Inner City Professionals Finding New Solutions To An Old Puzzle
As prices for inner urban properties push upwards into the stratosphere, inner urban professionals are finding new ways of investing in the property market. Caught in the midst of a property price boom they are faced with the daunting prospect of huge mortgages and long years of high loan repayments if they wish to purchase in suburbs with reasonable access to the CBD.
Typically, professionals work long hours often juggling the priorities of both partners' careers, care for their children and their capacity to save and build wealth. Most want to live in a property as close as possible to their place(s) of employment, and stay in their current locale where their social and support networks are established.
So it becomes quite a problem when they turn up to auction after auction to find themselves outbid by property investors. The demand for property remains high and it is not a level playing field:
- Investors typically bid from the base of a strong deposit which is very often derived not from savings, but simply through their ownership of existing property and being able to borrow against its increased value.
- Investors will earn income from the property which largely subsidises their loan repayments
- And to compound this, where their loan repayments and other costs exceed their income, they get a tax break from the government.
- And when they sell their capital gains tax bill is halved
If You Can’t Beat Them. Join Them.
So it is not surprising that many are finding new solutions to the inevitable compromise between geography, house prices and lifestyle. Many are now making the quite rational decision to become “rentvestors”: they continue renting where they want and can afford to live and enter the property market as investors purchasing in a location they can afford.
My forecast is that this trend will continue and may become the norm. By de-linking the property where you live from the property where you invest it really frees up the decision-making process:
- The home buyer can access the tax breaks given to investors from day one
- They can buy property they can afford
- They can choose property based on its return, not just its amenity
- Their overall property transaction is typically conducted at a much lower level of risk, particularly from a cash flow perspective
- They do not even have to buy in the same city, or even the same state.
This approach does not come without its own set of challenges. Families have to accept that their own lifestyle may be less stable, particularly when they are forced to change their rented abode through actions of the property owner. And they now have an investment property to manage with its inherent risks including tenancy risks. And they have to let go, at least for the time being, of the great Australian dream of owning their own home.
The financial challenge for inner urban professionals is this: if you are considering to borrow $1,000,000 to buy where you want to live, be aware that after 10 years of minimum loan repayments you will still owe approximately $800,000 to the bank. Your house may have increased in value (and it may have not!) but for that whole 10 years you have to cover the cash flow through every disruption in your life: having more children, renovating, unexpected periods of unemployment, unexpected illness. Every month, every year for 10 years or more.
They cannot see it now but many won’t even be able to afford their mid-life crisis!
In my next article I will provide some more numbers around the choices facing property buyers as they contemplate increasingly difficult choices about their financial relationship with property.