Not only do first home buyers have to come up with a deposit from scratch. They will also have to spend 30 years in most cases to pay off the home. To make things even harder they are competing with investors and downsizers who have massive advantages over them.
Here is the real cost over time for three categories of buyers. Note I’m not going into details investors on tax as there are too many variables. Results shown are likely outcomes and demonstrate the massive gap in buyer types.
First Home Buyers
Deposit $160,000
Stamp Duty $0
Future Principle Payments $640,000
Future Interest Payments $293,000
Total Funds Needed From Purchase Date: $933,000 over 30 years
Investor
Deposit $160,000
Stamp Duty $40,000
Future Principle Payments $640,000
Future Interest Payments $293,000
Rent Received: $780,000
Total Funds Needed From Purchase Date: $193,000 over 30 years
Downsizer
Deposit $800,000
Stamp Duty $40,000
Future Principle Payments $0
Future Interest Payments $0
Total Funds Needed From Purchase Date: $40,000 which is paid immediately
Here Are Some Reasons Why There Is No Easy Fix
To even the playing field the government would have to consider removing negative gearing for future purchases. It would not be a popular choice and a lot of economic modelling would have to be done to assess how this would play out. If this was to happen and investors were to stop buying, the downside is this could have put rents up as there is less supply. Therefore the problem is not solved as first home buyers would find it harder to save for their own homes due to rent increases.
The other competition, the downsizer, I will assume have 100% equity, therefore the only additional cost is stamp duty. If downsizers are competing with each other and have sold their family home for substantially more than their new home they can pay $100,000 more and it just means on paper they pay the government $5,000 in stamp duty and have a little less in the bank. For many of them no big deal.
I don’t believe in penalising the downsizing segment of the market as they have worked hard to pay off their homes. They deserve extra cash in the bank in the twilight years. However if they paid double stamp duty like foreign investors do in some states, it may discourage them from moving which could assist first home buyers as there could be less competition.
But the consequence is less upsizing properties are listed for sale as retirees continue to live in a large home to avoid double stamp duty. This could cause existing home owners not to upgrade as there is less choice for them, again not good for the first home buyer who want that starter home.
So What Can Be Done?
I feel first home buyers looking to enter the market may have to look at instead purchasing an investment property they can afford, maybe even something they would live in one day. That way they can live in the $800,000 home in their preferred area and pay rent but also be in the market with a home they may purchase for $500,000 and receive a similar rent to what they are paying but also benefit from tax advantages. so they are not falling behind.
In this example above they would lose stamp duty savings but now have a greater deposit (or need less to get in). Pay less interest and own the investment sooner if they are disciplined with additional payments. The great Australian dream is still achievable, it just looks a lot different to the 1/4 acre block of the past.
Here is the real cost over time for three categories of buyers. Note I’m not going into details investors on tax as there are too many variables. Results shown are likely outcomes and demonstrate the massive gap in buyer types.
First Home Buyers
Deposit $160,000
Stamp Duty $0
Future Principle Payments $640,000
Future Interest Payments $293,000
Total Funds Needed From Purchase Date: $933,000 over 30 years
Investor
Deposit $160,000
Stamp Duty $40,000
Future Principle Payments $640,000
Future Interest Payments $293,000
Rent Received: $780,000
Total Funds Needed From Purchase Date: $193,000 over 30 years
Downsizer
Deposit $800,000
Stamp Duty $40,000
Future Principle Payments $0
Future Interest Payments $0
Total Funds Needed From Purchase Date: $40,000 which is paid immediately
Here Are Some Reasons Why There Is No Easy Fix
To even the playing field the government would have to consider removing negative gearing for future purchases. It would not be a popular choice and a lot of economic modelling would have to be done to assess how this would play out. If this was to happen and investors were to stop buying, the downside is this could have put rents up as there is less supply. Therefore the problem is not solved as first home buyers would find it harder to save for their own homes due to rent increases.
The other competition, the downsizer, I will assume have 100% equity, therefore the only additional cost is stamp duty. If downsizers are competing with each other and have sold their family home for substantially more than their new home they can pay $100,000 more and it just means on paper they pay the government $5,000 in stamp duty and have a little less in the bank. For many of them no big deal.
I don’t believe in penalising the downsizing segment of the market as they have worked hard to pay off their homes. They deserve extra cash in the bank in the twilight years. However if they paid double stamp duty like foreign investors do in some states, it may discourage them from moving which could assist first home buyers as there could be less competition.
But the consequence is less upsizing properties are listed for sale as retirees continue to live in a large home to avoid double stamp duty. This could cause existing home owners not to upgrade as there is less choice for them, again not good for the first home buyer who want that starter home.
So What Can Be Done?
I feel first home buyers looking to enter the market may have to look at instead purchasing an investment property they can afford, maybe even something they would live in one day. That way they can live in the $800,000 home in their preferred area and pay rent but also be in the market with a home they may purchase for $500,000 and receive a similar rent to what they are paying but also benefit from tax advantages. so they are not falling behind.
In this example above they would lose stamp duty savings but now have a greater deposit (or need less to get in). Pay less interest and own the investment sooner if they are disciplined with additional payments. The great Australian dream is still achievable, it just looks a lot different to the 1/4 acre block of the past.