meaning friends and relatives about not wanting to raise kids in a rental.

When we did buy, I noticed some friends seemingly get anxious about what our news meant for them – they were in no position to buy a house and didn’t have access to help from their parents, and suddenly they seemed stressed at being left behind in the financial stakes.

To me, this way of thinking feels quite outdated. Yes, I’m very grateful to own (or at least own in principle, given the bank really owns our house), but I simultaneously don’t for a minute think it means we’re more financially successful, or even necessarily more secure than our renting friends. I also make a point of telling people that we could only buy with help, because I don’t want to contribute to this myth that hard work will equal homeownership when the factors determining what you can afford in the market actually have very little to do with how hard you work.

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I think the focus on bricks and mortar investments feels odd in a digital age, especially when I then watch things like the bushfire crisis decimating the carefully saved for investments of Australians who focussed all of their financial security into property. I know all investments come with risk and the stock market definitely has these, but are the risk really that much greater than property these days?

Whether or not it’s achievable for many, is homeownership genuinely still a marker of financial success, or do we need to think differently about the financial milestones we work towards?

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ChrisinTurner5:18 pm 06 Nov 20

Retiring without owning your own home (with no mortgage) is very difficult. Do the sums.

C’mon, support the pyramid and get onto the magic carpet.
Only the carpet has flown too high and its means of propulsion is in doubt.

Kieran Schmidt8:33 am 31 Oct 20

I look at places like western creek and prices have quadrupled over the last 20 years from 200K to 800K. Considering inflation it’s a comparable 336K vs 800K today. I don’t think today’s low inflation rates make up for the 2.4x increase in real value.
Owning a house in canberra is a luxury asset and needs to be seen as one nowadays, if you got into the market in the past 5-15 years then gratz, you’re doing well and i’m actually happy for you.
But for my age group, Is it affordable? Well you cannot live like previous generations and expect the same results in life. I think it’s still doable with no help and median income if you’re willing to live povo for about 10 years, but that’s probably not viable for most people. Otherwise, i guess owning an apartment is still achievable and while weak on capital gains it is often cheaper than renting. From an investment perspective i’d imagine even the most relentless optimists going ‘yeahnah’ to canberra houses in the next 5 years. I don’t really see a massive crash occurring but maybe a 5% dip into a fairly stagnant growth period with a couple of rich suburbs continuing to rise. The market is pretty irrational so no real point getting to into short term speculation.

Anyway i still view financial success as having a paid off property (of any kind) with enough passive streams to continue living a similar lifestyle that you enjoy until F.

You say, “Well you cannot live like previous generations and expect the same results in life.”

The previous generation didn’t always start off in houses like we see our parents in now; it was a progression to that. It often appears that the present generation is looking at the house their parents have now, and saying, “cannot live like previous generations.” Although I am pleased you recognise that an apartment is still achievable, (for a first home).

Here’s how it often used to be. First home for my parents after they married was living with my mother’s parents. Then they got their first home together; a flat, not a house, over shops in an undesirable location. One child. They then got their first house (likely about 100 sq metres, as that was the average size then). Now there were two children. They moved several times, until their final house was a home in a better suburb in Canberra. They did not get that first off, or even a house first off.
My experience. After renting for awhile (shared house and then a section of a house split up for rental), I bought my first house. It was the cheapest house in the whole of Canberra at the time, in a place people warned me not to buy. Drug dealers and house robbers lived in my street, but strangely they never worried me; even would say hello. After many years living there (the area improving), I was finally able to move and have a nice house built.
Start small; don’t expect what you have been used to. Buy an apartment, get equity and move on.
These days the first home is more likely to be an apartment, rather than a house. But an apartment doesn’t have to be the last home.

Maya,
You can’t possibly be trying to say it isn’t significantly harder for the younger generations to buy a house than it was in the past.

All the data shows this to be the case.

But if you want anecdotes, my parents bought a house in central Canberra at a small multiple of my father’s below average wage.

It would not be remotely possible to do that today, the costs are ridiculously higher on all metrics.

Of course it’s harder to buy a house these days, that’s why people need to lower their expectations and buy an apartment as their first step. My parents first home together was a flat. That’s the first home I remember.
My words as a conclusion were, “These days the first home is more likely to be an apartment, rather than a house. But an apartment doesn’t have to be the last home.”
It appears you didn’t read what I wrote.

Maya,
No i read your comment and the tone it is written in. And I don’t agree with you.

“The previous generation didn’t always start off in houses like we see our parents in now; it was a progression to that. It often appears that the present generation is looking at the house their parents have now, and saying, “cannot live like previous generations.””

This is not remotely true and you even now admit it by saying it is much harder to buy a house.

The vast majority of previous generations did start off in houses unless they had a particular reason to live in an apartment.

The same houses that my parents and most other people’s parents started off in could not be afforded by people in the same situation today.

You’re claiming it’s about unrealtisic expectations when that is simply a lie older people tell themselves to justify kicking younger generations and maintaining/growing their own wealth.

