As financial planners, helping our clients manage their family home is one of the most enjoyable things we do. We love family homes. For a start, we love families – and families live in family homes. What’s more, enjoying your home is the easiest way to enjoy life in general. A happy home – and a home you are happy with – is an essential part of a happy life.
But that is not the only reason we love helping people get the best family home they can afford. Family homes are not just great places to live. History shows that family homes are also cracking investments. Over the last 20 years Australian property has averaged a return of more than 9.5% a year, including both rents and capital gains. That means that house values doubled every seven or eight years. (Yes, these are average figures across the country and not every market did this well. But all markets did at least quite well over that time period).
Things are even better when gearing is involved. ‘Gearing’ is a fancy word for borrowing – and most people borrow money to buy their family home. If you start with 20% equity (and borrow the remaining 80% of the purchase price), and the house doubles in value, then the value of your equity increases to 60% of the increased value of the house. The proportion of debt halves when the value of the property doubles.
But that is not all. Even better is the fact that the family home does not attract Capital Gains Tax (CGT). This means that you do not pay tax when selling a home that has increased in value. This is a central plank of Australia’s taxation system and it is not going to change any time soon.
Combine this tax treatment with the long-term results that Australia’s housing market has achieved, and you find that most Australians are living in tax-free investment machines. For example, if you are in the 45% tax bracket and you own a $1,000,000 property and it goes up in value by just 5%, or $50,000, that’s the equivalent of earning an extra $92,500 a year in pre-tax salary. This is because you would have to earn $92,500 and pay tax at 45% to be left with $50,000 in cash. What’s more – you can’t live in cash. That is why houses are usually better places to hold wealth than cash.
The last 20 years has seen constant growth in the value of Australian homes, with Perth being an exception in the last few years (having grown by more than the national average prior to the tailing off of the mining boom). This has a lot to do with our constantly growing economy (we have not had a recession for 25 years now). In addition, immigration has been a particularly important driver of the national economy. And guess what? People still want to come to live in Australia. That won’t change any time soon.
The Australian obsession with home ownership is likely to continue. It makes sense to invest wisely in the home. We strongly encourage home ownership strategies, and their close cousin, debt management strategies, whenever we meet with a client. Even if the rate of growth slows (or we get a negative year or two), long term the right housing purchase turns out well. What’s more, this ‘investment’ gives you a place to live as well.
(One word of clarification: when we say housing we do not mean high rise apartments. Their economic future is very different to homes and units in small blocks).
And our advice is not just about homes for clients. We also help with homes for the children of clients and even sometimes the grandchildren of clients. Indeed, it is these adult ‘kids’ that our clients tend most to worry about. “How will our kids ever afford their own home?” is one of the most common things we are asked. In our blogs and ebooks for this month and next, we will discuss various ways to make buying and holding property as easy as possible. And we will not just focus on your home. We will look at ways to help other people – typically your kids – own their homes as well.
But there is no need to wait for your next email from us. Feel free to contact us right now and we can talk you through ways that make home ownership much more achievable for you and the people you care about.