Will first home buyers be locked into apartments forever?

So I was thinking about am average first home buyer who say was going to buy a single bedroom apartment in Melbourne cbd as their first property. Why this location and type of property? Well let's assume they are single or maybe have a partner but no kids and are employed in an office role in the city. They like to go out with friends to bars and restaurants when the budget allows.

So looking at this type of property (very quickly) it looks like they can get something for about 450k. A 20% deposit would be 90k. Then let's say they pay the remaining loan off in I don't know 15 years? I assume they and their partner get a promotion.

Here's the thing though. Let's assume that their future next house is currently 1m and over the next 15 years property prices rise 40% (the percentage doesn't really matter too much). So now their apartment can be sold for 630k but their next property costs 1.4m.

In the space of 15 years the gap between their current PPOR and their goal property went from 550k to 770k. What's more is that for every percentage increase at this high level it becomes harder for them to catch up.

All this is to say that if we don't have some significant wage increases over the next couple of decades (and if property starts rising again) it looks like many young people who bought in to FHB properties could well be locked into their current properties (or ones like them) for life.

IMHO

 

I realise your using a specific example to get the point across

But hasn’t there always been spread/GAP even comparing houses vs houses.

You buy a $500k house, vs $900k house, over time at exactly the same rate of growth that gap will widen. I just mean it’s not specific to FHB or units vs houses is all.

So yes to agree with you, I believe in the coming decades as our populations grow and capitals become increasingly more dense, apartments/townhouses will become more & more normal and accepted in generations to come, this will however keep higher value assets/houses prices out of reach. And so on

 

Agree with what others said, the disparity between properties and suburbs varies and always has!
While I understand your example is very specific there are a lot of other factors in your life to consider...that may change that perspective!
Will it be you and partner, you will age, will you start a family, will you need to move for better employment opportunities, will you earn more as you progress more, will you start a business, will you receive any estate funds, etc...
What I wish to point out... life is not just so simple, wish it was, but there are many aspects of your life under your control which you can change.
I just reflect on my situation, came as migrant kid with family and suitcases only, lived SW SYD for 20 years, then moved to North SYD and lived there for 10 years. So how was it possible for me to advance to live in a suburb say where the current median price for a house is $2.8M to $740K where I lived before?
Not to boast, well I can tell you, ......passion, passion, passion (dreams/goals), drive, then knowledge, risk, determination, and most of all action!
What I mean by that, is if you want more then do more, become more, become a better paid worker, a better income earner, or a better saver, or a better investor and so on... Read and model on successful people how did they get there and then act yourself!
Do not settle for mediocrity, as my mentor JR said:
- Don’t set your goals too low. If you don’t need much, you won’t become much.
- Each of us has two distinct choices to make about what we will do with our lives. The first choice we can make is to be less than we have the capacity to be. To earn less. To have less. To read less and think less. To try less and discipline ourselves less. These are the choices that lead to an empty life. These are the choices that, once made, lead to a life of constant apprehension instead of a life of wondrous anticipation And the second choice? To do it all! To become all that we can possibly be. To read every book that we possibly can. To earn as much as we possibly can. To give and share as much as we possibly can. To strive and produce and accomplish as much as we possibly can.
- Humans have the remarkable ability to get exactly what they must have. But there is a difference between a “must” and a “want.”
- If you are not willing to risk the unusual, you will have to settle for the ordinary.
- If you really want to do something, you'll find a way. If you don't, you'll find an excuse.
- There are two types of pain you will go through in life, the pain of discipline and the pain of regret. Discipline weighs ounces while regret weighs tonnes.
- You cannot change your destination overnight. You can change your direction.
- You must either modify your dreams or magnify your skills.
- Your personal philosophy is the greatest determining factor in how your life works out.
So I like the last 3 especially to your point of view....!

 

That is not essentially true - price relativity plays a big part in the economy otherwise there would be a big profit to be made in arbitrage of real estate.

That said, other than the scarcity value of land causing the house to increase more than the unit, the fairer comparison is between a $500k unit and the $700k unit in those two locations not unit vs house.

 

It is true. $500k at 10% growth, vs $900k at 10% growth = $550k vs $990k

“At the same rate of growth the gap widens” I think you mis read my post

 

For anyone that buys in at the current interest rates they will probably never see good downwards movements in IR , maybe a 50 point movement .
Then look at many that had bought over the last 10-20 years they watched their interest rates drop by up to 500 points.
That what really helps when paying of a home loan , and wages running at 1.5-2% above inflation.
Just prior to the GFC , many banks were charging well over 9% before the RBA seriously dropped interest rates.
That an absolute impossibility in todays environment, and will cause house prices to be a lot more volatile .

 

Yeah I guess what I am pointing out is that when you have small percentage increases on large numbers the result can be really dramatic. So a we really need large wage increases if we expect our purchases to also increase in cost. 3% changr in salary vs 3% change in property is a big difference.

 

Where do I start?

A FHB who buys a sparkly, new CBD 1 bedroom apartment is chasing lifestyle, not a solid financial base. For their $450K (price you quoted) I am sure they could get a 3 bedroom house somewhere in the Melbourne suburbs. Or a bigger unit a bit out of the centre of town. Both with much better capital growth prospects.

