Those who experienced applying for a loan in the early 90’s when interest rates were peaking around 17% might be quick to tell you that millennials don’t know how good they have it. Arguably, interest rates are at a historic low, however, the widening gap between wages and the cost of buying a home have increased exponentially.
Housing affordability has become not only an issue for the millennials looking to break into the property market, but just about anyone looking to afford a home that ticks all their boxes on where and how they want to live.
The latest Perceptions of Housing Affordability report by CoreLogic is an interesting read not just for its statistics but also insights as to why so many struggle to buy a new home. Topping the list are 6 key issues:
- Affordability ratios remain elevated
- Prices may be in an upswing again
- Australians are struggling to get a loan
- Low income householders struggle to save a deposit
- Housing costs are huge
- Wage growth is anaemic
Is “Rent to Buy” a solution?
The Rent-to-Buy or Rent-to-Own scheme aims to bring property investors and those struggling to break into the homeownership market together. Described as a leasing agreement, renters are given the right to purchase a home at an agreed price at the end of a pre-determined rental period. For the aspiring property owner (renter) this can mean not having to apply for finance but also avoid having to save for a big deposit.
But what about…..
Yep… there’s a lot of “buts” here, not least of which is that the aspiring property owner (renter) won’t have their name added to the certificate of title. You can also expect to pay higher rents, make a larger than normal deposit and there are no guarantees that in 3 or 5 years the bank will loan you the funds necessary to purchase the property, which could see you forfeit your initial deposit and be left homeless.
Equally alarming is the uncertainty that the owners won’t fall on hard times and be forced to off load their (your future) property because of bankruptcy etc.
Remind me again why this is a good idea?
Here at the aicwa we’re not in the business of handing out investment advice nor would we want our members to. Lucky for us Andy Kollmorgen’s article Vendor finance and rent-to-buy schemes appearing in Choice online on the 05 April 2018 warns readers to “think twice (or thrice) before signing up to these dodgy deals.” Andy goes on to explain a deal gone wrong where:
- aspiring home owner finds a rent-to-buy broker online
- enters a three-year rent-to-buy agreement at a purchase price of $429,000 (significantly more than the house is worth) without consulting a lawyer
- pays an $8000 deposit plus $20,000 from a First Home Owner Grant
- agrees to pay $670 a week for three years, totalling $104,520 – well above market rent but part of the rent-to-buy deal
- after three years, the buyer would need to get a $401,000 home loan to make the purchase
- would end up paying $533,520 to the vendor (through the broker) and then payments plus interest on the $401,000 bank loan
- deal goes bad – aspiring home owner can’t qualify for the $401,000 loan after three years and in any case the property value is far less than the $429,000 agreed to
- aspiring home owner is back at the start, deeper in debt, and may not be able to get back the amount paid above market rent (about double what it would have been outside the rent-to-buy deal), his deposit or the First Home Owner grant.
In Choice’s submission to the Senate Inquiry into banking finance last year, they called “for property investment advice to be brought in line with overall financial investment advice, and to be regulated by the Corporations Act under the watchful eye of ASIC. We also want property investment advisers to qualify for a financial services license before they start spruiking their deals.”
Are there are other solutions and alternatives?
In short yes. While not tackling the issue of the divide between wage growth and rising property costs there a few initiatives here in WA that strives to get first homebuyers into the market.
The Home Buyers Assistance Account (HBAA) provides a grant of up to $2,000 for the incidental expenses of first home buyers when they purchase an established or partially built home through a licensed real estate agent. The maximum purchase price criteria for the HBBA is $400,000. More information on the HBAA is available on the Department of Commerce website.
Key Start Loan
Key Start recently increased their loan book by $420m as well as increased the income limits to help more people enter the housing market. In 2017-18, Keystart approved a total of 2,789 loans, with 2,169 loans for construction or newly constructed homes, with Key Start’s lending capacity (loan book) now at $4.8 billion.
Axe the Tax
While not a current solution, calls are mounting to axe or modify Stamp Duty, which is widely considered a negative determinant for why homeowners are not keen to upscale or why first home owners won’t enter the market.
Nationally the Liberals have announced a scheme to assist First Home Buyers, with a proposed commencement date of 1 January 2020, the scheme will assist first home buyers with a deposit of 5 per cent compared to the typical 20 per cent which has become the industry norm.
I’ve cut out my Sunday breakfast order of “smashed avo”, so where’s my great Australian dream at?
Well if its affordability you want you can’t go past a 3×1 siting on 1,024m2 in Cue WA for $22k or if money is no object then why not put a solid offer of $20m for a 16×14 getaway in Albany WA siting on 224.6ha.