The people I have in mind for this article are young couples. They might have a young family. Both have reasonable jobs. They can afford to rent a house that meets their needs. They have some discretionary income. They can put some money away. But they don't feel like they can afford to buy a home.
I've recently had conversations with friends in various locations throughout the world (namely: Melbourne, Auckland, and London) about real estate. The recurring theme is that it's increasingly difficult to get onto the property ladder.
This can seem depressing. I understand. When I lived in Melbourne, I remember looking at the sorts of houses my wife and I would want to live in, and constantly thinking how absurd the prices they were selling for were. And although it wasn't the main reason for us to move to Christchurch, property prices made the decision easier.
I think when you're feeling like you're being priced out of the property market, and it feels like you're going to rent forever, it's important to take a positive perspective on your situation.
Firstly. You can make ends meet. And although you might own your property, you can afford to rent a property and keep a roof above your head. Congratulations! That's more important than the technicality of whether you own your place or not.
Secondly. Owning a property is not the be all and end all in life. There are many more important things in life. Like being healthy - physically and mentally. And cultivating your relationships with friends and family. When all is said and done, people won't remember you in terms of whether you owned your home or not. They'll remember you for more important things.
Thirdly, and most relevant for this article. You can still build wealth and put yourself in a good long-term financial position, even if you don't currently feel like you can buy a property. It's important not to lose sight of this. And this is what I'll focus on for the rest of the article.
Just because you don't think you can afford to buy in the current market, all is not lost. What's important is that you don't get discouraged about keeping an eye on your long-term lifestyle and financial goals, and working towards those.
When you think about your long-term lifestyle and financial goals, is owning a property your most important goal? If so, it's worth asking yourself why.
Is it because it will give you financial security (whatever that means for you)? Is it because it will help you give your children better opportunities? Is it because it means that you'll be able to have a comfortable retirement? Sure, there's an appeal to owning your own home. But when you look at what you really want to achieve, at the very deepest level, is home ownership essential to achieving your lifestyle and financial goals?
To give a hypothetical example: let's imagine you had $2 million locked away, so that you couldn't touch the capital but received $100,000 per year in income, in addition to any income you personally earn. If you had this, on the condition that you had to rent, would you still be reasonably happy?
Over the past few generations, one of the most important features of buying a house, having a mortgage, and paying it back over several decades, is that it has acted as a form of "enforced savings". As a result, the single biggest source of wealth for most households has been the equity that they have in their home.
But building wealth through home ownership isn't the only way! And if a home without a mortgage is the only wealth you have, in this day and age, you're unlikely to be in an ideal position come retirement.
Even if you don't own a property and have the "enforced savings" that comes from having a mortgage, you can still save. It might require more discipline. But you can still do it.
There are various ways that you can do this. For example, if you're in NZ you can maximise your contributions to Kiwisaver. For the most part, this means you're automatically saving a portion of your income and you can't access it until you're old enough to get the pension. You can also make automatic payments on the same day that you're paid to a bank account for which you have limited visibility and that is very difficult to access and withdraw funds from. You can pre-commit to investing a portion of any future increases to your income or windfalls, so that you whenever you get a raise or windfall, you supercharge your savings.
As these balances build you can start to become engaged about how these funds are invested, to try to minimise the risk to which you are exposed while trying to maximise your returns. As your balance builds, getting financial advice might be very wise.
If you're focused on your long-term outcomes, and prioritise these, it might be possible to build considerable wealth over the course of time. This can be used for any number of reasons. It can give you a sense of security. It can help to give your children opportunities. It can mean that you're retirement lifestyle is better than what you'll get from the minimum allowance you're provided by the government.
It could also position you in terms of your home needs and opportunities in the future. Who knows what the market will do. If it decreases, or stays stagnant over an extended period of time, you might find that you have built up a really significant deposit to put down when the opportunity arises.
Your requirements will also change. You might have young children right now, but before you know it, they'll be independent and you won't need to accommodate them. When you no longer need all that space, you'll find that what you want won't be as expensive as what you're looking at now. Potentially, you might have enough saved away to buy a great unit that meets your needs at that point in time, without ever having a mortgage.
It's even possible that not getting onto the property ladder is the best financial thing that ever happens to you. Property doesn't always increase in value. Given that we're looking at record highs in terms of rent/price and price/income ratios, there's a compelling argument that current values can't be sustained over the long-term.
I have close friends who have sold their house and lost a significant proportion of their deposit because the house they purchased decreased in value. In other words, property didn't help them build wealth - it helped them lose wealth. These are not stories you often hear because people love to talk about their wins and are reluctant to talk about their loses. But they happen, and it's a risk that you take when you buy property.
Nor is renting that bad. You know what you're paying each week. And you've got a landlord who is legally obliged to maintain your property and pay for the costs of keeping your property to a suitable standard. There are certainly downsides, but there are upsides as well.
And if you're paying $500 a week to rent a house that would cost you $900 a week to own, without even factoring in the additional costs of ownership such as rates, insurance, and maintenance? Well, you might just have a landlord who is subsidising you, in the sense that they're giving you an opportunity to put $400 or more away each week to build your long-term wealth.