COVER STORY

Build on the dream of home ownership

Months of economic and social shutdown were tough to cop but necessary to beat the coronavirus pandemic. The subsequent economic recession won’t be an easy beat either, but experts are reassuring us that Australia is in a far better position to recover than other countries.

Fears about our financial future are rational in these circumstances, but they will also go a long way in shaping how property and sharemarkets react.

Kristian Kolding, lead partner for macroeconomic policy and forecasting at Deloitte Access Economics, says fear will be important to Australia’s outlook because “fear generates its own momentum” and “that makes it really hard to stop. Fighting an awful virus is really hard. Fighting both a virus and fear is doubly hard [for an economy],” says Kolding.

In a survey of about 3000 people in May, Switzer Financial Group says close to 1600 (54%) believed that property prices will drop in the next 12 months. In its February survey, less than 150 people thought property prices would drop. According to comparison website Finder, 24 out of 42 economists and finance experts said in May that now was not a good time to buy property.

Fears about property – whether it is about affordability, supply, mortgage debt, vacancy rates or investment potential – are present and looming large. But it’s not all doom and gloom.

The greater Sydney region, for example, needs 1.03 million new homes between 2016 and 2041 to meet population projections. This means, on average, 41,200 homes need to be built every year for 25 years between the council borders of the Blue Mountains (west), Hornsby (north) and Sutherland (south).

However, the NSW Department of Planning forecasts only 38,210 homes will be built each year over the next five years and this has some property experts suggesting that prices will continue to rise in Sydney as demand outstrips supply.

Meeting population demand is a point Money magazine founder and editorial adviser Paul Clitheroe always makes when speaking to the

strength of property markets and it’s a good indicator of where price growth will likely occur.

Prime Minister Scott Morrison’s latest stimulus package (at the time of writing), known as HomeBuilder, aims to address a predicted national home construction shortage in the second half of 2020. However, the government grants of $25,000 to help build a new home or substantially renovate an existing one (see eligibility criteria on page 34) have received mixed reactions from experts.

Largely in line with previous government grants, the HomeBuilder package is a win for first homebuyers. In some states and territories you can now access up to $55,000 in first home buyer grants (including HomeBuilder), and this doesn’t account for stamp duty concessions. However, there’s also an argument that HomeBuilder is encouraging people to increase their debt levels well beyond their means – and this is before any certainty is established around the economy once JobKeeper and JobSeeker payments come to an end in September.

The Real Estate Institute of Australia (REIA) has tried to allay people’s fears of a property crash, saying forecasts of price drops of 30% are highly questionable. “Currently we have a situation where listings are decreasing yet the inquiry level from prospective buyers is increasing. It’s simple economics that when supply decreases and demand remains, prices edge upwards. They certainly don’t drop,” says Adrian Kelly, president of REIA.

“The Housing Industry Association is expecting building of new dwellings to fall by almost 50% over the rest of 2020 and into 2021. This does not suggest a scenario of supply exceeding demand – a prerequisite for falling prices.”

Fears of a property “corona crash” might be overdone, but this shouldn’t stop you from making sure a roof will always be over your head. This feature article will look at why you can still afford the great Australian dream; what property investors should think about in a pandemic; whether it is better to invest with friends or family or go it alone; what you need to know about property and your will; and how to manage a mortgage and divorce.

Any property will do

In 2017 and 2018, broker Mortgage Choice conducted research to identify what the “great Australian dream” really meant in present times. Surveying 2000 Australians, the firm found that no longer is our dream home a free-standing house on a quarteracre block (1000sq m) in the suburbs. And neither is it an apartment, penthouse or three-storey mansion. The research concluded that the great Australian dream is now the ownership of any home or investment property in a desirable area.

