- Rising house prices are pushing young Aussies out of the market
- However, there are alternative methods to get into the housing market
- These include fragmented property investment, rentvesting and the 'Bank of Mum and Dad'
Housing affordability is back with a vengeance at the forefront of Australian public policy.
Rapidly rising house prices are advantageous for investors and those who already own a home. However, prospective first home buyers are being priced out of the market, with Grattan Institute research finding that saving a deposit is the biggest hurdle to home ownership – in the early 1990s, it took 6 years to save a 20% deposit on an average home. Now it takes around 10 years.
The current housing boom is now giving rise in popularity of alternative methods for first home buyers to access the housing market. This article will highlight three of them.
Fragmented property investment
As it is becoming harder and harder to buy a house, fractional and fragmented property investment looks to provide a potential way for young people to get their foot in the door of property ownership without having to fork out large sums of money for a deposit.
The basic idea is that you can buy a small part/portion/share of a property. For example, if a property is purchased for $500,000 then divided up into 1,000 units, that makes each share worth $5,000. This looks to be a way of providing people with a lower-cost way of getting their foot in the door of the housing market.
Note that there is a difference between fragmented and fractional property investment.
‘Fragmented property’ means all investors are true owners of the property (each being named on the land title as tenants in common) while ‘fractional property’ involves a company or trust owning the property and the investors owning shares of that company or trust.
Notable platforms that allow you fragmentally invest in properties are BrickX, Bricklet, and Domacom. Bricklet in particular is beginning to show promise, attracting new investors back in February to make further strides against the traditional property investment sector.
See this article for more information on the different platforms.
Rentvesting involves purchasing an investment property in your area that suits your budget, while at the same time renting a property in an area that suits your lifestyle. This strategy aims to strike a balance between owning a property you can afford, while also living in a property you cannot currently afford to buy.
You can rent out the property to cover some or all of the ownership costs. If it is making a profit then it can also go towards your own rental costs.
This strategy is becoming increasingly popular, especially among young buyers. As you are not interested in living in the investment property, there is a greater focus on capital growth and rental yield which increases the likelihood of climbing up the property ladder quicker.
The most obvious advantage of rentvesting is the potential capital gains. If the investment property increases in value (which is certainly true in the current housing boom), then it could be sold at a profit in the future. Of course, the big disadvantage is the opposite of capital gains, where it is not guaranteed that the property will increase in value.
Another massive advantage of rentvesting is that all of the expenses associated with an investment property are tax-deductible. If the property investment makes a loss, these losses can be deducted from other income streams such as wages (reducing one’s overall tax bill). This is known as negative gearing, which is a contentious issue in Australian public policy but is unlikely to change anytime soon.
The Bank of Mum and Dad
Parents are often willing to sacrifice so much for their children, and that includes helping them fulfil their dream of homeownership.
The Bank of Mum and Dad refers to parental funding of a property and is now one of the largest home loan lenders in the nation. This is perhaps unsurprising, considering that because house prices have been skyrocketing, many young Australians are now turning to their parents for assistance.
There are multiple ways in which parents help their children buy a house:
- Allow children to live in their house rent-free;
- Contribute money towards the deposit;
- Acting as a guarantor;
- Assisting with repayments;
- Buying a house on behalf of, or in joint ownership.
Most parents tend to dip into their own savings to fund a deposit. Other ways parents help their children are by cutting expenses, delaying retirement, using home equity, and selling assets.
Of course, this comes with legal issues if family relationships break down. Especially when assistance is offered in gifts or loans that are not properly documented.