Home Ownership – Dream or Burden?

APRIL 30, 2022

Home ownership has gone from the concept of building wealth slowly to a “get rich quick” scheme, simply because the stakes are now very high. What’s worse is that we have bestowed this, apparently foolproof “forced savings” concept on younger generations and encouraged them to continue the tradition. Whilst everyone in the game is now a lot richer there are more questions about how long this will last. If real estate doubles in value every 7-10 years then the AUD $140 million dollar Barangaroo, Sydney apartment will be worth $280m by 2030. On the same basis the average Sydney home will be worth AUD $3.2m.

Perhaps it’s time to pause and re-evaluate the wisdom of this well trodden pathway to past success. Is it still the most desirable goal for future generations? Doesn’t superannuation fulfil the forced savings role which the home did and do we actually need both to succeed?

Why do we desire to own our own home?

Looking back over the last century, home ownership was a good goal to embrace. To the vast number of immigrants it meant the opportunity to provide for their families whilst giving them a true sense of belonging to their new country. It was a privilege to become a citizen, a tax payer and then a rate payer. These were badges of honour and reinforced a commitment to the new country. When you consider that many new Australians were dispossessed of their assets as a result of war and were fleeing to find safety it was a very meaningful goal.

Unfortunately, like so many things in life it is not necessarily a transferrable dream and in my opinion it is no longer sensible. In fact, older Australians are so wedded to seeing their children pursue this dream that many will not only put up a deposit and fund the stamp duty but some will step in if things go wrong for their children. I hope this doesn’t eventuate but I would hate to see retirees having to plunder their hard earned superannuation to help their children save the home. Older people don’t need more fixed assets and unforeseen problems, they need income, liquidity and a simple life.

Growth in prices 

Today, it is quite incredible to listen to 30 something year olds buying $2-3m properties and doing them up. It’s exciting and in many cases where super profits are made, tax free. Why is this happening? Well its a combination of historically low interest rates, the lockdowns which have narrowed our interests and prevented us from spending and the fear of missing out (FOMO). It can create the end of having to work again. In fact, I have read articles that try and calculate the rate of growth in this booming market. Some argue that real estate prices are rising at $1100 per day and others as much as $420 per hour. In any case these are highly attractive outcomes and well beyond most people’s earning capacity. What is common though is that annual growth over the past 2 years has been 15-22%. That’s astonishing when 7%pa is the norm. When you compound those high annual rates, which are double or triple the norm, then you know that there is likely to be trouble ahead. Surely there will be a payback period to follow when things are too good to be real.

Consequences of disproportionate capital gains

The capital gains free house has over performed all expectations and made people wealthier than they expected. But like all successes there is a shadow and that’s the cost of such success. It is recognised that the social implications of “haves” and “have nots” is creating a divide which may create a class structure. This hasn’t been part of Australia’s make up. Australia is renowned as the place of the battler where you give people a go. We’ve been poor and hardworking people and through sacrifice and success become broadly a middle income/middle class society. Historically, there have been very few truly rich families and up until now few large inheritances. That’s about to change dramatically. So the social cost will come as society changes its shape based upon wealth and the generational transfer of it.

The problem I see with our confidence in home ownership is that we are blinded by optimism. The long, three decade history of continuous price increases is a powerful argument and almost impossible to oppose. In fact, when we look closely at the size of the Australian residential market it is now over $9 trillion. Putting that in perspective it is larger than the ASX, Superannuation industry and the Commercial property industry combined. 

Let’s have a look at what is happening in Australian residential property.

How much money do I need?

Firstly, the cost of entry for most people is beyond impossible. The median price of a Sydney home is AUD $1.6m. This means that you need AUD $320,000 (20%) for the deposit and AUD $72,567 in stamp duty. Realistically, who has AUD $392,567 in their bank account? Note, even the stamp duty is virtually a year’s salary.

Secondly, reflect for a moment on the average Australian salary, which is AUD $90k pa according to the ABS. If the whole home cost was AUD $400,000 then that deal might make sense but it’s 4 times that. The only way through this nightmare is to get a partner to pour their income in so you have two incomes and ask the Bank of Mum and Dad to fund the deposit as well as the stamp duty. APRA doesn’t recommend buying a property which is more than 6 times salary. Which is amazing as my example is 18.56 times. Based on APRA the income required for the median Sydney house price is $278,761 pa.

