Facts, house prices sky high, mortgages and government levies
The ‘it’ topic of the moment is house prices. Everyone is discussing the current trends in property prices, selling or buying, mortgages and everything to do with this topic. Everyone has an opinion but here are some of the facts relating to the current state of the housing market. These are also good pointers for people wanting to obtain information in order to invest or buy.
Housing prices sky high and supply and demand quotas
Why is the housing market experiencing such a boom of late with house prices so high? Its not just because of the Reserve Bank’s decision to lower or hold the interest rates. Its also a matter of supply and demand and the rising population.
Population growth is now at the high end of the range of the past 40 years due to an increase in the rate of birth and net migration flow especially with skilled migrants who arrive typically cashed up adding to the housing demand.
Even though there has been an increased rate of new home construction, its not enough to cover the demand for houses. As such the ‘demand’ is running ahead of the ‘supply’ leading to an increase in house prices.
Its also interesting to note that although house prices are rising everywhere in Australia, growth rates vary significantly from city to city. Sydney is at the top with 15.6% rise in house prices since 2006.
What effect is the rising prices of houses having?
It is now starting to dent housing affordability. Rising prices are also reducing rental yields as some renters have become owner-occupiers themselves.Vacancy rates are rising and rental growth is slowing. Lower rates of return will thus repress interest from potential investors.
Dream home versus modest home
Another interesting trend of late is first home buyers choosing to invest in more expensive houses (with associated larger mortgages) rather than something more modest. The low interest rates have misled new investors to believe that they can easily afford the monthly repayments.
However its actually smarter to start your foray into property investments with a modest property and thus a smaller loan. You should then work hard to put as much of a dent in your home loan
balance as quickly as possible. This is because in the early stages of a loan, the most part of your repayments are being eaten away by interest whereas extra repayments go straight off the principal.
If you had taken out a smaller loan and paid extra you will pay off your loan sooner than trying to pay off a large loan where you can afford to pay only the minimum repayment, not to mention the savings of thousands in interest bills. You can then upgrade to your ‘dream home’ by using your initial investment as a stepping stone.
Also noteworthy, the present is the time to pay down your loan more aggressively. Interest rates are low so they absorb less of your repayments. This decreased interest expense means more of your repayment is going towards reducing your debt.
How is the increase house value affecting the rate of government levies?
The state government is experiencing a hefty revenue raise from the stamp duties levied on any property sales.
Under the tax system, a higher duty is charged on more expensive homes than average homes which is as it should be. However, governments seem to have missed on the fact that they need to regularly adjust the threshold limits as our home values increase. As a result of this, we are now paying “luxury” stamp duty amounts on average homes.
Even though the revenue from taxes are essential in order to provide a range of important government services, this tax is now becoming unfair. The amounts of duty being charged is considerable enough that it can actually keep people from owning their own homes.
Its also interesting to note that owner occupied stamp duty in Queensland is less than half that of the other states. This is a smart move because with this incentive, Queensland benefits from a migrating population that has been educated and supported by the other states. NSW is therefore losing these aspirational, hard working citizens to other states.
About Aaron Sainsbury
With expertise spanning mortgage lending, property law, property investment and borrowing to invest within Self Managed Superannuation, Aaron Sainsbury offers more than 25 years professional advisory expertise.
He is an enthusiastic supporter of financial literacy, working closely with clients to help them gain and maintain control of their financial future.
Aaron is thoroughly committed to building lifelong relationships with clients based on the highest quality service, advice and trust.
Contact Aaron direct on 02 9818 8643 .
Smartline Personal Mortgage Advisers
G5/1–15 Barr Street , Balmain NSW 2041
Authorised Representative No 298191
Smartline Operations Pty Ltd Corporate Authorised Representative No 376868
Aon Hewitt Financial Advice Ltd AFSL No 239183