Over the past few months of 2015, I have found myself dealing with a similar conversation almost every day. Many clients have been looking for help to think through a very difficult and challenging situation. My clients (usually Sydney based ambitious families in their 30s and 40s) have all been battling the very same problem
“How do we get our family “forever home” with the insane price rise in Sydney property?”
I doubt that I need to mention just how enormous the prices have been. Apparently Sydney is now up 57% since January 2009. What makes this even more challenging is that the once affordable parts are now part of the unaffordable parts of town close to the city. I would argue these have gone up closer to 100%.
If you read, what other people are willing to say (not that you should believe it) but prices are likely to continue to rise.
Article 1 – AFR
Article 2- John McGrath
Article 3 – Property Observer
From what I can see on mind end is that affordability is pushed to the hilt for most families. Most families are taking out very large loans but what i see is that it does not meant they are not willing to push it a bit further.
With five year fixed interest rates at 4.4%; Buyers are undoubtedly saying I do not mind if the property prices do not grow further. I am just happy to make sure I do not have to rent long term.
With rental prices at 3-3.5% of the house value; it is not such a crazy argument to have a stable home and potentially get some capital growth. Interest rates at 7% however and it would be a totally different story.
Without going in to detail about how I think Sydney Property prices work, why they are very special, dangerous in some parts and very safe in others; it has been very interesting to have these conversations.
What makes it exciting is that we have actually ended up in very different places and decisions.
While a mortgage brokers job on the surface is very similar and boring to most, in reality when they take a financial planning approach with an education mindset they are able to help clients deal with their situation in their very own individual way.
An outcome that is suited to them and their future.
I love this about my job, it’s never a one-dimension answer and I believe in all these cases the client has made a great decision for THEM.
So fundamentally, what is the problem and what are the options?
Option 1: do I continue to rent in Sydney and be pushed out of the market forever
Option 2: do I buy a home with a huge debt
Option 3: do I invest elsewhere
Option 4: do I save a bit more money and wait for Sydney prices to fall or cool down?”
Option 5: Many others as you will see.
"What do options create? Problems"
It’s important to know that even though they all want the very same thing - a family home to last them forever; they are all have very different circumstances. Some have property already, some know their future plans exactly, some have lots of savings built up and some have very little savings but very high incomes. No matter where they have come from and where they are today, they are all dealing with this problem of "how can we get a home in Sydney with these ridiculous prices".
Couple 1 – Don’t buy in Sydney but invest elsewhere
This couple are in their mid 30s and are soon to be getting married. One partner is from Melbourne and both very successful in what they do. To complicate things, depending on their employment they may move to Melbourne one day.
They do not have any kids, but long term they would love to live on the Northern Beaches in a family home. They are renting together at the moment and are questioning what they feel like is a ridiculous amount on rent each month.
At our initial conversation, they were planning on buying a two-bed unit in North Sydney as this is what suited their needs today. We discussed the pro’s and con’s and the more we chatted the more the conversation went in many alternative ways. It generally does J
Is this really the best thing to do, what is our longer term plan they thought?
At the end of the conversation, we realised the 2 bedroom unit was not the right move. We agreed that even though they knew it may be better to buy their longer term home today in Northern Beaches and rent it out, they were not sure, where, when and what they wanted.
After many followup chats, they decided to invest elsewhere and in another state. They chose to buy a great unit in Brisbane with the help of a buyers agent. They still kept plenty of cash aside and are potentially going to buy another investment property in Melbourne in the future.
The outcome, was to get one to two great long term investment properties and delay the home purchase due to uncertainty around where, when and what. A great result I believe, as the assets they are purchasing are top properties and it would have been riskier to buy something that did not suit their needs in Sydney long term.
Couple 2 – Buy dream home today, but fix it up and rent it out
This couple had a very large amount saved up from years working overseas. While they have no immediate plans to get married or have children they are very sure they want to stay in Sydney long term and know the areas they love. Happily renting a cheap property on the beach, they decided to buy a home today in the inner east. They went for the worst house in the best street approach and they are spending the first few months, tidying it up before renting it out. While they are not planning on living in the property for at least five years, they will be making a tax deductible loss and have improved the rental return with their small renovation. A great outcome and job well done.
Couple 3 – Buy their dream home but in the Central Coast for a third of the price
This couple were at a similar point in time, not married and with no kids on the horizon just yet. They loved space and the sea, and after a few discussions they did not want to put a huge debt over their head. To buy a home near the sea in Sydney would have cost them a fortune and after a few trips up the coast they decided to buy a home on the central coast at less than a third of what they would have paid for something similar in Sydney. This decision suited them to a tee. They can now live the life they want but without the worry of a huge mortgage over their head and pressure to earn very high incomes. A great outcome and job well done.
Couple 4 – Buy a great Investment Apartment in Sydney and borrow at 88% to keep cash available for the home.
This couple similar to the above were looking to purchase a property in Sydney with the idea of selling again in 5 years to buy a home. After a long and lengthy discussion, we agreed that this may not be the best decision due to buying and selling costs, the type of investment they were looking at and what they want to buy long term.
We agreed that if they were going to buy in Sydney it would need to be a great asset that they could hold forever – not have to sell. They would have to get a great property and after some heavy negotiation with a very sharp agent they picked up a top two bedroom unit in the inner east of Sydney. A beautiful unit that will stay highly desirable forever.
We realised to buy this place and put down a 20% deposit would be a big ask and may not be wise. We decided to borrow at 88% and paid a portion of lenders mortgage insurance as a result. This kept a significant amount still available for when they purchase a home one day and lowered their risk for what was a minimal fee. A very happy outcome and couple. They haven’t got the dream home yet but they do have a cracking property in Sydney market for the next five years at least.
Couple 5 – Buy now with the help of parents and pay down the debt fast
This couple in their 40s and had a family already well underway. After a divorce, a wedding and bringing up teenager kids in Sydney, savings were limited. Fortunately however their combined salaries serviced loans well over $2million.
After a lengthy chat, it was clear that it would be possible to use the equity in their retired parents investment property. While extreme care was taken, they are now able to purchase the home they want today. It should not affect their parents as long as they continue to pay the loan and in a few years hopefully they can remove this guarantee. With interests low, they are able to pay down the debt significantly over the next five years as long as they bought within their limits due to the very high incomes. A great result that means they have their home forever now for the family and do not have the stress of having to continually pay very high rent for a family of four.
These are just five examples and there are actually many other examples. Sydney prices are insane and difficult but there are other ways to cut the cake.