‘My next-door neighbours sold their house at auction over the weekend.
We built our houses at exactly the same time. In fact, we used the same builder.
Safe to say I was a very interested onlooker.
My neighbours were happy with the result. The house sold for more than its reserve and, amazingly, sold for 56 per cent more than what it was valued at two years ago.
There were two things I took away from the auction.
First is that the markets cycle.
I bought my house in 2015. Between 2015 and 2019 my local market did nothing; it didn’t drop in value, but it would have increased in value during that time by 5 per cent at best.
That wasn’t just true for my suburb, it was true for the whole Brisbane market. The Brisbane median house price in 2015 was $525,000. By 2019, it had increased to $547,000.
Today – just two years later – it has increased from $547,000 to $710,000. And rising.
House prices don’t rise in a linear fashion. Growth comes in spurts.
While it might be true that the median house price roughly doubles every 10 years, what actually happens is that between 60 and 80 per cent of the 10-year increases occur over a two- to four-year window.
We saw this in southern capitals in recent years, where 69 per cent of the decade’s growth occurred between 2014 and 2017 in Sydney, and 64 per cent in Melbourne over the same period.
In Brisbane, prices increased by 40 per cent between 2009 and 2019, but between 1999 and 2009, they almost tripled.
Second thing I took away was the look of dejection from half the bidders at the opening bid.
The market has moved so quickly that it’s priced a lot of people out of the market they want to live in.
I couldn’t afford to buy where I wanted to live when I bought my first home. I bought where I could afford.
I figured being in the market was better than being out of it.
My income was $80,000 per annum at the time, and my after-tax pay was about $5,300 per month.
Most people can save 10 per cent of their after-tax pay.
That would mean saving $530 per month – or roughly $6,240 per year.
The median house price in Brisbane is growing by more than that in a month right now. Other states are growing by even more.
There would be many people around Australia struggling to get into the market and potentially even facing the conundrum of no longer being able to afford to buy where they want to live.
My advice is to get into the market.
That could mean buying and living in an area that doesn’t tick all the boxes, but ticks most and can be used as a steppingstone towards the area that does tick all boxes.
Or it could mean investing in an area you can afford to buy in, and renting in the area you want to live in. This is often called ‘rent vesting’.
Getting yourself into the market, rather than sitting out and trying to save more money and wait for the market to slow down, is a way to work ‘smarter’ with your money.
One last thought. When investing it’s important to have a long-term perspective. You shouldn’t go in expecting short term gains. Sure, it’s a great bonus when that happens, but to go in with that expectation is doomed for failure in my view.
I dedicate a whole chapter of my book to the property cycles and how they work. You can now download a sample of my book HERE. If you haven’t read the book yet but are curious what’s in it, then this is a good place to start. Alternatively, if you have someone you care about that you think should read the book, this is a great way to introduce them to it!
Q – We are wanting to upgrade our home and are thinking of converting our current home to an investment property. It’s in a good area and school catchment so I think will do well as an investment. Any thoughts?
A – This is a very common question to ask.
It depends a little bit on how much debt you owe, and what your incomes and savings positions are.
The issue with converting your principal place of residence(PPoR) into an investment is that any debt you borrow to purchase the new home won’t be tax deductible.
Let’s say you own a $1m home debt free and you want to buy another property that’s worth $1.2m. Most people would borrow money against their debt free, old home to buy their new home. The issue with that is that the interest on the money you borrow, because it was used for the ‘purpose’ of buying your new PPoR, won’t be tax deductible.
What’s more, because you’re debt free against the previous PPoR, you’d be paying tax on the rental income without getting the benefit of the interest costs as a tax deduction.
The banks won’t like lending money to you either, as their number one concern is customers with high home loan balances on their PPoR.
Then there’s the fact that, once you rent your PPoR out, you trigger capital gains tax.
Having said all that, I completely appreciate the concept of trying to hold onto your PPoR if it’s in a good area. The costs of getting in and out of real estate are very high, after all.
I’d suggest that, instead of paying off your home loan ahead of time, try setting up a savings account that’s linked to your home loan (they’re called an offset account).
You only pay interest on the difference between your loan and savings balance, but it means that you avoid the situation above.
Hopefully it’s not too late and you can use some of that information.
If you are in fact debt free (or owe very little) on your current PPoR then, in all honesty, it’s probably a wiser move to sell the current PPoR and buy your new PPoR with a low debt balance. You can then draw out the equity as tax deductible debt to use for deposit and costs on investment properties.
Author, BULLETPROOF INVESTING