Back in the 1970s you only needed 5.8 times the average annual salary to service a median home loan. Today that figure has almost doubled to 8.9 times.
Mark McCrindle of McCrindle Research cites these figures in his recent study on Housing Affordability and Generation Y. So it is hardly surprising that more Gen Ys are staying at home with mum and dad long into their 20s.
But there are a lot of factors at play here. Firstly Gen Ys are starting work later than previous generations and some are kicking off their adult life with a HECS debt of about $20,000. And not only are property prices significantly higher, but Gen Y also wants significantly more than what their parents were satisfied with when it comes to quality of housing.
In addition, McCrindle says Gen Y also has to fund additional costs such as mobile phones and broadband that were not around before.
“All these factors conspire to mean that Gen Y need to be savvier,” says McCrindle.
So how do you get a foothold into the property market with all these hurdles? McCrindle and Scott Pape of the Barefoot Investor take opposing views when it comes to getting help from the oldies.
“Make the most of your parents’ generosity by staying at home while you save or buy a property with their help,” says McCrindle.
But Pape, although not averse to living at home for a while to save, warns against getting money from your parents.
“You need to start training for the biggest event of your life – the debt Olympics,” says Pape. “Look at what it would cost to finance a $400,000 home, say, at 7 per cent and then put that money away each week. You have to prove to yourself (and your lenders) that you can pay the debt off.”
While the First Home Owner Grant bonus has already been dropped from $7000 to $3500 and will be eliminated completely on December 31, you will still be able to take advantage of the basic FHOG of $7000.
What Pape sees as the real winner for prospective home buyers is the First Home savers account which encourages savings.
Introduced in October last year, the scheme is a special way to save for your first home by encouraging the saving habit and then as long as you save a minimum of $1000 a year, you are rewarded with a government contribution. That means you only have to save $20 a week.
The government will contribute 17 per cent on the first $5000 in contributions made each year. So if you save $5000 a year in this special account, that’s a government contribution of $850 on top. Any earnings on your savings will only be taxed at 15 per cent, so if you are on a higher tax rate, it has additional advantages.
And because you have to save a minimum of $1000 a year for four years before you can withdraw the savings, it really does develop the habit of making regular payments. There are important restrictions and eligibility requirements that apply to these accounts, so you should check these carefully. It’s also a good idea to aim for having a 20 per cent deposit as this will rule out the need for lenders’ mortgage insurance which could knock you back a couple of thousand dollars.
If you are struggling to come up with a sufficient deposit, then there are ways around this. You might want to consider the parental help road either by their giving you sufficient funds to pay the deposit or assistance with the mortgage repayments or they may even often to go guarantor for you. They should be very aware of what they are doing here because, although it is unlikely you will default on your loan, they will be responsible and their own home could even be on the line.
Or you might consider buying with a friend. The key here is to draw up a legal document from the outset that includes an exit plan. You may be friends now, but who knows how it will turn out down the track? And also make sure you are tenants in common. If you are joint tenants then if one of you were to die the other would automatically get the property. If you are tenants in common you can direct who gets your half.
Another option is to buy an investment property and rent out it. However, this strategy puts your first home owners grant in jeopardy as you have to live in the property to claim it. But offsetting that is the advantage of earning rental money and also getting into the market so you can enjoy any capital gain.
Ahead of the rate rises in October and November, affordability for Australian property slipped 3.3 per cent to 35.7 per cent, according to the Housing Industry Association. So the two 0.25 per cent hikes since then would not have helped the situation.
For those already with a mortgage, the prospect of rising interest rates can be daunting. Hopefully you allowed a buffer when you took out your loan by factoring in the ability to pay an extra per cent or two. That should always be the golden rule – don’t overstretch yourself.
Don’t spend beyond your means,” says Cameron Kusher, senior economist at RP Data. “Do your calculations and make sure you can afford to pay rates of 7 to 8 per cent.”