What do you tell your kids who are trying to buy a home in a 30-year property bubble?
My daughter, Anita*, and her partner, Sam*, want to buy a home in the midst of a 30-year property bubble.
What do you tell your adult kids about buying a home in this supercharged real estate market?
They will, after all, be slaves to a bank for the next 30 to 35 years, saddled with an enormous debt.
But the rental market is unpredictable. Rents have risen where they live, by around 15% over the year. Moving constantly is expensive and time-consuming.
Anita and Sam have moved rental properties four times in the past six years. They moved into a rundown property with low rent less than a year ago. It was in a poor state: a broken stove, black mould on the bathroom walls and ceiling, window frames caked with mould and black dirt.
When they had the carpets steam-cleaned, the cleaner did them a second time for free because they were so filthy. It took six weeks before the stove was replaced. Other things, like the front light, haven't been repaired.
But they cleaned it up and in summer it was sunny and airy. Less than a year later the real estate agent told them the owners are returning from overseas and they have to move out.
"That's it. We're going to buy a home and then we won't have to move all the time and pay more rent," says Anita. They doubt whether they would even find another rundown home with affordable rent.
The problem is that they have found themselves in an overheated, highly speculative market. House prices are sky high because there is a lack of stock as owners hold onto properties, fearing they will miss out on rising prices.
Sure, they both have full-time jobs and a frugal lifestyle means they have some savings.
But they are up against buyers who are often armed with money from the bank of mum and dad or are cashed up foreign buyers but are most likely investors able to take advantage of more readily available credit and more generous tax breaks.
Sixty per cent of Australians don't think young people will ever be able to afford to buy a home, according to a survey by Resolve Strategic for The Sydney Morning Herald.
The share of housing finance going to first home buyers has fallen from more than 20% in the mid 1990s to below 11% in 2017. At the same time the share of finance going to investors has jumped from less than 10% in the mid 1990s to more than 40% in 2016.
For buyers, a booming property market is a stressful, depressing experience. Anita and Sam have to be careful in such a cut-throat environment to not end up making a mistake.
It is quite different from when I bought a home with my partner in 1995. Then interest rates were 10%.
Currently they are at record lows. Anita and Sam have a quote for 95% of the loan at a fixed rate
of 1.88% and 5% at a floating rate for the next three years.
We borrowed $390,000, which we considered a fortune 25 years ago. Anita and Sam keep upping their borrowing amount the more they look at homes and attend auctions.
The mortgage broker has encouraged them to put down a loan figure of around $1 million, even though they don't intend to borrow that much.
What this means is that their mortgage repayments will be about 50% more than the rent for their rundown home.
The substantial transaction costs of buying a home - such as stamp duty, lenders mortgage insurance and conveyancing - are equivalent to just under three years of rent.
Their mortgage will soak up most of their income. There won't be much money left to replace their old car or go on any fancy holidays.
Owning a house, we believe, will give us peace of mind and a feeling of security that we have a tangible asset. Owners can't have their home taken away by a landlord who has decided to move back in. They can fix broken items and hang up a picture without asking permission.
But I worry that they are getting in over their heads, so decided to look into the statistics to find out if they are more at risk than we were.
Since we bought 25 years ago, people's income has increased by two and a half times, according to the Bureau of Statistics.
At the same time, mortgage rates have dropped from above 10% to below 3%. As a result buyers' borrowing capacity has doubled. These two factors mean that young couples today can pay five times more for a home than their parents.
But interest rates are under pressure to rise. What does it mean for Anita and Sam?
If rates on their mortgage rise 1%, their borrowing capacity on a 30-year mortgage will go down by 10% while an increase of 2% will decrease it by 20%.
My partner and I had healthy wage increases and promotions in our day. Our kids' wages have stagnated since 2011.
Over the past five years, incomes have grown at around 2% a year compared with over 3% in the previous 20 years.
You do wonder how long prices can keep going up. Surely it can't be forever. We bought a starter home that appreciated, but there's every chance that prices at these levels may stagnate and go down.
One of the reasons they are rising is the role of the bank of mum and dad, which throws fuel on the market. These days two incomes just aren't enough to afford a home that parents want to see their kids start in.
I know some young adults who have saved a 20% deposit by living at home for years, but a more common situation is for parents to come to the party with some money so that the kids have a big enough deposit to avoid costly lenders mortgage insurance.
My parents helped me and so we are helping our adult kids.
The flip side of 10% interest rates was that our savings in the bank - the deposit - were growing at a healthy rate. With such rock-bottom interest rates today, the savings of young couples aren't going up.
The only way to increase their deposit is to save more. It isn't advisable to invest the savings in risky assets such as shares, because they could be hit by a sell-off just when the money is needed and it could take years to recover.
One of the positives for my kids is that low interest rates mean they would be paying off the principal a bit faster than I was.
When rates were above 10%, even after 10 years of paying off a 30-year mortgage, there would still be 90% of the principal loan remaining. At the current low mortgage rates, after 10 years there
would be 75% remaining.
While I saw the equity in our home mushroom as prices rose, will our adult kids have the same capital gain?
When my home was worth more, it gave us the opportunity to renovate or upsize. Anita and Sam may not be so lucky. Although their debt may reduce, the opportunity to renovate or scale up may not be the same as it was 25 years ago.
*Not their real names
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