Thirdly, with a complete roadmap of financial misery now chartered, it’s time to sign up a long term mortgage, say 30 years. This means that whatever career you choose it better be fulfilling and reliable otherwise you will spend your time as a servant to your loan. If financial freedom was your goal you might get there, one day.

Finally, what is the true cost? Australia has really failed to take advantage of the technology revolution which started in the 1990’s. Barring a select few it has not harnessed the vision which the US did with amazing success. Sure we have Atlassian and Canva but Atlassian’s founders first credit application did not go towards property, it went into business development.

Our best and brightest computer scientists, electric engineers and coders have left our shores for serious careers overseas. You have to make a choice and I contend that a debt you can’t jump over, which needs to repaid seemingly forever simply overburdens and overwhelms young talent. The Australian dream has effectively stymied ‘start up’ businesses and Australia’s productivity is falling on a global scale.

Overall, there is nothing wrong in buying residential real estate but salaries and wages are too low to make the current prices work. If you get in then you need to be careful that your deal isn’t a millstone around your neck, weighing you down. If that doesn’t make sense think of all the people who grew up on the land as farmers’ children. There was almost an expectation of parents that one child would continue their dream. Many children escaped living on the land to pursue their own lives leaving parents to face the reality of it being a tough life. So if it’s an old dream and it doesn’t feel right then the lesson is to get a new one. Right now the numbers don’t make sense unless you are getting a big leg up. The AUD $1.6m I used in my example does not get you into Sydney’s Eastern Suburbs or North Shore, it’s simply the Sydney median house price.

Advice from older Australians 

I’ve asked older Australians who were originally immigrants to the country to comment on the economics of current salaries and house prices and the disparity. The solution seems common for them and obvious and it will surprise you. They say, if Sydney and Melbourne are too expensive to buy a house in then what about relocating to Brisbane or a New Zealand city where the cost is more manageable? 

Alternatives to home ownership

So if you are not buying a residential home where you want to live, then what?

I think the obvious solution will be to search for cheaper houses and this will mean sacrificing location. As indicated earlier in this article this might be to look regionally, interstate or overseas. Many people will consider home units instead of houses as a cheaper entry point to the market where sacrificing location isn’t an option. Some will opt for fewer bedrooms too to further reduce cost.

When those options are still too expensive then the alternatives include, access through the sharemarket, in fractional interests like shares and units in companies which are directly invested in real estate, through buying with friends and/or family (syndicating) and simply investing. That flexibility puts you in the market quickly, but not expensively. It can also be more liquid. 

Rentvesting is a concept where you buy residential real estate where you can afford and rent where you want to live. This is a prudent solution. 

For the home user, the rental market is beginning to mature with Build to Rent schemes which will bring a better lifestyle product as well as professional management, which has been sadly lacking. For the renter that will be a surprising step up on the old fashioned rental offerings and dodgy management. It will provide a sense of pride, longer lease terms, access and lease transferability of varying property types, being part of a community and in many cases the opportunity to buy shares in the ownership vehicle. This is the ultimate in flexibility.

For the entrepreneur, get out there and push ideas, collaborate and make things happen by building businesses. We can’t keep staring at the US and Asia for innovation. We have talent so let’s use it.

The real estate market must continue to develop its offerings to appeal to smaller investors and so too should Australian’s work on their knowledge and understanding of investing. 

Home ownership and superannuation combined have been the key pillars to wealth creation. Globally, Australian adults on average rank 2nd, behind the Swiss as the wealthiest in the world. The average Australian would do well to re-train their mind to the creation of wealth through other accepted investments, including shared real estate ownership until they have the funds to afford buying real estate in their own name. 

We must stop looking at residential property as nirvana and start working out what we can afford to do. If we don’t then we are perpetuating an early Australian dream across future generations and it is beginning to look like a Ponzi scheme.

“No matter how much power you put in or how good your aim is – a broken arrow won’t hit the target.” – Kymbal Dunne