It is often suggested that it’s a lot more difficult for people to buy their first property compared to many decades ago. It is true that property is a lot more expensive. However, I would like to suggest that in many respects, buying a property today is easier than it was many decades ago.
I would like to start by highlighting the main advantages that property buyers enjoy today compared to many decades ago. I’ll address the affordability issues once I’ve done that.
Abundant access to information, knowledge, strategies, advice and so forth
How do you get ahead financially? One solution is to get the best advice so that you make the most of your financial opportunities. Often people learn by trial and error, but that can be expensive and waste valuable time. You can fast track your financial success by learning the best way to use your money.
There is an absolute abundance of information that is available on the internet. Most of it is accessible instantaneously at no cost. Blogs, forums, podcasts, books, websites, software and so on. It cannot be underestimated how valuable that is.
I purchased my first property 25 years ago and no such information was available (the internet didn’t even exist… now I’m showing my age). There were a few books about property investing, but not many. The only way to learn about borrowing strategies was by meeting bank staff, but they weren’t particularly knowledgeable or helpful. Therefore, unless you knew a successful property investor, it was hard to access knowledge.
Today, I can find out how best to save a deposit for a property and strategies to mitigate a low deposit. I can find out how to manufacture equity via renovations. You can learn what makes a property investment-grade. I can research specific properties and find out what they have sold for in the past i.e., historic growth rates. I can learn about borrowing strategies, how to increase borrowing capacity and a mortgage broker can compare 30+ lenders in seconds.
As the saying goes, “knowledge is power”.
Much higher borrowing capacity
Thirty to forty years ago, borrowing 3 times your gross income was seen as very high risk. Today, the banking regulator (APRA) classifies a high-risk borrower as anyone that borrows more than 6 times their gross income. That is, I have come across some investors that have borrowed 10+ times their income, although I would caution anyone against borrowing that much. Over-borrowing is very risky. Mortgages are a wonderful servant but a terrible master.
Therefore, by this measure, borrowing capacity has increased by 2 to 3 times over the past few decades.
The challenge is that there are more things to spend your money on today (you can literally buy anything in the world on the internet). That temptation didn’t exist 20-30 years ago. This means would-be property buyers must make sacrifices. If they want to buy a quality property, they’ll have to curtail their spending. You can’t always have your cake and eat it too.
In addition, 30 years ago, it was not possible to borrow more than 80% of a property’s value. Today, owner-occupiers can borrow up to 95%.
Higher earning capacity and more employment opportunities
The internet has made it very easy to connect with people around the world. This means people can explore a lot more job opportunities. In fact, given the increased acceptance of working from home, it is not even necessary for you to live in the same country as your employer.
Whilst these advancements might make the job markets more competitive, for some occupations it opens (literally) a whole world of opportunities. Therefore, first-time property buyers can proactively explore many opportunities to increase their income, thereby increasing their borrowing capacity and purchasing power.
In addition, incomes have increased in real terms over the past few decades, especially for many professional white-collar occupations. There are some young people earning 2 to 3 times more than what was possible in their occupation decades ago. I discuss this further below.
For people in industries that don’t offer involved incomes, there’s lots of resources available to help people start a successful side-hustle to boost their family’s income.
Family guarantees & the bank of mum and dad
The biggest impediment that delays first home buyers getting into the market is saving enough of a deposit. First homeowners need a minimum deposit of at least 12% of a property’s purchase price (being 5% deposit plus 7% for costs including stamp duty and legal fees). That can take a long time to save.
The most effective way to alleviate a lack of deposit is to get help from family. This might come in the form of providing a family guarantee, as I’ve explained here. Alternatively, parents might prefer to provide their child a gift or a loan. Most baby boomers have benefited greatly from higher property prices over the past few decades and are in a good position to help their children.
These options were not available 20+ years ago.
Cash flow budgeting/management tools
It is critical that young people establish good cash flow management practices as soon as they enter the workforce, as these habits tend to stick with you over your lifetime. Establishing a strong savings pattern will serve two purposes. Firstly, it will help a perspective home buyer save a larger deposit, sooner. Secondly, it will demonstrate (to themselves and a bank) that they have the necessary surplus cash flow to service a loan.
There is a huge array of tools available to people today to help them improve their cash flow management, including apps such as WeMoney that receive a data feed from your bank and automatically allocate expenses into categories.
In addition to these tools, there’s lots of information available online about how to improve cash flow management. In fact, I wrote a blog about it last week.
Ability to invest outside of your domicile location
I should make it clear that I would never buy a property without conducting a physical inspection of it (either personally or by a trusted advisor i.e., friend or buyers’ agent). However, the internet has made it a lot easier to buy a property outside of your domicile location. For example, if you live in a regional town, it probably makes financial sense to invest somewhere else i.e., in an established capital city. This is much easier to do today compared to a couple of decades ago.
A lot more equity in dollar terms
It is relatively easy to accumulate over $1 million in equity in a property if you (1) buy well and (2) hold it for a couple of decades. Of course, this is a function of borrowing more i.e., property costs a lot more today than it did decades ago. But if you can afford a higher loan and you hold a property for the long term, the wealth effect can be substantial.
One downside to this is that borrowing more means that you either must generate substantial income to be able to repay the loan or downsize the property at some stage to reduce/repay debt.
Do all these positives offset higher prices?
The average median house price in Melbourne and Sydney in 1980 was almost $53,000. Adjusting for inflation, that equates to $268,000 in today’s dollars. The average median house price in Melbourne and Sydney has increase to $1.2 million (Sept 2022). Therefore, house prices have increase 4.5 times in real terms since 1980.
How much have (professional) incomes increased?
My father used to work for an Australian government research organisation (CSIRO). In 1970, his salary was $4,000 p.a., which equates to $53,500 in today’s dollars. Based on the current pay scales (i.e., CSIRO’s enterprise agreement) he would be paid circa $100,000, which suggests that incomes have doubled since 1970. He retired in 2001 and in real terms, the salary for his pay grade has increased by over 30% over the past two decades.
I landed my first job as a graduate accountant in 1998 and was paid $24,000 p.a. which is equivalent to $46,000 in today’s dollars. Currently, a graduate accountant would be paid $55,000 – $60,000, which suggests incomes have increased by around 25% in real terms over the past 25 years.
Of course, this analysis is anecdotal and admittedly, not statistically reliable (although my father’s analysis does cover a large number of employees i.e., everyone employed by CSIRO). But it does support my thesis that incomes are higher today than they were decades ago.
It is not uncommon for us to deal with people in their 20’s that earn a very healthy six-figure income. That certainly wasn’t the case 20 years ago when I started this business.
Income plus higher borrowing capacity
Borrowing capacity has more than doubled since 1980 and professional salaries have risen by more than 30%. This means buying power has increased by factor of 3 to 3.5 times over the past four decades. Of course, this doesn’t fully offset how much property prices have risen (i.e., 4.5 times), but gives us a better perspective. In addition, all the other advantages listed in this blog will also contribute toward helping property buyers navigate higher prices.
It can be more difficult today
It can be more challenging to be a first-time buyer today. But a lot of the advancements over the past few decades have gone a long way towards mitigating the impact of higher prices (or, more correctly, driving prices higher).
Most importantly, it is easier to make the right decision today i.e., use property to build wealth and avoid making mistakes. Mistakes can be very costly.
If I knew what I know today before I purchased my first home 25 years ago, the financial outcomes would have been a lot different. This knowledge allows younger people to make a lot of money from property if they have the motivation and desire to do so and they are prepared to work hard and sacrifice.
