John McGrath: Short term sacrifice, long term gain: first home buying
12th OF October 2012
It’s not uncommon to hear property owners and investors lament: “I wish I’d started younger”, and there’s a message in this for young Australians who have not yet ventured into real estate. The fact is, the greatest source of wealth for most Australians is their home. As I reported last week, the country’s biggest mortgage broker, AFG tells us first home buyers are back in the market where activity increased to 17.3% in July. But in reality, this is not a big number. It’s my feeling that many young buyers are letting a golden opportunity pass them by in the 2012 market.
Right now, we’re in a climate of falling interest rates where it’s possible to lock in a fixed deal under 5.5%. In fact, with some lenders their variable rate is under 6% and this is pretty cheap money. Secondly, we’re in a flat market due to poor confidence and prices have been quite soft. So as long as your job is secure, and you can afford the repayments with a decent buffer, this is an excellent time for first home buyers to buy while they can lock in these low rates.
In most cases, first home buying involves some short term sacrifice for the long term gain. The first property I bought was a run-down inner city terrace in Sydney for $96,000. I cleaned it up and rented it out for $100 per week. Even though it wasn’t a palace, it was a lot nicer than the $40 a week studio I was living in, which was a real dump. But I chose to stay there for another two years to maximise my cash flow so I could get a foothold in the market. Looking back, I’m glad I made that sacrifice. A few years later, I sold it for $260,000.
While prices aren’t rising as quickly today, most markets will still grow faster than you’ll ever be able to save. Plus, the benefits of buying a quality property are magnified as time goes on. Not only will your capital growth boost your personal wealth, it will also create a source of equity that you can leverage later.
So in my view, the question for young Australians is not ‘Should I get in?’ but ‘How can I get in?’ There are lots of different avenues for first home buying, depending on your priorities and lifestyle choices.
Here are a few:
- Are you willing to forego some spending on clothes, a fancy car and eating out in the short term in order to acquire a bigger property or one in a more desirable location, which will invariably deliver better capital growth over the long term?
- Would you prefer to maintain your easy-spending lifestyle and buy a more modest home, perhaps an apartment rather than a house, in a less salubrious area?
- Maybe you’d like to do what I did and make your first purchase an investment? Many people today are renting where they love to live and buying in much more affordable areas. You maintain your lifestyle, your investment grows in value and the strong rental return helps you pay the mortgage
- If you're living with your parents, maybe you can afford to buy a small investment property and continue to live at home for another couple of years while you build up some equity
I’m not saying buying property is easy. It requires commitment and a long term view. And there are usually some trade-offs to be made between your current spending and property ownership, especially when you're young.
To assist you further, find out what financial incentives are available in your state to help you buy your first home. You might be surprised. For example, in NSW, the government has introduced a scheme whereby any first home buyer who purchases a new property under $650,000, from October 1 this year, will receive a $15,000 grant. They’ll also receive a full stamp duty exemption up to $550,000 (increased from $500,000, starting July 1) with reduced concessions up to $650,000. So a first home buyer purchasing a new $550,000 home after October 1 stands to gain $35,240 with the grant and full stamp duty savings. That’s a big leg-up into the market!
Finally, if you’re in the process of saving for your first purchase, good for you! But don’t wait too long. It’s easy to get stuck in the “I’m saving” phase of buying property, but more times than not, property prices will be rising faster than you’ll be able to save, so you have to ask yourself whether it’s worth delaying the purchase.
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