Secondly, few stay in their first home for 15 years until it is paid off, then move to a property worth double. There would be at least one house between the two.

Achieving home ownership has never been easy, even for the much-maligned baby boomers.
Marg

 

Wow MWI thanks for the big post. Lots of great advice from someone who clearly has a lot of life experience.

Thankfully I am not in the position I described. I am lucky enough to see a decent inheritance coming my way in time. In addition my wife and I are pretty frugal and mindful with our funds.

I do worry about our friends though. After all not everyone is going to be so fiscally minded as you. I would hope the average person in the future could live in a house and not be confined to apartment living. After all in 20 or 30 years even apartments in the outer burbs may be the only option.

 

Sometimes you have to open your eyes to a wider world to realise just how out of whack things can become at “home”.

The current ludicrous bubble in Aussie property prices is after all deflating, and we have no idea yet how much closer to normality things will finally get. This bubble was inflated by a three decade long effort via banks and government policy, (the Japanese market has been retreating for three decades)

A friend recently paid 1.6 for a fairly pedestrian home in the southern highlands, he nearly fell over when I showed him what he could have had for the same price elsewhere,

Chateau with a large farm, stables, kennels and land for sale in South Touraine

And if you really want to surprise yourself, look what you can buy over the Austrian border, in Hungary, not far from beautiful Budapest, for less than a second hand Ute.

To hear people talking of land rarity, and justifying prices because ‘shortages’, in what is the biggest nation island and least densly populated island in the world is rather bizarre.

I would rather hope that sanity will eventually return, and youngsters will be able to achieve their dreams for the usual 3 to 4 times wage again at some point, though I fear we will be going through a difficult period of adjustment first.

 

If there are cheaper apartments in the CBD than 450k then that's good. I only looked I think at the first 15 that came up in a search to get an idea of price. I think it's fair to think that most people (no matter their generation) will try to aim for some level of social lifestyle. I am yet to see a generation of youth that all move to rural centres because the rent is cheap or they can lower their cost of living.

Also young people aren't known for being great with money. They take risks and struggle to see the long term effects of their actions. Something I would guess is common across generations too. So I don't feel its fair to expect this to change across the population.

True about people probably not staying in their location for 15 years. I actually think more of our youth will move overseas if they have the chance and feel their quality of life could be better.

 

I think it was even worse when I bought my first house in the late 90s.
But it was irrelevant because house prices were so much cheaper especially measured against income.
For example the bank would only loan me up to about 115k on a single 30k income.
But for 85k I could buy a 3×1 established property with no work required, or for 95k I could buy a 4×1 run down ex rental that required a fair amount of work done , they were generally about 10 -15 years old on 600-700 msq blocks,and this was on a single mediam wage with no partner.
Interest rates were about 9-10 % and have watched them drop by about 500 points which allowed for properties to be paid off at a lot faster rate.
That aint going to happen in the current environment

 

Again, you can’t generalise, or imagine every young person is like those in your social circle. It’s a big world out there.

I know many young people who are extremely sensible about money. They work hard, save a deposit and buy their first home in their 20s. Then go on to bigger and better things.

Not everyone has (or wants) to live in inner Sydney or Melbourne.
Marg

 

I’d be interested to know as I’ve seen you post a few times that it’s never been easy to get a home, we’re you able to purchase a house? and middle or inner ring? Or was it quite far out or a small unit like young people of today. Just want to compare apples with apples.

We know interest rates were tough at a point, but remembering inflation was super high which eroded your debt quickly, along with values increasing substantially at times.

With rates at historic lows, no wage growth, low inflation, and house prices in some capitals unaffordable for most to get in without investing interstate, what do you see as the norm moving forward for the next generation?

 

We bought a 3 bed unit 10kms from the city for 530k. After our first baby we decided to move 30km out to live the great suburban dream and live closer to my family. Sold the unit for 760k and bought a large house on a very large block for 620K. Gave us the option to either pay down debt or have a deposit for an IP with no pressure on us both to keep our corporate jobs in the city

 

Our first home was a suburb on the outskirts of Brisbane, 25km from the CBD. We bought the land and built. 3 bedrooms (1 built-in wardrobe), 1 bathroom, living, dining, kitchen, laundry, double garage. No driveway, fences, paths or landscaping, with bare concrete floors until we could afford carpet.

Around a 10-15 minute drive to the railway station, then a 30-40 minute train ride to the city where we both worked.
Marg

 

Wow your story aligns pretty closely with the hypothetical I suggested. Thanks for sharing.

The fact that your move put you closer to family must have been a great bonus.

If you took your journey and instead put the starting date today how much further out would you have to buy to get your first 3 bed apartment for 530k?

Our first property I think was an apartment in bris for 300k about 3 or 4km out of the city. We moved a couple of times. Our last apartment was sold in 2010 and scarily enough other ones in the same block are selling for close to what we sold ours for almost a decade ago.

 

If I were doing the same today the buy-in price would be higher but so are wages.