Given that owning any type of property is now the number one goal, how exactly do you achieve it? There are several basic strategies: reduce your spending to save for a deposit; seek financial assistance from the bank of mum and dad or move back in with them to save; buy a smaller property (likely to be more affordable); co-buy with friends, family or acquaintances (higher risk); or rentvest – the strategy of renting where you want to buy but can’t afford, and buying an investment property in a location you can afford.

According to property researcher CoreLogic, the main barrier to buying a home is having the money for a deposit. Its Perceptions of Housing Affordability report surveyed 2200 Australians in August 2019 and 47% said saving for a deposit was their biggest hurdle.

So how do you save for a deposit?

Stuart Wemyss, financial planner and author of Rules of the Lending Game, says it’s a matter of budget first and deposit second.

“The simplest way to work out what you’re spending is to review the past three months’ worth of transaction account and credit card statements,” he says in his book.

Then you need to explore where savings can be made and establish at least two bank accounts – a savings account and a spending account. Once you are tracking your spending, you’ll soon work out whether you have enough income to buy a home or investment property.

“Most people’s first property is not their dream property. If your budget is limited, you might have to buy, improve and sell a couple of properties over the next decade before you’ll be in a position to afford your dream home,” says Wemyss.

CoreLogic says getting into the property market isn’t easy. It calculates that it takes, on average,

8.7 years to save for a 20% deposit. And when you finally purchase a home, you’re likely to pay 6.5 times your annual income – and that’s only for a medianpriced dwelling at $524,000.

Once you have your foot in the door, then you need to spend about 35% of your annual income to service the mortgage.

The good news is that throughout 2019, more than half of us (54%) felt housing affordability had improved. Low interest rates and a slight dip in Sydney and Melbourne prices helped drive this view, CoreLogic says.

If you’re going to struggle to save a home deposit of 20%, this shouldn’t be feared. You can buy a home with a deposit as low as 5%, but factor in higher mortgage repayments and the possibility of paying lenders mortgage insurance (see table, next page). If you qualify for all the national and state first home buyer grants, you can wipe up to $55,000 off the cost of your home without factoring in any stamp duty concessions.

If the great Australian dream is to now own any home or investment property, it is achievable, but it’s hard work.

The CoreLogic research says almost half (46%) of us will buy a property that does not meet all our criteria. And almost two in five (38%) people will consider more affordable property (for example, a unit over a house). Then there are

strategies such as choosing homes a little further from your workplace; moving to a less desirable suburb; buying with family or friends (this is more risky); or moving interstate. In this issue we’ve also discussed the possible upside to buying in a regional town (see page 77).

Investing during a crisis

Ben Kingsley, chief executive at Empower Wealth and chairman of the Property Investors Council of Australia, says the majority of investors in property are the buy/hold and “set and forget” type who will maintain a residential property, keep the tenants happy and then over the next decade pay the debt down and live off the passive income.

To this end, he believes most longer-term property investors should make it through the pandemic. For an investor who has bought in the suburbs, where there isn’t a high concentration of any particular investment property or high concentration of any one type of investor or tenants, “they’re actually quite safe – they may even experience some growth towards the end of this year if the second pandemic wave isn’t coming through,” says Kingsley.

If tenants ask for reduced rent, negotiate a solution. If you’re a landlord and you’ve also lost your day-to-day income or are working less hours, Kingsley says this is the rainy day that you save and plan for.

“With any type of money management and investing, you always need to make safeguards and buffers and a good rule of thumb is to be able to have a minimum of six months of cash reserves in the event that you have a sudden impact on your income,” says Kingsley. “And when we talk about cash reserves, we’re actually talking about it based on your standard of living in terms of what you would actually spend.

“You can extend that out even longer once you break down your spending down to essential and discretionary spending with buffers in that six to 12 months to know that you’ll quite comfortably see this period through.”

He says the data feeds coming through to him indicate that, outside their investments, the income of 20%-30% of households has taken a hit and “that’s the rainy day you should have always been thinking about”.

Lloyd Edge, buyers agent and director of Aus Property Professionals, says investors should use the pandemic to review their strategy and where they want to be in the future.

