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HOUSING AFFORDABILITY CRISIS?
18 February 2017

Last week I read of Nationals MP, Andrew Broad’s latest idea on a way to help fix the housing affordability “crisis”, which was to ask banks to lend 100% of the purchase price of a property if the applicant could demonstrate a positive 3 year rental history and where the amounts between rent and repayment line up.  

Last week I read Andrew Broad’s latest idea of a way to help fix the housing affordability “crisis”. The Nationals MP’s suggestion is to ask banks to lend 100% of the purchase price of a property, as long as the applicant can demonstrate a positive 3-year rental history and where the rent and expected loan repayment would be similar amounts. 

This is hair brain to say the least.  This is simply pushing it back onto the banks to absorb all the risk in a high risk segment such as first home buyers.  What about mortgage insurance (4.5% of purchase price at that level)? Who pays that? What if interest rates go up? Can they still afford it? Will it create a bubble? Probably!

If nothing else, it has brought the topic into the spotlight again and I have been having a think about some other ways this issue could be addressed and discussing it with a couple of the Advisers here at Hudson.

Firstly though, we’ve got to determine whether there is a housing affordability crisis.  I’m going to say no.  Yes, if you want to try and buy a house within 10klms of the city in Sydney and Melbourne, but let’s assume that first home buyers in Australia are a bit smarter than that and realise that they need to head to the outer suburbs or a country town if they want house and land or at the very least, purchase a unit if they want to live closer to the city.

Let’s have a look at what concessions and grants are on offer in each state:

 QLDNSWVICWATASACTSANT
Stamp Duty NIL to $500k purchase price (PP) home and $250k vacant landNIL to $550k PP for home and $350k vacant land 50% reduction up to $600k PPNIL to $430k PPNo concessionConcessions available up to $590k PPNo concessionNIL to $500k PP
Grant$20k – Building or buying new$10k up to $750k PP$10k up to $750k PP$15k – Building or buying new $10k – Building or buying new $10k up to $750k PP for new and substantially renovated properties$15k – Building or buying new $26k – Building or buying new 

 **Sourced from each respective state stat revenue website – For further information, visit the respective state revenue website** 

Over time the grants have changes quite significantly and certainly in recent times they are now mainly available if you are buying a new home or building one in order to encourage activity in the construction sector.  

If we have a look at Qld as an example and let’s assume that you are looking to buy some land for $250,000 and build a new home for $250,000, you will receive a $20,000 grant from the government and pay no stamp duty.  That’s not bad!

Let’s see how this breaks down when you go to apply for a loan from the bank:

Purchase price Land – $250,000

Construction cost – $250,000

Legals & other – $2,000

Total cost = $502,000

Let’s assume you borrow 95% and that the bank won’t capitalise your mortgage insurance (LMI) beyond this – (i.e. you need to pay for your LMI with cash) 

95% loan = $475,000

Mortgage insurance (approx.) = $16,000

Total cost (incl LMI) = $518,000

Less:

Loan $475,000

Grant $20,000

= $23,000 – CASH REQUIRED (Some banks will still cap LMI up to 97% value which would cap $10k to the loan and leave the cash requirement back at $13,000) 

As you can see, what stands out more than anything else is the cost of the LMI.  This is what inevitably pushes home ownership out of reach for young Australians.  It’s not so much the actual price they are paying for the property or the repayments that come with it, it is that cash requirement (even with the grant!) in order to get their foot in the door.

Andrew Broad’s idea was to politely ask the banks to lend to 100% (This has been done in the past with poor outcomes) but this would only push the cost of the LMI premium to even higher levels as the premium amount increases as the % of the loan does.  – We can’t expect the banks to pay that aswell!

It seems to me that we need to look at ways to make it easier for FHB (First home buyers) to be able to access this cash amount that they require in order to get into the market.  Having this cash will A/ – Make it possible to purchase and B/ – The more cash they have to put towards the property, the less they will pay in LMI premium and the lower their loan amount will be and thus, the lower their repayment will be.  What are the ways we can do this perhaps?

  • Early access to Super? – This has been thrown around in the past and shot down in most quarters.  I think there is scope to look at it so long as there are strict provisions in place.  Maximum amount perhaps at $10k and/or not taking more than a certain % of the balance.  Age may also come into play but it is in my opinion fair to say that whilst this is set aside for retirement to take the strain off the government down the track, utilising it now to assist with home ownership is setting people up to be in a better position down the track in any case.
  • Bank of Mum & Dad – How do we best make it easy for Mum and Dad (M&D) who have the equity sitting there to provide some to their children to help out?  Most are scared off by the thought of being a “GUARANTOR” (Even though it’s not nearly as scary as they think) but would prefer to provide a cash loan/gift to their children which gives them deposit required and saves them thousands in LMI.  Perhaps M&D should get a tax concession on this amount up to say $50,000 (@ 4% pa.. = $2,000 deduction each year) This might only be available for say 3 years to encourage children to pay them back as quickly as possible.  If M&D are retired, the loan/gift might come off their assets calculation when going through Centrelinks assets test  which may give them some more pension on the other end.   
  • Extended loan terms – This is where banks would look at someone who is say, 30 years old and offer them a loan term of 40 years as opposed to 30.  They will offer a 40 year old a 30 year loan term so why not extend the term for younger borrowers.  The average loan term in Australia is only 4 years in any case.  This doesn’t address the equity side of things** but will help on serviceability and the household budget (by lowering repayments) for FHB.  In the above example, the minimum repayment on $475,000 over a 30 year loan term at 4% p.a. = $2,267 whereas over 40 years it is $1,985 – (**This will make it easier to pay M&D back a bit quicker which may make M&D more willing to offer the funds in the first place!!!)

How much do you need to be earning 

As noted above and with rates so low, the serviceability/capacity side of things wouldn’t appear to be the primary concern.  By extending the loan term it will help serviceability but this would be with the intention of freeing up cash flow to repay M&D or perhaps replace the money back into their super fund.

Under our scenario above, if we had a young couple purchasing the property, they would need a combined income of approx. $80,000 (including provision for  $5,000 credit card) – That’s not a huge amount of income for a young couple to be earning in order to get into the property market so it really seems to be an issue of coming up with the required cash to get in.

If we make it too easy though, there will be concerns of creating a bubble but I think this relates mainly to bringing in temporary measures where people will rush in to make a purchase before the offer runs out.  I think we need to look at something permanent and make it Australia wide (not just state based) so FHB’s can have a clear idea of what options are available to them and plan accordingly without rushing in.  

Feel free to leave a comment and let me know what you think – Are these ideas feasible?  Do you have an idea?

If you want to discuss how you can help your son or daughter get into the property market or if you want to know how your M&D can help you get into the property market or you just want to see whether you will qualify and at what level, please give us a call on 1800 804 296 to discuss your options.





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