The property market in Australia has gone ballistic in recent months with sky-rocketing house prices. If you are looking to buy your first home, upsize, downsize or guide an adult child (perhaps out your front door and into their own home), you may be wondering what the right thing is to do. We take a deep dive into why the market has entered such a state of frenzy and look at the tools at hand to work the boom to your advantage.
One of the biggest stories to come out of the past year is the extraordinary growth in house prices across the country. In fact, March recorded the fastest rate of growth in 32 years1. While the rate has eased since then, property prices are still rapidly rising. So, what brought this about?
The runaway prices largely stem from factors such as record low interest rates (the Reserve Bank of Australia’s cash rate is currently 0.1%), government stimulus measures – including the Home Builder grant, a number of first-home buyer (FHB) schemes, and stamp duty concessions – and increasing consumer confidence as the economy recovers from the effects of the COVID-19 pandemic.
How sea and tree changes affect prices
The rise in house prices has been nationwide as people forced to work from home realised they didn’t need to be in a city to do their job. This prompted more people than usual to embark on sea and tree changes. Provisional internal migration data from the Australian Bureau of Statistics showed the nation’s capital cities had a net loss of 10,600 in the December 2020 quarter, compared to a loss of 3,800 in the December 2019 quarter.
The effect of migration was house prices in regional Australia began to rise at a faster rate than capital cities – particularly in coastal regions. Research house CoreLogic found the regional housing market far outpaced the growth across Australia’s capital cities in the 12 months to April 2021, rising 13 per cent compared with a 6.4 per cent gain in capital city values.
Effect on housing affordability
The situation of high property prices has severely affected housing affordability across the country, particularly for first home buyers and is one that the federal government is trying to address. While interest rates are at record lows, the average housing prices have risen much more than wages and inflation over the past decade.
Treasury forecasts put wages growth at a near-record low of 1.5 per cent for the 2021-22 financial year, before slowly rising to 2.5 per cent in the 2023-24 financial year. In inflation-adjusted terms, between July 2020 and July 2025, wages are expected to go backwards, giving households less purchasing power.
This rate of growth in home prices is driving up the size of home deposits faster than most prospective FHBs can save with a number of them turning to the Bank of Mum and Dad for help, according to Digital Finance Analytics. It found in the March 2021 quarter, 60 per cent of FHBs sought help from their parents to buy, with the average amount of support being around $90,0002.
Getting into the housing market
Owning a home has always been considered the “Australian dream” but it’s clear it’s becoming more difficult. The federal government is focusing on making housing more affordable with several initiatives, including some that were outlined or extended in the May 2021 budget.
First Home Buyer schemes
The First Home Loan Deposit Scheme assists FHBs with building or purchasing a first home earlier by letting them put down a deposit of just 5 per cent. This means they can avoid having the pay the expensive lender’s mortgage insurance that must be taken out by borrowers who have a deposit of less than 20 per cent of the property’s purchase price.
In the recent Budget, the federal government proposed the extension of the First Home Loan Deposit Scheme (New Homes), with an additional 10,000 places becoming available from 1 July 2021 to 30 June 2022 for eligible FHBs who want to build or purchase new homes.
FHBs can also look to take advantage of the First Home Super Saver Scheme. The scheme allows FHBs to make up to $15,000 in voluntary superannuation contributions per year to save towards the purchase of a home. Why do this? When an FHB makes these contributions as concessional contributions, this money is taken from their pre-tax salary (reducing their taxable income), taxed at just 15 per cent inside super, and has the benefit of adding any investment returns from the contributed cash to their super balance.
In its 2021-22 Budget , the federal government also proposed increasing the amount of voluntary super contributions members can now release from their super under the scheme from $30,000 to $50,000. If this proposal passes, it is expected to come into effect on 1 July 2022.
Help for single parents
Meanwhile, the federal government announced a new program called the Family Home Guarantee that provides eligible single parents with dependents the opportunity to build a new home or purchase an existing one with a deposit of 2 per cent, subject to the individual’s ability to service a home loan. The federal government will guarantee the other 18 per cent required to avoid having to pay lenders’ mortgage insurance.
From 1 July, 2021, 10,000 Family Home Guarantees will be made available over four financial years. Applicants must be Australian citizens, at least 18 years old and have an annual taxable income of no more than $125,000.
Downsizer contribution boost
The federal government also announced changes to its downsizer contribution scheme by reducing the age threshold from 65 to 60 which is also expected to be effective from 1 July 2022. This means that anyone aged 60 and above can make a tax-free contribution of up to $300,000 ($600,000 for couples) without it being counted towards their non-concessional cap (the amount of post-tax money super members can contribute to super each year – ordinarily $100,000 and set to increase to $110,000 on 1 July 2021) if they sell their family home after having owned it for at least 10 years. The aim is to free up more established properties before the owners reach 65, which is important as supply remains limited.
Overall, the government initiatives are designed to provide easier access to homeownership, particularly for FHBs, and to boost economic activity, especially within the construction sector, with the focus on building new homes.
While navigating such a fast-moving property market can be daunting, a qualified financial adviser can provide guidance and gear your investment strategy around your property ownership goals. Similarly, as experts in superannuation, financial advisers are well-placed to help you leverage the provisions in superannuation for buying (or selling) property.
If you need help seeking out or applying for a home loan, you might also like to consider the services of a mortgage broker.
1. CoreLogic: National home value index rises at its fastest pace in 32 years. 1 April, 2021.
2. ABC Online: “House prices surge means first home buyers are turning to the Bank of Mum and Dad”. 3 May, 2021.
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