“If people have got properties and they’ve got a lack of cash flow, I’d be thinking about how to turn these properties into having a more positive cash flow [to weather future economic crises],” says Edge.

This might include ways to add value to your property portfolio. “I’m quite big on dual-income properties and properties where you can have up to three incomes,” he says.

“You can particularly achieve this on cheaper properties in cheaper areas. You can get a large block and build a house on it as well as a duplex out the back. A duplex plus a house at the front has three incomes from the one property purchase.”

Kingsley says there is a small percentage of property investors who look for an edge or ways to accelerate their strategies, which carries a bit more risk – things like value-adds, subdivisions or shortterm stays such as Airbnb. In his view, these people aren’t necessarily what you’d call traditional, safe property investors.

“People who may have been attempting those strategies at this time or gearing themselves a little more aggressively would be challenged at this point,” he says.

“You’re taking a calculated estimate in terms of: ‘I want to subdivide this lot and I want to spend $1.5 million and put duplexes on it and my estimated return is 20% with margin.’ As opposed to: ‘I buy that property, I’m going to get a 4% yield on it, leave it how it is and in a decade’s time hopefully it’s worth considerably more than I paid for it.’ ”

Edge makes it clear that diversification in your investment portfolio is also necessary. He’d consider adding equities to take advantage of the markets when there are buying opportunities.

The Switzer Financial Group survey of 3000 Australians in May showed property is no longer one of the most favoured investments – 10.5% would invest in property right now, compared with 62.7% in shares, 10.1% in term deposits and 16.4% in “other”.

Edge says there’s value in the property market if you go looking.

“There’s a shortage of stock in the Sydney market, although investment prices haven’t dropped as much as some people were expecting,” he says. “Some of the better value and some of the better deals investors are getting are in regional areas and possibly there are better opportunities for negotiation on price there.”

He adds, though, that existing property investors can become obsessed with what properties haven’t performed well in the current market.

“Some markets have dropped in value more than others and there are markets where the rental demand hasn’t been so good, or you might have bought in lower socio-economic areas where the rental demand hasn’t been so great and hasn’t been good for the portfolio,” says Edge. “You should be assessing whether these properties are good for the long term.”

An investor himself, Edge says you need to ask whether it’s time to move forward to buy better properties. Properties that have been performing well are likely to have equity on them and that will be able to help you move forward, he says.

If you’re ready to buy a property but are holding off until Covid-19 is behind us, you may miss opportunities. There are people who do try to time the bottom of the market, but “that’s really hard to do”, says Edge.

He says signs that property markets are on the up include more people selling more and more people attending open homes in specific areas.

Perils of partnerships

Stuart Wemyss says that investing in property with family or friends as a partnership will pool and likely increase your borrowing capacity, but it’s risky. For example, if one partner stops making repayments on a loan, the remaining partner is responsible for making all repayments.

Typically, Edge advises against investing in property with friends and family without proper consideration. He says co-investing should be set up as a business partnership and it should be treated strictly as such.

Kingsley says property investments that are a joint venture should always be entered into with a clear line of sight, especially in terms of the exit strategy.

He says joint ventures can end poorly because often there’s no written contract, and it’s done on a handshake or verbal exchange between a couple of mates or siblings. It then becomes a problem when circumstances change for one party – that usually ends in the asset being sold earlier than it should be.

“In the event that one party is to cancel or to get out of that joint venture, then there’s got to be an economic punishment equivalent to the opportunity cost that’s going be experienced by the other party,” says Kingsley.

“If one party gets out, they only get out what they originally put in and nothing more. If the other party is then forced to sell, then they should pick up any losses from that joint venture.”

Another common scenario is that one of the investment partners is in a relationship and all of a sudden they want to get serious about their own property and become impatient.

“I’m of the view they [joint ventures] are riskier than what they are in terms of a good outcome for the customer,” he says.

