High prices mean it’s just a dream

Abbey and her fiance are keen to buy their first home, but ...

QI am 26 and my fiance is 27. We have combined savings of $110,000 in cash and $20,000 invested in the ASX. We have $50,000 each in our super accounts. We both have salaried positions in Canberra and take home around $2200 each a fortnight. We are renting at $850 a fortnight and have no debts.

We would really like to buy a house and have been actively looking for the past year. However, Canberra is an expensive city and prices continue to climb. The pandemic has resulted in less supply and even more demand. We have found that houses in suburbs where we want to live are increasingly out of reach.

It also feels as if the market is over-inflated and houses are selling for well above the advertised price – and don’t even get me started on what it’s like at auctions! At first we thought we were being too fussy, but we’ve found that it’s a problem across the city.

And no, the bank of mum and dad isn’t an option for us! (Neither is buying an apartment – there are too many horror stories about those in the ACT).

Are we just kidding ourselves by thinking this trend has to stop at some point? Where does that leave us? Is there another option we’re missing?

I’d be grateful for your advice.

Well, Abbey, I’ll have to drag out my rather flawed and cloudy crystal ball. We have three adult kids ranging from 26 to 33 and we really do get the whole issue over housing affordability, agents’ “price estimates” and the pressure-cooker environment called an auction.

I really wish my crystal ball had the ability to guide you, my own kids and all other potential home buyers with more confidence about the future!

Anyway, take a deep breath and let’s have a crack at this. About the most reliable fact is that Australia’s population will continue to grow.

Our bigger cities and stronger regional cities will grow quite rapidly. Building costs will rise, as will the price of land development, so it is not radical to say property will be more expensive in a decade.

The nearly zero cost of money is the biggest driver of property values today. This will remain for some time. But with the amount of money our system is creating to help us through Covid-19, sooner or later rates will rise. This should cause a mortgage crisis of major proportions. So, as always, we will see periods of falling property values. The problem is I do not know when.

You have great savings and secure jobs, so I think a compromise is your answer. Personally, I’d get into the market if you can. It may mean a smaller property in an area you like, or in a well-located suburb, but not one that is your first choice.

Being a dinosaur and looking back may not be helpful for you. Our first home, way back in about 1982, was a tiny two-bedroom semi on a busy road facing an industrial estate. But it was our home, we loved it and it got us on the property ladder.

I do wish you all the best with what is one of the biggest issues of our time – housing affordability.

QI am a low-income earner working part time. I earn just over $24,000 gross a year from work and receive around $14,300 a year from Centrelink from the carer pension and carer allowance.

I have a super balance of around $11,000, which has $2687 employer contributions going into it each year. I have $1669 going out of it in fees and insurance premiums.

I have about $4000 in various shares with nabtrade and about the same amount in employee shares for which I salary sacrifice $1000 a year.

I will soon receive (after legal fees) around $40,000 in compensation for medical expenses and section 56 and 58 entitlement. I will use $10,000 of this to pay off two credit card debts. I do not have any personal/car loans.

I’m too low an income earner to be able to get a mortgage over $145,000 because most financial places will not count the carer pension as income. I currently live in government housing, paying $312 a week (my son pays half because the rent is based on both our incomes).

I’m looking for some advice on what to do with the remaining money.

An extra $30,000 after you pay out credit card debts is going to be very helpful, Alison. I have to say I am pretty unhappy about you having a super fund with $11,000 in it and $1669 coming out in insurance premiums and fees. That is about 16% of your balance each year!

I am delighted you know exactly what the costs are in your super fund – very few people can tell me that. I really want you to have a chat to your fund and understand exactly what insurance you are paying for. You mention your son lives with you and you may need death insurance to help him and also income protection insurance to help you out if you get sick, but I would like you to make an informed decision about whether the cover you have is right for your situation.

Then, of course, I would want you to be in a large, low-fee super fund. There are plenty of these about, such as AustralianSuper, Hostplus and Cbus. Having the right fund is important, as adding your excess money to a super fund is an option for you. But it is critical you understand your ability to access that money in the future, what the fees are and how it is performing. A good chat with your super fund is needed here.

If super is not the right option for your excess money, then you need to consider how long you can invest it for and the level of risk you would find acceptable. You may find an easy and effective solution is to invest in a balanced-type option with one of the large fund managers. They will help you online or over the phone. Vanguard, for example, is a very sound, low-cost manager of money. Perpetual is another example, but there are plenty of other reputable managers.

Historically you could expect returns in the range of 5% to 8% a year on average, but in years of poor market performance your investment would fall in value and good years would tend to see high returns. This means it is wise to invest for longer periods – I would suggest five to seven years.

If it is invested well, this pot of money should grow in value over time and provide you with a little more income in retirement, which I am sure would be really valuable.