I can’t buy a home, am I financially doomed? Episode 19

There’s a template that all Australian’s are meant to follow.

  • Study,
  • enter the workforce,
  • buy a house,
  • raise kids,
  • pay off a mortgage,
  • retire.

It’s served us pretty well for the past 100 years or so, so you know the saying about if it ain’t broke…

But for an increasing number of Australian’s this model is broken.

The original spark that started me on this Financial Autonomy journey was the realisation that the path from studying until around your early 20’s, then working in paid employment for the next 40 odd years, then retirement – the traditional path – was becoming less relevant, and a serious re-think was needed.

Home ownership is an unspoken overlay applied to that traditional life path.  And whilst I certainly don’t believe that owning a home is a bad thing, in re-thinking how our life’s journey might unfold, I certainly think it’s worth questioning the place of home ownership as a core belief in one’s financial life.

And it’s not even just the core assumption that we will buy a house, it’s the assumption that this should happen in our 20’s, or perhaps early 30’s if you’ve been really wild.  It’s really quite a rigid prescription for life.

So in today’s audio blog we’re going to explore alternatives to the traditional home ownership path.  How can you achieve the Financial Autonomy goal of having choices in life, but chose the life path that makes sense for you.

You’d have to have been living on Mars for the past decade to not be aware that house prices, especially in Melbourne and Sydney, have risen sharply.  The combination of extremely low interest rates, a growing population, and in some cases a lack of supply of new homes, has resulted in existing home owners becoming wealthy, at least on paper, and those outside the home ownership club wondering how they will ever break in.

Reflecting this challenge, between 2002 and 2014, home ownership rates for 25 to 34-year-olds dropped nearly 10 points, to under 30 percent.  HECS/HELP debts certainly don’t help.

Now those facing this home ownership challenge could rail against the unfairness of it all, but in truth that’s likely to have as much impact as putting up an umbrella during a cyclone.

How about instead, focusing on a Plan B?  Sure Plan A, the traditional path, worked for your parents, but so did smoking and Saturday afternoons at the TAB.  Things change.

So how could you re-imagine your life journey, where the purchase of a home in your late 20’s or early 30’s, probably with a partner, is not in the plan?

For the purposes of this episode I’m going to assume you’ve already looked into moving further out of town, going smaller etc.  You’re at the point where buying a home is just not possible right now, or in the foreseeable future.

If we’re to find an alternate path that works for you, it might be useful to consider why buying a home has been seen as such a cornerstone of financial security.  Home ownership is attractive because:

  1. It provides a guaranteed roof over our head – shelter is a basic human need, and if you own your home, no-one can kick you out.
  2. When you retire and have less income coming in, you have a roof over your head at little cost.

Let me know if you can think of other reasons.

So in finding an alternate path, we need to consider how we can solve for those two objectives.

If you don’t own your home, then you’re renting.  And if you’re renting, then there is always the chance that the landlord could ask you to leave.  Now, if you pay your rent on time, and look after the property well, this isn’t a risk with an enormous probability of arising.  It does happen, but I think it’s a risk that is over estimated.

Put yourself in the landlord’s shoes.  They’ve bought this property, and almost certainly borrowed to do so.  They want nice regular rent and no headaches.  They don’t want turnover of tenants, because then they have periods with no rent coming in, and they usually have to pay the managing agent to find a new tenant.  Landlords are vulnerable.  No rent coming in for a month, or damage to a property, and they’re likely to be hurting.  Smart landlords value a good tenant.

So pay your rent on time and take care of the place, and the risk of you being asked to move becomes really quite small.  Not zero, for sure, but not highly probable.  Be the tenant a landlord wants to have in their property.

Longer term financial security is certainly the stronger argument for becoming a home owner.  Finding money to pay rent when retired may well be a challenge unless it is well planned for.  So if it is the case that buying in the area where you want to live isn’t feasible, it becomes really important that you build financial wealth in other areas.

So what might that look like?

To start with you need a savings capacity.  If all your income goes back out the door in rent and living costs, then clearly there is no ability to build wealth and create a position of Financial Autonomy.

I worked with a client recently who will be a long term tenant.  She was having trouble making the monthly finances work.  We explored various ways to solve this, but what it really boiled down to was that she was just paying too much rent given her take home pay.  We ascertained that rent was gobbling up 42% of her take home pay.  And then when she paid other housing related bills such as gas and electricity, half her income was gone.

This wasn’t sustainable.

So as a starting point, aim to have your rent at no more 30% of your take home (ie. after tax) income.  Of course the lower the better.  That may require some compromise as to location, or size of the place you rent, but it’s absolutely critical.

With less than 30% of your income going towards putting a roof over your head, you will have enough money to live, and also have funds available to save and invest.

Okay, so now you have a savings capacity, a foundation stone to you gaining choice through Financial Autonomy.  Initially that will build up in the bank, ideally in a separate account specifically for savings.  But with interest rates of next to nothing, the growth of your savings will be limited to how much you can tip-in.

