AUGUST 23, 2019
Should you buy a 'starter' home before your 'dream' home?
For many first home buyers, the idea of buying a ‘starter’ home before their ‘dream’ not only makes sense but is the only path towards homeownership that they have. The ‘property ladder’ doesn’t get its name for no reason, as the path towards owning a home that ticks all of your boxes is a long path and one that passes your first, second, and even third home before finally ending up at the doorstep of your dream home.
In a report released in late 2018 by the Property Investment Professionals of Australia (PIPA), 36 per cent of first home buyers said that they had chosen to invest in property as ‘rentvesters’, continuing to live in a rented property while servicing the loan of their investment property.
With approximately a third of surveyed first home buyers dedicating their finances towards investment properties, it is clear that the current consumer behaviour of first home buyers is different to that of previous generations. Rather than buying and living in a first home that may, by budgetary constraints, be located further away from work, amenities, family, and friends, some first home buyers are rejecting the idea of a ‘starter’ home first to instead reap the benefits of being a renter while accumulating long term capital gains. With these gains, they hope to afford a more ‘ideal’ home in which to own and live. In other words, their dream home.
Despite a third of first home buyers as surveyed by PIPA opting to be rentvestors rather than owner-occupiers as first home buyers, other studies have found that Australians overwhelmingly perpetuate traditional opinions towards homeownership.
Studying attitudes towards homeownership and alternatives to it in the Australian city of Sydney, Ernst & Young found that two out three Sydney residents thought renting was a waste of money.
This is understandable and is supported by a strong argument that is based on the longterm performance of the property market in Australia as a source for personal longterm wealth accumulation.
According to Corelogic, the median house price since 1993 has increased by 412 per cent, providing longterm homeowners with the opportunity to accumulate wealth and eventually leverage their equity as investors to improve their living standards.
It is unsurprising that this sort of attitude towards homeownership as a form of forced savings, as early on in life as possible, has continued to maintain its influence and viability as a form of economic management in Australian life.
Aside from buying a ‘starter’ home or being a ‘rentvestor’, there is the option of diverting your savings towards an alternative form of investment and wealth accumulation as a method for eventually being able to afford your ‘dream’ home.
In a model produced by EY, the firm evaluated the financial success of two fictitious home seekers who both started out with the same amount of capital (20 per cent of the average unit price at the time of the model being produced). The first individual bought a home at an 80 per cent loan-to-value ratio and the second individual rented in the same area but invested in the ASX200 stock market with a margin loan-to-value ratio of 50 per cent.
EY calculated in their model that, when comparing 10-year periods, in 62 per cent of each equivalent 10-year period the renter/stock market investor was financially advantageous over the individual who had bought a unit.
What this model did not include were the outright and less visible costs of owning a home, which may have influenced the model’s result for the homeowner even more dramatically and negatively. On the other hand, the model chose to look at a homeowner who had bought a unit as a ‘starter’ home, rather than someone who had bought a ‘starter’ home that was an unattached dwelling, which may have generated larger wealth accumulation across a 10-year period and placed that individual in a greater financial situation across many of the 10-year periods.
What is clear is that there are alternatives available to young Australians over immediate homeownership. Homeownership may not necessarily be the best way to accumulate longterm wealth, while renting may allow individuals to maintain some of the economic and lifestyle advantages that come with it (i.e. opportunities to move for work and increased wages, no maintenance costs, proximity to work, savings on car ownership and travel).
Buying a ‘starter’ home is still a viable and arguably favourable option for first home buyers. Very few can afford to buy their ‘dream’ home if that means an unattached large dwelling that is within the inner city ring of a major city and that offers opportunities for further wealth generation. Of course, if your dream home is a small property in the country or a shared financial investment in a home with friends, than you may not have to wait for very long.
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