Can’t afford to buy, can’t afford to rent
We all aspire to own a home at some point in our lives. Some first home buyers are still living with their parents when they buy their first property, which they typically rent out. This is known as rentvesting. The buyer continues to live in free or cheap accommodation while using their salary and rental income to make loan repayments and build equity in their property. But this strategy doesn’t work for everyone; especially couples who want their own space.
Indeed, most people start off by renting their first home. They might then find a partner who they decide to move in and rent with. Some go on to marry and have little choice but to continue renting.
However once you start renting, it becomes near impossible to save the deposit needed to buy a home. Especially when you consider that over the last four decades house prices have risen three times faster than wages — so for every $1 you save in after tax income while you’re renting, property values have risen by $3. This divergence, between wages and property prices, explains the falling home ownership levels noted by the Australian Bureau of Statistics over the last 40 odd years.
Compounding the problem further, rental affordability has now deteriorated to the worst level on record. Melbourne rents have increased at ~7% per annum over the last three years while average real wage growth fell by 0.2% over the same period. So now some aspiring first home buyers are struggling to afford their rent!
Australia, like many countries throughout the world, has a major shortage of housing. This is arguable the greatest socioeconomic issue facing our country today. Demand for housing is soaring at a time where much of the construction industry is in disarray. Building mid-rise apartments in many Sydney suburbs isn’t even feasible anymore — they cost on average $905,000 to build yet can only sell for $885,000.
Economic theory tells us that when demand for any good or service outstrips its supply, prices rise. So a sharp increase in supply is really the key to reducing property prices. But this is easier said than done. The National Housing Accord is meant to deliver 1.2 million new and well-located homes over a five year period, but completion rates are falling 40% short of where they’re meant to be.
So where does this leave us? Well for some Australians, their dreams of owning a home have evaporated. They’ve come to accept that they’ll rent for life.
The built-to-rent model that gained some financial backing and momentum over the last decade (before beginning to unravel more recently) catered specifically to this growing trend. After all, is renting for life all that bad? It is unfortunately. The Retirement Income Review 2020 noted 48% of people who rent in retirement are in poverty. For single renters the figure is 60%.
What you’ve just read is the dilemma that Real Estate Capital has been working on. Years of research and industry consultation have yielded an innovative new model that we believe will become the standard pathway to first home ownership for many Australians. There’s still a lot of work to do, but if you’re currently renting and looking for a way to transition to owning a home, stay tuned.