If you’re to really maximise your ability to build financial wealth, those savings need to be invested.  You need to develop an investment strategy that works for you on all levels – risk, time frame, and ethics.  Educate yourself and/or get professional help.  Check out episode 15 – The sharemarket – a beginner’s guide, and also the 3 part series on Common investment mistakes – episodes 12 to 14, to get you started – episode 12; episode 13; episode 14.

You could set-up a strategy where you invest a regular amount every month, no different to paying a mortgage.  Unlike a mortgage though, it’s changeable as your circumstances change.

Need to suspend contributions for a while whilst on maternity leave say?  No problem.  Get a pay rise and want to increase your contribution.  Easy.

Over time your investment will grow to a very handy nest egg.

For the person perusing the alternate path of non-home ownership, superannuation is likely to take on increased importance.   When (if?) you retire, either you will want to buy a home, or you’ll need sufficient income to continue to pay rent.  Either way, your super can help.

A larger balance enables a large sustainable income to be withdrawn, covering rental costs.  Or, perhaps you withdraw a lump sum from your super to buy a home.

Now of course the primary purpose of your superannuation savings is to provide income in retirement, so it’s no good taking out so much of your balance, such that the remainder won’t produce the sustainable income that you need.  So this is certainly something you’d want to think through carefully, and I’d strongly urge you to get some expert help. But the key takeaway for now, is that your super definitely provides a potential solution to the challenge of having an affordable roof over your head in later life.

Share-houses are not a new concept.  Co-working spaces are a rising trend.  Whilst most of us like having some private space in our lives, going it alone in a housing sense is expensive.  Is there scope to team up with others to solve your housing need?

This could play out two ways.  One would be to buy a place with someone else if that was affordable.  The traditional way is to do this with a life partner, but could you do it with friends or siblings?  Maybe 3 or 4 of you could go in together to buy a property, whether it be something you live in, or something you rent out.

Alternatively you go for the share-house model whilst renting, as a way to bring down your housing costs and have more money available for savings and investment.

Earlier I mentioned the increased importance of building wealth if you are to achieve Financial Autonomy without owning the home that you live in.  Just because it’s not viable to buy a home in the area that you wish to live, doesn’t mean you are prohibited from having a stake in the residential real estate market.  Could you afford to buy a property in another more affordable city, and rent that property out?  You may be able to use the negative gearing provisions to help with affordability.  In brief, negative gearing means that, where the interest expense on your loan each month is more than the rental income that you receive, you can claim that difference – that loss, to reduce the tax you would have ordinarily paid.

Hopefully over time the value of the property grows, and perhaps you pay down the debt.  One day, you’ll own a home that either produces income for you later in life, or is perhaps an option to retire into.

It’s not something that you want to build your life around, but receiving an inheritance from parents is a reality for many of us later in life.  Indeed, the rising price of housing that may have priced you out of the market, may have an upside in also inflating the inheritance you one day receive.

Perhaps then the long term solution to your housing is that you rent until the inheritance occurs, and those funds provide you with the capital to buy something of your own.

As mentioned, I wouldn’t encourage this as your primary strategy.  Your parents might spend all of their money, or simply chose to send their estate elsewhere.  I also find it just a bit distasteful to absolve yourself of doing anything towards your own financial security and rely on the work of those before you to provide.

But with that caveat stated, when thinking through how you will achieve the security of owning a roof over your head in later life, perhaps an inheritance is an important component of the solution.

The solution that’s right for you may well be a combination of these different strategy options – perhaps you buy a rental property and negative gear in your 30’s and 40’s, contribute a bit extra into super throughout your working life, and when an inheritance comes through, sell the rental property and buy a home for yourself.

Regardless of the approach that’s right for you, I think a key change is that, if you do ultimately become a home owner one day, it will be later in life than may have once been assumed.

So rather than beating yourself up about not owning a home, or paying down a mortgage, perhaps there just needs to be an adjustment in time frame.

Perhaps it suits you to live inner city and rent during your peak earning years.  Sure, properties cost more in Melbourne or Sydney, but wages are also higher than most other parts of the country, so there may well be a robust argument to be made that your long term financial position is improved through you renting in the vicinity of the highest paying work.

Then later in life you move out to a rural area, or a city where you can afford to buy.  Maybe the goal should be to own a home by the time you’re 60 say.  The reality is that whilst in recent memory, Australian’s have always worked to a formula of buy a home asap, that doesn’t have to be the only way.    You can achieve Financial Autonomy without buying a home in your 20’s or 30’s.  With good planning, you won’t be financially doomed.

In this week’s toolkit I’ve created a document called “7 Strategy options for non-home owners”, which dot points the various strategy options I’ve mentioned here.  There’s also the Budget tool, a piece on Risk vs Reward, and a summary of Sharemarket basics to get you started in learning about investments.