And no, younger generations shouldn’t have to lower their expectations when the unaffordability is hugely driven by government policies and tax benefits deliberately aimed at maintaining and increasing previous generations wealth.

So how about instead of expecting to continue the massive intergenerational wealth transfer to older wealthy people, we actually enact policies that make it easier for people to buy a home?

This would also have the added benefit of redirecting investment funds into far more productive areas of the economy rather than the housing ponzi.

An issue two colleagues have had in Canberra is that they both bought small flats in two different parts of the city as their first step on the property ladder and the units are now worth less than what they bought them for. It can be a vicious cycle when there isn’t the opportunity anymore to affordably buy ‘land’ itself. It’s interesting that one was an older one bedroom apartment in Braddon bought for just $330k and it’s still dropping in value. Harsh lesson for her after the high annual rates and strata fees she pays.

So you are basically saying that people refuse to lower their expectations. Yes it’s true that most people got houses in the past as a first home. So what. Times have changed, there are more people than in the past. In recent decades, the city has increased at least 400%. That alone increased house prices, but there are other factors too. Now, an apartment will likely need to be the first home for many people. Later they can move to a house; it doesn’t need be a forever home. It’s a first step; to get out of the rental market.
I get annoyed at people who WON’T lower their expectations and then complain they can’t afford anything, when they can, but what’s available they won’t consider.
I was on a lower than average income (not a public servant) when I bought my first house, and to do so I had to lower my expectations from what I was used to, otherwise no house. It almost was one of those old flats I put links to, and if the very basic house at almost the same price hadn’t come on the market, I would have bought one of those cheap one or two bedroom flats, because that’s all I could afford. I found them depressing, but I would no longer be renting. A first step. I would have bought a house later, when I had some equity.

It is best if people think ahead and buy their first apartment before children. Then hopefully, they will have built up some equity and can buy a house.

As an added; these old flats, although very basic and boring, have no inflammable cladding to worry about, and are likely more structurally sound than some of the modern apartments.

BJ,
Yes I don’t think that buying units in Canberra at the moment (or for a while) is going to be a smart investment decision. Particularly not in Central Canberra, considering the (over) supply and proposed future projects.

Maya,
So what you’re basically saying is that it’s fine that the government policies have changed to further enrich existing owners and younger generations should just accept that the system has been stacked against them.

It is literally zero to do with people having unrealistic expectations and everyrhing to do with the property market being converted into a wealth accumulation and tax dodging sector for wealthy people.

So how about instead of expecting younger generations to basically enslave themselves so you can be kept in the manner you’ve become accustomed too, we encourage government’s to repeal policies that make housing so unaffordable?

The current situation is not the natural order of things.

Property should mostly exist as a place for someone to live, not to make investors wealthy.

And I say this as an owner of an above average price house so doing what I’m suggesting would actually cost me money. That’s how ridiculously out of touch I think the property market has become and how much it negatively affects pur economy and society.

Please explain how what you are talking about can be done. Stamp duty is being reduced to make it more affordable to buy a house, while rates are going up for present owners, making it more expensive for them. What else do you want? How do you get around the free market that sets the prices. The government can’t tell people what they can sell a house for. Do you secretly want to put people over a certain age out in the street, so you can take their house? It’s coming across that way. Most people only own one house. And those who do own more, if they didn’t, there would be nothing to rent. I do think that negative gearing should be looked at and changes made, but beyond that, I can’t see what else can be done. So please enlighten me as to want you want done.
We can’t keep spreading out further with green fields developments, as that unsustainable with public transport and encourages more car use. It’s also environmental, clearing bushland and farmland. We need farmland. I often think that people brought up in cities, can’t get that alien last thing through their urban heads. They are so removed from where food comes from. With the increasing population (which will unfortunately be pushed up again after Covid is over and the borders are reopened) people need to live somewhere. The least damaging way to build housing, is to concentrate it more, and that mostly means apartments and town houses. Therefore, many people, especially first home buyers, are going to have to live in them, at least for the first home. If you don’t want this to happen vote accordingly at Federal elections. I do.

environmental should be anti-environmental.

Maya,
Are you serious?

Just for the basics, removing negative gearing on existing property and the capital gains tax discount ( replaced with an inflation factor) would be an easy start.

The current market isn’t remotely “free”. If it was, I wouldn’t have a problem with it.

The greatest travesty was the move to allow assessment based on 2 incomes. That was ultimately the beginning of the end of affordable prices for households (said in a very general sense) – that combined with a raft of policy settings that skew investment decisions towards property over other investments and we have the unsustainable, debt laden households of today.

You mean when female income started to be considered! When it changed from female income didn’t count and from the days we couldn’t get a loan without a male guarantor, to our income being considered too. You call this a “Travesty.”
Well, it’s a travesty that you think this way.

Way to take 2 + 2 and get 365 Maya. Nothing to do with who is earning the $ at the end of the day – my point quite clearly said an assessment based on 2 incomes, rather then 1. and said nothing about gender – your the one that took it there.