“They really need to stress-test why they’re doing this, how long is the venture going to be for, and have it legally documented so that they go into it with eyes wide open.”

The experts have all seen investment partnerships work well and others fail. It comes down to each party knowing what they’re contributing and how the workload is to be shared.

“You need to approach the partnership with the premise that it’s likely to fail and that you’ll have to do everything possible just to make it survive,” says Wemyss.

“If you do this, you’ll probably have a good chance of making it work. Partnerships can be very rewarding, but the majority require a lot of toil and truckloads of patience.”

Move on after a divorce

Rebecca Jarrett-Dalton, founder of mortgage broker Two Red Shoes, says that unfortunately handling divorce and mortgages has become an increasing part of her Sydney-based business. And if you believe expert forecasts, there’ll be more of these cases as a result of Covid-19.

She says there’s no one-size-fits-all approach to working out how a mortgage will be handled in a divorce. However, the most important thing to do is talk through solutions with a professional before making the final agreement. (See tips, next page.)

This can include calling your bank’s or lender’s hardship team straightaway and letting them know what’s going on, and they can advise you on your

options. She says couples may decide to split the funds in their individual accounts but freeze any joint accounts such as the home loan redraw.

Often she finds clients have already made an agreement, but if they haven’t “we can plant the seeds” for better solutions that the divorced couple might be thankful for in 10 years.

Talking to a professional adviser can also help both partners financially in the long term. For example, it may be beneficial to take on the family home when you factor in the stamp duty costs or real estate agency fees of going into a new property. She’s seen cases where people have avoided $60,000-$80,000 in costs.

Anna Hacker, national manager at Australian Unity Trustees Legal Services, says if the divorce is amicable, there are lots of things that can happen because people are talking to each other.

“They can negotiate with a bank if they’ve got separate finances at that point. I’ve seen people that have continued to have the mortgage together and it’s not that uncommon,” says Hacker.

She says financial institutions won’t always focus on both names on the property title and it becomes trickier if one person is remaining in the property.

There are many cases where people continue living under the same roof, too. If that’s the case, there’s less of a need to deal with the property immediately.

When couples are not communicating properly or there’s more tension in the room, JarrettDalton says this is when poor financial decisions can be made.

“There might be one partner who gives up and says, ‘I’ll give them everything,’ and they get out of there. That can mean passing over all the assets or they’ll take on all the debt just to get out of the situation,” she says.

The “do whatever it takes” attitude is not always the best one because there might be better options, even if it means taking over the other person’s responsibilities. “Someone might be walking away with a car and feel they’ve got the better deal. But they’re not doing it with eyes wide open,” says Jarrett-Dalton.

Hacker says there are also situations where assets are tied up with businesses. The business may have a loan that was guaranteed by the property or the property was security and that becomes difficult to untangle. Financial stress might have led to the end of the relationship.

“Suddenly there’s a debt on a house that there wasn’t before because of an issue with a failing business. One party might be bankrupt and the other isn’t, and it’s really hard to settle anything there.” she says.

And divorce cases occur in all age groups and scenarios. Jarrett-Dalton says first home buyers pop up more than people might imagine.

“Those first six months of making repayments when you’ve got to manage your finances on a tighter budget can be very stressful and we can see some couples come undone taking out that first mortgage,” she says.

“I’ve got an example where a couple had been together for some years, saved really hard to get their first home (one party more than the other). Once they got into the house, both parties then had to match their savings and the contribution to the home loan and it wasn’t long before that didn’t work for them any longer and six months later they were selling.

“It’s a shame and a wasted opportunity and here they are coming out of it with no equity and a tougher time to start again.” (See case study, page 39.)

Traditionally it can be a

tougher time for women, and the mortgage broker is often asked what it means if, all of a sudden, their name is on the property title or the mortgage becomes solely in their name.

