Ever wondered what to expect from financial planning? Or do you have money or investment questions you’d love some guidance on from a financial advisor?
We bring you – ‘Dear Aussie Advisor’: Our new weekly advice column that sees our very own Aussie Advisor, Brendan Gow, answer your questions and show you the value of a solid financial plan.
Dear Aussie Advisor,
I have a question about buying a first home in Australia.
I am on $105k salary per year, with $25k in savings and $28k in super, proposed to be released in the first home buyer scheme.
I am looking to purchase a $550k house and land package, and to absorb $25k from the federal grant and $15k from the SA grant.
My wife has been working for under three months, and we have two children.
Is it wise to enter the property market considering the forecasted decline due to Covid-19?
Exciting times! And, certainly, a milestone for any young family.
Firstly, for the sake of clarity to those audiences reading this, the first home buyers’ grants you are referring to do alter from state to state, however, for clarification on the FHSS scheme, or First Home Super Saver scheme, which will allow you to deduct $15,000 per annum from any ‘voluntary super contributions’, up to the value of $30,000, to put towards the purchase of your first home.
The rules behind this are that you must have the intention to live in this property for at least six months, starting in the first 12 months that you own the property. Also, you must not have owned property in Australia before.
However, I believe the main query in your letter is, “should we be buying now, or wait for a further decline due to the current Covid pandemic?”
This is a great question, and one that holds a few levels to it.
Should we buy or wait?
We, firstly, need to look at the different reasons we would buy property. Excluding commercial property and focusing on residential, we would typically buy to either live in it, or to rent it out to tenants. So, in effect, for personal use or as an investment.
Whilst a dip has currently occurred, according to Westpac Chief Economist, Bill Evans and senior Economist Matthew Hassan, the property market is forecast to “surge” as much as 15 per cent in the future.
As such, we are seeing an increase in investors taking advantage of the low prices, with many buying across regional areas. But how does that affect you?
As the saying goes, “it’s less about timing the market, and more about time in the market’”. So, if we look at this from a share trader point of view, we could’ve bought BHP shares at $25 back in March of this year during the dip.
Today, with BHP recovering, they have increased to around $34-$36 range – around a 36 per cent return, which is great! Now, alternatively, if you bought BHP back in September 2000, you would have entered the market at $8 per share – a 325 per cent return today.
Taking a few things into account, the company’s ongoing revenue, and hence valuation, vs the same source material and adding long term inflation on top, our outcome is far greater.
Now, why am I telling you this? I understand this home to be one your family will live in. Regardless of if you buy now or in six months’ time, the long-term difference would be considered immaterial.
However, again, for the sake of audiences reading and those potentially in the market for investment purposes, I feel it’s important to reiterate that property should seldom be viewed as a short-term investment asset.
Given the current circumstances, you may question the market’s ability to pay top dollar in rent, especially after rent reductions were seen nationally as a result of Covid-19.
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Rest assured, the current economic state suggests we are somewhat past this consideration, and on the road to recovery – great news for investors.
As such, as you’ve insinuated this is intended to be your first family home, you might consider being more open to buying at any point in time given it is a personal asset.
You’re not competing for customers, and, therefore, not inclined to be as selective about the growth rates, rental yields, vacancy rates, amount of forecasted government expenditure in that area or percentage of owner-occupier to renters in that area etc.
Hypothetically, if you buy your first home now, and then decide to upgrade and buy another in five years, the property market at that time will likely reflect both the property you’re selling, and the property you’re buying.
If the property market, at that point, has dropped and you find that your home is worth 15 per cent less than six-months prior, the likelihood is that the property you’re buying will also be at a 15 per cent discount.
In a nutshell
So, to conclude, the decision to buy your first home now, or to wait, should more so be focused on your financial position to do so, and less on the property market itself.
Having said that, if you are concerned about timing your entry into the market, the market does show that now is a good time to be buying and will continue to grow somewhat rapidly over the next six months.
Brendan Gow, an authorised representative (no. 427470) of Shaw and Partners Limited AFSL236048 (the “Aussie Advisor”). This article has been prepared without taking into consideration any investor's financial situations, objectives or needs. Accordingly, before acting on the advice in this article, if any, you should consider its appropriateness to your financial situation, objectives and needs. Every reasonable effort has been made to ensure the information provided is correct, but we cannot make any representation nor warranty as to the accuracy, completeness or currency of that information. To the extent permissible by law, no responsibility for any errors or misstatements is taken, negligent or otherwise. Shaw or its authorised representatives may also receive fees or brokerage from dealing in financial products, see Shaw’s Financial Services Guide for information about the services offered by Shaw available at http://www.shawandpartners.com.au/.
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