How can we fix the housing affordability crisis?

How can we fix the housing affordability crisis?

It seems as though there is no hotter topic than the housing affordability crisis and what needs to be done to solve it. From the endless news articles to the discussions had in homes around Australia, it’s a problem that strikes right at the heart of the Australian dream of property ownership.

But with the issue not going away anytime soon all that hopeful first time buyers can do is keep an eye on the solutions proposed and add their voice to the discussion where they think a difference can be made.

Find out about the solutions that have been proposed to the housing affordability crisis below.

Limit negative gearing

The Australian Labour Party has been very vocal in pushing for changes to the current negative gearing system that allows investors to claim loses on their investment property as a reduction on their taxable income. This ultimately reduces the amount of tax paid by these investors and acts as an incentive to stay in the property investment game.

The issue for first home buyers with all of this is that the more investors are encouraged to continue investing in property, the higher property prices will be pushed up and the harder it will be for those without property to get a look in.

The ALP is proposing to limit negative gearing to new housing only from July 2017. This will not affect people who currently negatively gear a property. Read more about the pros and cons of negative gearing here.

Medium density housing

Terrace Houses, coastal New South Wales

Named “the missing middle” this type of housing includes townhouses, terraces, dual occupancies and manor homes. The NSW state government in particular has recognised the role that medium density housing can have in opening up property in Sydney to first time buyers and is currently accepting submissions on their proposal to make this a reality.

The government aims to make it easier to get approval for these types of dwellings in order to contribute more options to buyers who want to live close to the city at an affordable price and increase overall supply. It will also help to provide suitable housing alternatives for empty nesters living in established suburbs who are looking to downsize and yet still stay in the area they are used to.

It is hoped this will open up some great family sized homes to younger Aussies and allow for generations of families to live side-by-side in the suburbs they love.

Open up super accounts

Another proposal that has been floated is that first home buyers should be able to access their super fund savings to put down a deposit on a home. This solution, however, raises immediate red flags as it goes against the very purpose of super which is of course to assist in funding retirement. Using this money to buy a property may seem like a good short term solution but can have serious negative repercussions in the long term.

What has been approved by the ATO, however, is that a self-managed super fund holder can use their funds to purchase a property that is then rented to a family member as long as the fund owns less than 50 per cent of the property. This was only made possible this year and provides an opportunity for family members to invest in property together.  

Rentvesting

Rentvesting is the only solution proposed that doesn’t require any government intervention and is currently being used by first home buyers. This is the term coined for when a home buyer purchases a property in an affordable area and rents it out while renting another property in the area that they wish to live.

Renting vs buying: The costs and fees

While this isn’t a viable solution for all home buyers, it has helped some Australians get a foot in the door of an otherwise impossibly expensive property market. Whether or not this will turn out to be a long term trend, with home owners never buying into the area in which they live, will remain to be seen. Although for now, it is one of the last options available to those who still want to claw their way onto the property ladder.

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Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is stamp duty?

Stamp duty is the tax that must be paid when purchasing a property in Australia.

It is calculated by the state government based on the selling price of the property. These charges may differ for first homebuyers. You can calculate the stamp duty for your property using our stamp duty calculator.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

What does pre-approval' mean?

Pre-approval for a home loan is an agreement between you and your lender that, subject to certain conditions, you will be able to borrow a set amount when you find the property you want to buy. This approach is useful if you are in the early stages of surveying the property market and need to know how much money you can spend to help guide your search.

It is also useful when you are heading into an auction and want to be able to bid with confidence. Once you have found the property you want to buy you will need to receive formal approval from your bank.

How much is the first home buyer's grant?

The first home buyer grant amount will vary depending on what state you’re in and the value of the property that you are purchasing. In general, they start around $10,000 but it is advisable to check your eligibility for the grant as well as how much you are entitled to with your state or territory’s revenue office.

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out.