According to Triple J’s Hack this year’s Intergenerational Report highlights the stark differences between generations in the challenge of smartly investing money and achieving the Australian Dream of property ownership. Young Australians are facing new demands arising from ascending house prices overtaking salaries, tax incentives favouring investment and land prices making inner city investment unrealistic. However, young people willing and courageous enough to change their outlook on home ownership can take advantage of these factors getting into the property market while still young and securing a stable and growing investment!
“Over the past three decades wages have increased ten fold while house prices have increased thirty fold” (Hack- Triple J). With the housing shortage in Perth set to continue and rise over the next twenty years house prices have a secure and upsurging future. With this in mind many aspiring homeowners and young investors are feeling the struggle of saving an initial house deposit and are leaning towards joint investment arrangements with friends or family members.
Co-ownership as tenants in common involves two or more people pooling their savings and borrowing capacity to share the ownership of a property in equal or unequal proportions. This is a fantastic way for young people to take the first and most difficult step into the Australian housing market and does not prohibit first homebuyers from receiving government stamp duty discounts or the other considerable tax incentives offered for investment properties.
As discussed on Hack the Australian Tax System provides strong incentives to buy property favouring and encouraging investors over home occupiers with enticements such as negative gearing and depreciation. Negative gearing is a form of leveraged investment that permits costs such as council rates, insurance, property agent fees and loan interest to be deducted before taxable income is assessed. In regards to interest alone a house purchased in December 2014 for the median Perth house price of $550,000 on a 90% loan will accumulate $460,000 of tax deductable interest! This weekly interest repayment of $1,200 can be claimed in advance to cover any shortfalls between rental income and property holding costs. In addition property investors benefit from depreciation with any decline in building construction value, fixtures or fittings being tax deductible.
Baby Boomers have used these incentives to invest and build their property portfolios after establishing and gaining equity in the family home. As depicted in this year’s Intergenerational Report this investment strategy is out of reach for many young Australians who cannot afford the high mortgage repayments to buy their first home. However, there are still many options available to young people who are willing to sacrifice the small comfort of residing in their own property. Increasingly aspiring investors are choosing to take the challenging first step into the housing market with an investment property gaining the same substantial advantage in incentives and tax breaks that their parents have had the opportunity to enjoy. Applying this strategy many young Australians have managed to break into the housing market early, gain equity while lowering their weekly repayments and appreciate the increased flexibility of renting.
“Compared to past generations young people these days are less willing to live on the fringes, wanting to live in the city closer to work and nightlife” (Hack- Triple J). While statistics suggest this statement is true inner city land prices have made investment unrealistic with mortgage repayments on a three bedroom property in Perth costing $1,100 per week. In comparison this same property would rent for $650 per week explaining why many young people make the consumption choice to live in a centrally located and comparatively extravagant house for lower weekly payments.
The Reserve Bank continues to predict financial gains for renting households over owner occupied properties discouraging many young people from signing away thirty years of earnings to a non-tax deductible mortgage. While home occupiers are faring worse off than renters this statistic does not extend to renting investors and continues to highlight the many advantages of investing in property. By considering joint investment arrangements and taking advantage of tax incentives and the benefits of renting many young Australians are continuing to enjoy the lifestyle and flexibility renting offers while also securing their financial future in property investment.
Hack Triple J – http://www.abc.net.au/triplej/hack/podcast/ Thursday 5th March