In modern Australia, the housing affordability musings attract more newspaper column inches than a royal wedding.
For most, the biggest challenge isn’t being able to afford the mortgage repayments – it’s putting together a deposit for the purchase. Let’s face it, if you’re trying to save a ten to twenty per cent deposit to buy a median-priced house ($1,033,892) or apartment ($878,325) in Sydney, you’ve got your work cut out for you.
But for those who reside beyond the Harbour City or for those prepared to explore the increasingly popular rentvesting strategy, the opportunity to purchase a piece of Oz is there for those with an open mind.
Property Investment Professionals of Australia (PIPA) recently pointed out that a detailed study of mortgages and incomes shows the average loan is more easily serviced now than it was thirty years ago. The problem isn’t affordability per se – Australia is littered with locations offering affordable housing – but rather accessibility, because the hurdle is putting together a deposit rather than paying back the lender.
There’s a narrow, inaccurate and slightly offensive assumption by the broader media and political landscape that “the Australian property market” is a proxy term for Sydney real estate. Last time I checked, Sydney was a city, not a country!
If you’re willing to break free of that misnomer, I can show you how to double the power of your deposit.
The first important step in understanding the solution is to remember Australia consists of 10 million dwellings that are spread across 550 local councils, and the vast majority provide affordable real estate options to potential buyers.
With our realistic view of Australia’s whole market now firmly front of mind, let’s run the figures and see how you can power up your savings and get into a property.
According to the Australian Bureau of Statistics (ABS), Australia’s capital city average median dwelling price was $686,700 as at December 2017.
A buyer would therefore need $68,700 for a 10 per cent deposit.
Adopting the national median rent of $435 per week, the annual holding cost (after rent) on a typical property worth $686,700 with a 10 per cent deposit would be $13,100 per year – that’s before taxation or negative gearing benefits.
This cash flow calculation assumes receipt of rental income for forty-eight weeks of the year, interest expenses calculated at 4.5 per cent, and other standard holding costs (property management fees, council rates, insurance, and $500 for general maintenance).
The solution to double your deposit
The simplest way to double your deposit is to buy a property that’s priced at half the capital city average dwelling price.
That’s right – instead of laying down $70,000 as a deposit for a purchase of almost $700,000, try broadening your mind and seeking areas where a house price closer to $350,000 is the norm.
Remember – the phrases ‘more expensive property’ and ‘capital city location’ don’t automatically translate into ‘better capital growth potential’.
If you doubt this, ask yourself why property markets in Sydney and Melbourne both declining right now while Hobart is booming and parts of regional Australia are strengthening nicely.
Buying an investment property worth $343,500 (half the capital city average house price) using your $68,700 deposit means you’ve fronted up 20 per cent straight away. The annual holding costs will now be significantly less at $850 per year, because you’re only borrowing 80 per cent from the lender.
If saving up a deposit of $68,700 is too steep, how about halving your goal to $34,350 and using it as a 10 per cent deposit on a $343,500 purchase? The annual holding costs would be a very manageable $2,400. And, if you’ve purchased in a location with all the fundamentals in place for great long-term growth, the asset is working for you straight away. This means you’re in the market and enjoying the benefits sooner.
The key takeaway from all this is that you shouldn’t stand back and struggle waiting to save up a deposit for an expensive property that will be more difficult to service and has no more, if not less, potential for capital gains than some non-Sydney investments.
Instead, lower your buy in, look for smart locations and start reaping rewards sooner.