* This article was written for homeowners in Melbourne and Sydney but also has behavioural mindsets i encourage all my clients to put in place*
It is undoubtable that we are nearing the end of a significant growth cycle in property prices in Sydney and Melbourne.
RP Data (One of Australia’s premier property data hubs) just released a report showing that the price growth in both Melbourne and Sydney is starting to reach the end they believe.
Their research suggests that prices in Sydney are around 75% and Melbourne 65% higher than in January 2009. But like all aggregate data, you should never look at one number in isolation as it only ever tells part of the story. Some first homebuyers will sadly tell you that they wish that some spots in Sydney only went up 75%. Some suburbs have seen growth closer to 100-150%. Areas that were once selling for $600,000, are now selling for $1,500,000. It is clear that there has been significant growth across the board in Sydney and Melbourne.
The problem with property prices going up is that we feel richer but at the moment it really is just paper wealth. It is a good problem to have but the wealth in your home is worthless to you right now really. You cannot spend it unless you sell and move out of Sydney or Melbourne. Alternatively, you could take out a loan for personal expenditure, spend it and pay interest on it. Not ideal.
Some would say that you could downsize but generally most people want to downsize their home and move to a nicer apartment. The nicer apartment has gone up in value as well as your home, so it rarely leaves too much left over either way.
So if we agree, unless you are going to sell, the value of your home is basically pointless to you right now. It feels nice but it really is just a number. Whether it is worth $1,000,000 or $1,200,000 it really is just a number to you and the only number that really matter is what you may sell it for many years down the line.
A big misconception I like to talk through with my clients is their real net wealth.
In comparison to your house value this figure is generally not nice to think about.
Your net worth is your investments (savings, shares, property and super) minus all your debts.
Your home does not come in to this equation
Even if your home is worth $1,500,000 and your debt is $800,000, unless you have $800,000 in investments and super, you actually have a negative net worth.
So before we move forward, what is your net worth?
A rough figure is fine. Please just put the value of all your assets down and minus your current debts. Don’t be afraid by this number because unless you are retiring today, there are always things you can do to improve it.
It is very common that clients come to me with negative net worth. They have lots of equity in their home but have no plans to sell in the short or long term. They plan to stay in their home all the way through retirement so they can live close to their children, friends, future grandchildren and the life they love.
This however creates a conundrum. If they just focus on paying down their home loan they will get to retirement with a small real net worth. This may not be enough to support their retirement and they could be forced to sell their home and move away. Something they do not want to do and when they finally have a lot more time to spend with family they are too far away to see them.
Before we continue, lets be clear that you do not have to have $1,000,000s in net wealth to be financially free forever. Sure you might like to but striving for a ridiculous number might not be what you need to do to live the life that matters to you.
Please ignore all media or nonsense you read in the press, this number is extremely unique and is based on YOUR life, no one else.
The good news is that there are two ways to improve this number. Firstly as you pay down your debt you are actually increasing your net worth. The second way is to generally take out good debt (tax deductible) and use it to smartly invest to increase your assets.
So if you are looking to stay living in your home well in to your 90s, you need to think
If we continue like we are, will we have enough net worth to live the life we want for the rest of our lives?
Unfortunately, the answer for most is their continue on their current path they will not. But with a focus, a number of small changes and making some good decisions while avoiding mistakes – they will.
“So what about this growth in my home – is it really pointless?”
While I said before that the value of your home was just a number, there are a number of ways that you can use this large increase in house prices to help increase your net worth. This increase has created an opportunity that you may not have had available just a few years ago.
To be successful at investing you need three things – ability to invest, good decisions and time.
The biggest cost with investing is the opportunity cost.
“What if I invested five years ago”
The more months or years you let slip by, it could mean that the opportunity you had on the table today, is no longer on the table tomorrow.
In reality, you have two options
- You can continue on autopilot and see where luck takes you
- You can decide to prepare for the future by taking action.
Below are five areas I think all homeowners should consider if it makes sense in their personal situation. Please remember every single situation is different, so this is not advice.
- Refinance your home loan to a much lower rate
Recently, APRA released additional regulation on all banks and forced them to hold more cash against their investment loans. This has created a banking war and the ones who are winning are you - the homeowners. The discount banks are offering now are higher than they have ever been and some as high as 1.5%. Currently some banks are offering variable rates at 3.99%- amazing. If you have a home loan, this is the first thing I would do.
- Take control of your debt and start taking ACTION
The last three years have seen a massive increases in house prices on the back of low interest rates. What they have also done is decrease the amount of your minimum loan repayment. Some families may be using this for personal expenditure but what low interest rates are is an opportunity to pay more off your home loan before interest rates go back up. I would review your budget and agree to a set amount each month and set a 1, 3 and 5 year goals. This is an opportunity you will not want to miss. Pay down your debt now when you can, not when you cannot.
- Wisely renovate your home
I am completely for families renovating and improving the value of their homes via renovating. While you need to be careful with the additional debt repayments it creates, a renovation done wisely has a number of benefits. Firstly, a good renovation should add at least the value of the renovation itself. Secondly, if you are planning on staying in the home long term, why do the renovation five years down the line when you could afford to do it today. Get it done, enjoy the benefits and protect the value of your home. As interest rates are low, the cost to access the debt is cheaper and this also gives you a great line in the sand to save towards paying off before rates rise.
- Invest wisely and broadly.
I got a call from a magazine recently asking if “because the share market had fallen 15% whether it was now a good idea to sell the shares and buy property?”
Unfortunately short term returns are not a good indicator for where you should put your money and in fact at times it might be the opposite. The recent share market fall has meant that beginning to invest slowly in to the investment markets is much more attractive. Extreme care needs to be taken here and I recommend you speak to an independent financial planner here to help you with this decision.
Secondly, you may like to invest in Property. While the Sydney and Melbourne markets have made significant growth, a number of markets across the country have had a number of years of flat growth and are potentially looking much more attractive to investors. A buyers agent will be the best person to speak to here but you might like to speak to a financial planner and mortgage broker to see what your can afford firstly and if it fits your long term plan.
For some homeowners out there it might be the right time to sell. If you have changing needs on the horizon, an extreme amount of growth in your area and can cash in while the market is still hot, it might be the right time.
While this decision is extremely complicated, the risks and also the costs to sell and buy again needs to be considered carefully, sometimes it’s hard to not say now is the best time to cash in and walk away while you can.
So here’s five ideas to think through and consider. If you would like to discuss your situation on a no-obligation basis – please book a strategy chat here
* THIS IS GENERAL IN NATURE AND SHOULD NOT BE CONSIDERED AS PERSONAL ADVICE.