You are tying in a cultural element that is irrelevant to the point being made – I’m not suggesting a move back to the need for male guarantors, or only men can get loans. – never once did I say anything of the sort. I don’t care if its the dog that brings home the income at the end of the day while its owners bludge all day.

The opening up to allow assessments on the basis of 2 incomes (rather than the primary income source) was a key element of the beginning of the end for affordability of housing. Do some research and you’ll see the empirical evidence supports that supposition.

Because it fundamentally means a far greater chunk of the household budget is chewed up on housing costs, putting substantial pressure on and forcing both people to work full time to even get into a basic home in many cases – its had substantial impacts directly on financial affordability, and substantial pressure on life work balance too.

Nothing to do with genders at all.

Pertinent article. Its even harder if you aren’t a couple ie on one income, even if it is a good income. I was only able to do it with a stint working overseas a good job in a low tax country. Otherwise as you say it would never of happened until into 30s, maybe 40, by the time you pay off HECS/HELP, then its maybe too late to start a family if that’s your preferred sequence. A lot of young people are getting into cryptocurrency now which can be a much better investment. That said you don’t have to save 20% deposit, with prices where they are now it may be better to save 10% and cop mortgage insurance premium eg 10K on entry level property.

As someone in the group you are talking about, it is tough, but whether its any harder then other generations, who knows.

But I feel a keen understanding of the scenario you paint. Without a bank of mum and dad to rely on (both of us come from very much a lower income working class background), we are now in our early 30s only just getting to a point where HECS has been paid off. We are earning good money, but will likely need ot start a family if we want to do that before we seriously look to build a substantial deposit. So very likely we will not purchase out first place till our mid 30s at the earliest, which means we are likely to still be paying it off as we approach retirement. And that is on decent wages for both of us – I’d hate to be on below average incomes and trying to juggle it all.

James Savoulidis1:48 pm 29 Oct 20

“not wanting to raise kids in a rental”….. But I thought you were one of those millennials who thinks climate change is a reason to not have kids???

1 – A home is not an investment. An investment is something that earns money. A rental property is an investment. A business is an investment. Buying a home because the value will increase is not investing, it’s speculation.

2- That aside: the #1 reason to buy a home is that you can’t be kicked out of it with a month’s notice. The money aspect: meh, you have to live somewhere. The security that homeownership gives is … is something difficult to appreciate when you have rented all your life, and are accustomed to living on sufferance..

3 – And yes, it’s crazy: it is cheaper to buy than to rent right at the moment.

I did a quick survey of a few of my friends last year, most of whom are either renting but intending to buy as soon as they can save the deposit, or have bought in the last couple of years. It arose after I was reading some research into taxation of housing and it was talking about motivations for home ownership (which was heavily focussed on the financial aspects. most of my friends laughed.

for them the reasons for buying or wanting to buy were: first and foremost security of tenure – not being forced to move constantly or facing the fear of eviction for no reason; the ability to decorate and do want you want with the property including putting on solar panels, hanging pictures on the walls (!), planting a garden, keep pets etc; not having rental inspections and having to deal with real estate agents, (which is despised by every renter I know). growth in value was only a minor consideration for most of my friends.

Not necessarily the most scientific survey, but I would bet its pretty accurate.

Incidentally – nearly everyone I know who has bought had some help from family – towards the deposit or as guarantor for the loan to avoid mortgage insurance. its a sad situation that for a large chunk of the population on average or low incomes the only chance to own a home is through inheritance or parental rather than through earning their own money

Capital Retro12:08 pm 29 Oct 20

I don’t agree with a few of your claims. I am a senior person and at no time in my life have I ever heard of house ownership being a benchmark of financial success. Renting is a necessity for some people as they are simply unprepared to change their lifestyles to be able to save the deposit and service the loan. Making home loans “affordable” by legislation doesn’t work either as we saw when the Clinton administration allowed renters to buy homes with little or no deposit with a honeymoon interest rate. The outcome of this contributed to the GFC in 2008.

I can recall having 3 jobs concurrently 55 years ago in order to save the required one third deposit for my first home to qualify for a savings bank loan which was a privilege back then.

I am not aware of any difficulty getting house insurance in certain areas or for environmental risks apart from properties in known flood areas. And suggesting the changing climate should be a factor is nonsense.

Everyone I know who lost their house in the 2003 Canberra bushfire was able to re-insure (without penalty) the new house they built on the same site.

I agree houses cannot be made affordable by legislation. (although its a very large stretch to attribute the GFC to Clintons housing policy – at most it played a minor role) if you take housing affordability to be the ratio of the median house price to median income then the the only way to improve average housing affordability is to either increase incomes by faster than house prices or by reducing house prices, without incomes falling.

the idea that we are going to get significant increases in average income in the next few years is laughable so that leaves falling house prices. this is not generally welcomed by most homeowners or voters and would take a brave government to stand for election on the promise that they will reduce the value of the family home

Capital Retro9:47 am 30 Oct 20

I said “contribute to”, not “cause”. You are right about the rest though.

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