It can be challenging for women financially because often they’ve been out of the workforce and their skills might not be up to date, or perhaps they’re part-time workers. They usually have the primary caring role or have to sacrifice the caring role to go back to work and put the kids in daycare.

They usually have to manage the childcare fees, and they perhaps have lower income. While there might be some income support such as the family tax benefit or child support payments, not all lenders like to consider these. “So they might have additional income that would help support a loan, but it isn’t considered by every mainstream lender. It can be more challenging to find where they’ll fit.”

Jarrett-Dalton adds that women in their senior years can also find it challenging. They might not have as much super if they’ve had employment gaps. And banks now look for property exit strategies in the post-retirement age.

Passing on property

In April, comparison site Finder released a study of more than 1000 Australians which showed that 20% were prepared to create a will when they bought a property. Only 7% would create a will as the result of a divorce.

Australian Unity’s Hacker says there have been

cases where, even after many years of divorce, a person passes away and another person – because there wasn’t a proper property settlement – may still be able to challenge the will.

“We will always say to people, ‘Were there other relationships, how was that settled, and is there a skeleton in the closet that’s going to come out later that we need to account for and explain why you haven’t provided for that person?’,” she says.

A common scenario is that, for a range of reasons, couples may not have wanted to finalise the property settlement at the time of divorce.

“There are many cases where we go to do someone’s will and they’ll say, ‘Oh, I actually own that property but my ex-wife is still living in it and I’ve had nothing to do with that property since – we just agreed that’s what will happen’,” she says. “In this day and age it’s probably less common, but we’re talking about people who separated 20 to 30 years ago.”

If you find yourself in this situation, Hacker says you should make it a priority so that it can be covered off in the will. It can be further complicated if people don’t want to go through the expense of settling property. And if there’s a new partner in the mix and you need to provide for them, it becomes even more complicated.

In terms of passing on your property to family, Hacker says you can give it to whomever you wish, but it’s best to have a discussion about it early.

“Most people will have an idea about who they’d like to pass the property on to. It might be they’ll pass the family home to the daughter and the investment property to their son,” she says.

However, parents need to think about the different tax liabilities or other issues that may arise by giving one child a principal place of residence and another child an investment property that will have capital gains tax attached to it, which will be payable at a later date. Normally there would be detailed instructions on how to manage that.

“Let’s say you have two $500,000 properties but one has $100,000 of capital gains, therefore after tax it’s worth less than $500,000. You might have a calculation to give that child more to cover that capital gain to make sure it is equal,” she says.

“On the other side of it, when people inherit those properties, they very much know their sibling received more than they did and are very keen to make sure it’s equalised. Unless it’s in the will, you can’t necessarily just do it.”

She advises having flexibility in your will. A common way to do this is to leave it in a wish – “it is my wish that if my daughter wants the property, she has the right of first refusal”, for example.

The wishes are really important because it’s what you’re meaning to do. Are you meaning for it to be equal or are you meaning for it to be not equal. And it’s always better to have the conversation with beneficiaries because they might not want the assets or there might be a better way to split them.

To exclude someone in a will is more difficult and Hacker says if someone is insistent on exclusion they really should provide detailed explanation – often an affidavit – of why that person wasn’t provided for.

“If someone was to challenge, the affidavit can be used in court. A statement could be used as well but an affidavit is something you have to swear by. It’s serious and has weight in court,” says Hacker.

She points out laws are different from state to state on who can challenge a will and it’s always important to make sure you get advice if there’s any concern.

Hacker says people sometimes want to pass on their house to a charity, especially if it is valuable, or if it is an emerging charity as it could be a good place for a headquarters.

However, these cases are not always an easy “in specie” transfer. The main issue is whether the property is something the charity wants. “There was a case a couple of years ago where someone had these intentions of passing on property but then had really specific requests in the will about what was to happen and it had to go court, where the charity said, ‘Well, we already have a property that does this – so while we appreciate this gesture, it’s going to create a financially impossible situation for us to maintain two similar properties for no reason’.”

M