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Stepping onto the property ladder; difficult but doable
December 10, 2013
With the media full of stories telling us housing is so unaffordable that many first home buyers are being priced out of the market, it’s not surprising that some would be home buyers feel dejected about their chances of ever getting their foot on the first rung of the property ladder.
But is it all really as dire as it seems? Or is the ‘Great Australian Dream’ still very much alive and attainable?
Well…according to the latest HIA – Commonwealth Housing Affordability Index housing is more affordable now than it’s been in a long time, driven by low interest rates, rising wages and the fact that despite the recent house price rises, property values are only back to where they were when the market peaked in 2010.
So rather than despairing at the state of the market, maybe it comes down to young buyers adjusting their expectations.
Sure, you might love the idea of buying a house in the same suburb where you’ve been renting for the last few years, or where you lived with mum and dad, but is this realistic?
And if not, what are the best options that suit your budget?
Here are some tips as to how you can climb onto the property ladder and even aspire to hit the top rung one day…
1. Have realistic expectations
Instead of staying on the rental roundabout and thinking you’ll never be able to get into the property market, now could be the right time to seize the opportunities that exist within your price range and consider doing what some might be a dirty word to some – compromise.
First time buyers often start with a wish list that may not be realistic given their resources. It’s likely you’re going to need to make some trade offs between location, size and features.
First, assess your lifestyle. If you are single, enjoy walking to Gloria Jeans for a latte and hate cutting grass, then a detached home in the suburbs is likely not for you.
Make a list of the things you want. Do you need a two car garage? Space for a home office? Are you going to have children? Is it a good location?
Don’t look at the property in isolation. Make sure the neighborhood, schools and surrounding amenities and services fits your needs.
You may not have sufficient funds to buy the home of your dreams, but it’s getting your foot in the door that counts. Perhaps you could consider trading a back yard for a balcony and buying an apartment or you could buy a few suburbs over from your ideal location.
Then once you are in your first home you can sit tight, wait for values to start rising again (as they always do) and after a while use your growing equity to take the next step on the property ladder into something bigger and better.
Remember – from little things, big things grow!
2. Location is key
Having suggested the idea of compromise for those wanting to get onto the property ladder, I’m now going to suggest something that might seem like a contradiction. Never go for size over suburb.
What do I mean by this?
Well… whilst there are many things you should be prepared to forego in order to buy your first home, like a shiny new kitchen and bathroom or the latest home theatre system, buying in a cheaper suburb just so you can have some extra luxuries or mod cons is not necessarily a good idea.
You see, it’s relatively easy to make a few changes to improve an older style home, but it’s not so easy to make a tired suburb more appealing to potential buyers.
Essentially, it’s all about location and although most people don’t see their first home purchase as an investment, it ultimately is.
Wouldn’t you rather have a property that will grow steadily in value over the years because it’s in a good location rather than one that underperforms? Just think how hard you worked to get there in the first place!
3. Take the first step
Although your first home purchase is based more on emotion than financial logic, you should still consider the property you buy to be an investment for the future.
This will be the biggest acquisition you’re likely to have made, so ensuring you end up with an appreciating asset that you can leverage off to generate more income (or your dream home) down the track is the best approach.
4. Save, save, save!
Take the time to get all of your financial ducks in a neat little row so you don’t overcommit yourself.
Ideally, you’ll need tocome up with a 20% deposit, plus an extra 5% or so for purchasing costs. However if that’s too much of stretch, aim for at least 10% as there’s always the option of getting lender’s mortgage insurance.
So get into the discipline of spending less than you earn, and saving the balance, maybe investing it in an interest bearing account until you build a big enough balance.
5. Bring forward your inheritance.
More and more parents are helping their kids get onto the property ladder these days.
Whether it be your parents agreeing to go guarantor for your mortgage or buying as a joint investment arrangement, asking mum and dad to lend a hand could be a good option.
If they can manage to donate enough to your cause to get you that 20% deposit, you will make yourself more attractive to the banks and avoid the cost of mortgage insurance.
6. Do you really need your own home?
As much as I would recommend anyone currently renting to make the leap onto the property ladder, I would qualify this suggestion by saying that you don’t have to be a home owner to own property.
Remaining a tenant and purchasing an investment property is a great option for those just starting out. There are numerous benefits to this including:
- You can continue to rent in a suburb where you may not be able to afford to buy just yet.
- One way to pay your mortgage off faster is to have someone help you. As a property investor your tenant will help to pay the mortgage and take some of the repayment burden off your shoulders.
- You can use your investment property as a steeping stone to get into the home of your dreams and avoid having to compromise on location down the track.
- The interest payable on your mortgage as well as expenses like rates and maintenance are tax deductions for investments, but of course this does not apply to your own home.
- You are starting to build a property portfolio that will enable you to generate long term wealth and perhaps retire early one day!
Regardless of how you choose to get there, climbing onto the property ladder is a fantastic way to secure your financial future and I would recommend you make the leap as soon as you can.
Because if you get it right, the only way is up!
Michael Yardney is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog. Subscribe today and you’ll receive a free video training – The Golden Rules of Property Investment.