Owning a house is the Australian dream. But for many, it’s increasingly out of reach. Here in Melbourne, many buyers are getting frustrated because they can’t afford to buy a house. Particularly the house they want, a forever home in their ideal suburb.
Today, I’m covering what to do when you are getting priced out of the property market, and ways you can compromise to get on the property ladder.
You are not alone
It’s depressing, going to auctions and seeing your dream home sail past the asking price.
Reporting on the housing affordability crisis, ABC’s Four Corners found that, during the pandemic, house prices have risen at the fastest pace in three decades. In Melbourne, house prices are up 16.8% in 2021.
The fear is that if you don’t buy soon, the market will continue to rise and you’ll never get on the property ladder. This means buyers either take on more risk in the form of big mortgages, or they are priced out of the market altogether.
When you’re working and saving for a deposit and house prices are soaring above your budgeted maximum, it feels very unfair. If you’ve worked hard and saved meticulously, it can be disheartening to see your dream slip from beyond your reach.
But you can still get on the property ladder even though you can’t afford to buy the house you want yet. It takes compromise, and it means being patient , but you may find that your property dream is still within reach.
Carefully consider your finances
Many buyers consider extending their loan to get a bigger mortgage. It’s extremely important that you don’t put yourself into financial difficulty. A change in your circumstances, employment or lifestyle can impact your ability to make mortgage payments, not to mention a rise in interest rates (which are currently at record lows.)
So before you ask the bank for extra funds, it’s important to work with an independent financial advisor to determine your true budget.
You should also consider any lifestyle changes that may impact your income — are you going to retire soon, or start a family? Could you cope if you were made redundant? These life changes impact your ability to service your home loan.
Importantly, you need to be confident that you can manage rising interest rates. Legislation has forced banks to lend only if borrowers have income to cover an 3% increase in interest rates (it was previously 2.5%). This means your bank won’t allow you to borrow if you can’t prove you can cover repayments both at your current interest rate, as well as if they increase.
So before you make any big financial decisions, consult an independent financial planner.
If borrowing more is not the solution, explore potential compromises
The idea of getting on the property ladder is simple. When you can’t afford to buy a house, you can get a foot in the market with a property that might not quite have everything you want (yet still represents a quality investment). And down the track, you gain equity and upgrade to your dream home when the timing is right. If you buy wisely and are willing to compromise on some factors and be patient, you may be able to reach your dream property as the next step.
If this is the case for you, it’s important to buy with the potential resale value in mind. Consider that if there’s buyers competing for the keys now, there’s likely to be strong competition in years to come when you sell. On the other hand, if you are the only interested buyer due to some kind of fault or problem with the property, you may struggle to find buyers in future too.You will be less likely to have equity in the property to get to the next step. If you renovate, focus on increasing the mass market appeal. The idea is to add value and attract as many buyers as possible, to maximise your chance of getting a return on your investment. This enables you to increase your buying power so you can move on to the location and kind of home you prefer.
Allow at least seven years on the property ladder — or more
If you are buying with a view to selling over the shorter term, you should be willing to wait at least seven, or even ten years. This is often how long it takes to gain equity in a home. Even if you renovate and improve the property, the market gains generally won’t compound any faster. Unless your income grows considerably, you do have to be willing to live with the compromises you make on the property for the better part of a decade.
Consider bridesmaid suburbs
Many buyers have a major road in mind as the outer limit of their ideal location, such as Warrigal Road or Nepean Highway. But if you cross that major road, you may find the median house price is more affordable.
For example, in Ashburton, the median house price is $1.95 million. Just over Warrigal Road in Ashwood, the house median is $1.44 million. A short drive across a major roadway can save you considerably.
However, jumping to the next suburb may not fit your lifestyle. It depends on your key non-negotiables. If you love the café lifestyle of a suburb, the bridesmaid suburb may not offer that opportunity. Whereas if you’re more focused on space, a bridesmaid suburb can potentially offer you more value.
When you are getting on the property ladder, follow the train line to the next outer suburb. Particularly if you want to resell down the track, having a home that is accessible to public transport will be likely to appeal to buyers.
Be open to renovations
Are you willing to paint, upgrade the kitchen and install a new bathroom — or even extend? If you have the energy, capacity and time to renovate, you may be able to purchase a more affordable property that other buyers overlook. It’s important to find a property that:
- has a good floor plan (good bones)
- has the potential for you to add value with renovation
- can be renovated in stages (to extend your budget further)
- has a good orientation
- is in an up-and-coming area (look for local infrastructure investment, new businesses opening nearby and good amenities like schools and parks)
If your budget is limited, you can undertake short-term repairs, like a budget kitchen. When your financial circumstances improve (and you have equity) you may be ready to undertake a better quality renovation or extension.
Compromise on land or features
Would you be willing to sacrifice a bedroom, or the land size to live in your preferred suburb? Perhaps a townhouse, villa unit or flat is your better option, until you can upgrade to a house in your ideal location. We all like the quarter acre block with a large house and double garage — but perhaps living in an apartment or semi-detached with a small courtyard will suffice for the time being. It’s important to consider lifestyle factors here. If you will be miserable struggling with a property that’s not right for your needs, waiting seven years or longer to upgrade will be unwelcome. Working with a buyers’ advocate can help you determine what you really need for your budget and lifestyle.
Consider a tree change or sea change
The pandemic has changed the way we work, and many Melbournians are opting to move to more affordable regional areas. More than ever, people in Melbourne are moving interstate or to regional locations. Now that working remotely is more commonplace, you don’t have to leave your job to enjoy a new life in the country or by the water.
However, if you do sell and leave, it will be difficult to buy back into the market. So it’s important to be 100% sure about regional life. It’s a good idea to rent for a year in your new area first, to be sure it’s the right move for you and your family. Loving a regional town that you visit in the holidays is a different prospect than living there year round.
Don’t buy off the plan
When you can’t afford to buy a house, you may be tempted to buy property off the plan. This is never a good idea, for many reasons. You can’t inspect the property in person, and get a true feel of being in the space. Delays are common, and you can get stuck if the market changes. There’s often ambiguity on fees and rates, and any savings you enjoy in stamp duty are eroded by lower resale values. For more on this subject, read our guide to buying off the plan and why it’s a terrible idea.
To summarise, what to do when you can’t afford to buy a house
- avoid overextending financially
- buy to get on the property ladder
- be willing to wait at least seven years before upsizing
- consider bridesmaid suburbs
- sacrifice some land or rooms (but not floorplan or orientation)
- consider units, town houses or apartments if you are wedded to a suburb
- be willing to renovate or extend down the track
- think about regional options (only if you love the idea — you are unlikely to be able to buy back into Melbourne )
- don’t buy off the plan
You may also like
How to bid at an online auction
Tired of missing out at auctions? How to avoid FOMO buying
Making an offer on a house before the auction
When you’re the underbidder at auction
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