A first-home buying checklist
Considerations when entering the property market.
Summary: Taking the first steps into the residential property market can be daunting, especially when the entry point happens to be in a market such as Sydney or Melbourne – both of which have been firing on all cylinders for years. But there are affordable spots in every city, and elsewhere too.
Key take-out: A growing trend among first-home buyers is rentvesting – renting in an area that's more desired for lifestyle while buying in an area that's more affordable. Tax incentives and higher rental returns can make this a good strategy.
Affordability is a hot topic in Australia right now, but we need to keep in mind that the whole country isn't unaffordable.
The problem is that the locations that have jobs growth are the ones seeing the strongest house price growth. If you are a home buyer in Sydney or Melbourne, the market can seem increasingly out of reach.
And although prices are far more affordable in the rest of Australia, spending so much on a home can still be daunting. Here are some things to consider when buying your first home.
Buy within your budget
Hindsight is a wonderful thing and, for many people that bought decades ago, wishing they had spent more on property is a common thought. The Australian residential market has done very well for a prolonged period, however there is no guarantee that future performance will be the same as past.
Buying within a budget that enables you to pay off your home, even if interest rates rise or your income fluctuates, is important. While it is likely that your income will rise over the course of the loan, changes to circumstances can happen. So, it's sensible to ensure you aren't too stretched if something unforeseen happens.
Your first home is unlikely to be your forever home
When we bought our first home in 1999, our new neighbours tapped us on the back and told us we paid too much. We ended up spending a lot of money renovating the house, but when we sold it years later, it set us up to buy our current home, in a much better area.
Not only did we benefit from enforced savings, but we also had some capital growth that performed in line with the overall market. Most people trade up to a second home, so remember, the first home you buy is unlikely to be your dream home.
Consider whether you want lifestyle or space
Australians still overwhelmingly want a large home on a large block with great access to schools, public transport and shops. Unfortunately, big homes in suburbs with great lifestyle elements are very expensive.
If you are in a big capital city, you need to decide what is more important to you – a large home, or lifestyle – and then make trade-offs from there. Historically, lifestyle suburbs outperform the market. However, it may be that living in a bigger home works better for you.
It isn't just wealthy baby boomers that benefit from tax incentives designed for housing investors. Rentvesting is when you rent where you want to live and buy where you can afford.
The strategy can pay off provided you are not fussed about renting long term. Cities like Hobart and Adelaide, as well as regional areas, can provide higher rental yields in addition to potential negative gearing and capital gains tax concessions. Although capital growth prospects may not be as high in these centres, the tax incentives and higher rental return can make it a good investment.
First home buyers have the potential to radically change suburbs
Young people change suburbs. We've seen this in places like the inner west of Sydney and the inner north of Melbourne.
Price growth in these areas has outperformed the wider market as the housing stock has been renovated, and demand for better schools, cafes and retailing has increased. Although locations that many first home buyers can afford may not necessarily be highly desirable, suburbs can change dramatically over a relatively short period of time.
Investing in housing is a long-term strategy and buying a home still makes good financial sense.
Not only does it enforce saving, but at retirement, it means you won't be at the mercy of the rental market. Making the initial leap of faith and getting into the market is the hardest step.
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