How to help your children or grandchildren up the property ladder
For anyone with family trying to buy a home in today's market, the past year hasn’t been particularly accommodating, even for people who already own a home and might be looking to upsize. Banks have tightened lending criteria and the volume of property available to choose from has reduced as well over the past 12 months.
According to CoreLogic RP Data, the number of houses for sale in the past 12 months was down 3.7 per cent and the number of apartments by a huge 9.7 per cent. Interestingly, most cities also saw lower sales volumes as a trend of younger families moving to regions to find better value became more evident.
According to the Housing Industry Association's Affordability Report, the affordability index dropped by 6.4 per cent over the December quarter. This has pushed the rating to 75.6 (a score of 100 represents a balanced market). A mix of incredible 2015 price growth and a supply shortage has helped see to this.
However, it’s also clear that the 2016 property market has cooled considerably, with prices growth slowing and some markets such as Perth and Darwin actually falling. So while housing affordability had been declining, despite the lowest interest rates since the 1950s, the past quarter has shown improved affordability. That could improve further, following the recent decision by the Reserve Bank to cut rates.
In these circumstances, young first home buyers could find it tough to break into several city's markets, and are often being priced out of their own region. If your family is struggling to get a foot on the property ladder, there are a few ways you can lend a hand.
Let's take a look at how you can do this:
Saving a deposit
CoreLogic's monthly indices show that the average value of houses across Australia's five biggest cities was $757,330 by the end of January. In Sydney, Australia's densest city, this figure was a whopping $993,770. Clearly, buying real estate in Australia is more costly an affair than its ever been, making it a journey just to save for the initial down payment.
If you want to invest into your family’s future, why not consider giving them a one-off cash gift or interest-free loan that will go toward a deposit? Not only are you speeding up the saving process for them but keeping them motivated and with their eyes on the prize. As they build equity in property and trade up, they may be able to take some profit to pay you back with.
Put your home up as collateral
For those searching for a home loan for the first time, lending conditions aren't usually in their favour from the outset. With no property of their own to put up as collateral should things go south, they present a greater risk toward lenders.
Signing on as a guarantor can be risky
If someone in your family is in this situation, it can help them immensely if you put yourself forward as a guarantor. This means that you'll put your own home down as collateral for the mortgage, which can help lower the minimum deposit that they have to commit to by quite a bit. It could help them to buy a home and get a foothold in the market much quicker, as well as keep them motivated.
The great thing is that it won't cost you a cent, but can fast-track your family’s property journey significantly. However, there are obviously big associated risks. So make sure they have the income and financial stability to make those repayments or you could, in the worst-case scenario, lose your home. Speak with a financial adviser to see if such an approach is right for you and your family.
Sydney is still the least affordable capital city, with families spending an average of 35.6 per cent of their income on mortgage repayments as of 31 March 2016, but affordability around the nation remains better than the average for the past 10 years – thanks to low interest rates.
Households in Melbourne spent on average 30 per cent of monthly income on repayments compared with 27.2 per cent a year ago.
Affordability was down in Adelaide (to 23.2 per cent from 21.9 per cent) as a result of higher prices and falling incomes.
Reduced affordability was also Brisbane’s story with families spending 24.3 per cent of income as opposed to 23.6 per cent a year ago.
Affordability actually improved in Perth (to 21.5 per cent from 22.6 per cent), due to a decline in home prices, and despite household incomes falling.
Sydney is Australia's most dense and least affordable city
Wrap it up
At the end of this year, when we look back over 2016 with the benefit of hindsight, the period between the election being called and the arrival of spring may well turn out to have been the best time to get into the market. The market tends to be less competitive during elections but the recent cut to official interest rates has the potential to introduce fresh stimulus.
So, if you’re giving thought to helping a family member get a foot on the property ladder or upsize their home, now’s probably the best time to do it. Just make sure you get good financial advice in the process and weigh the pros and cons carefully.
What are your thoughts on helping family out financially? Join the conversation below.