19yo LONG TERM FINANCIAL PLAN advice!!

[fondest tozzy]

ok. seeing the price projections for australia 10 years from now is ridiculous. particularly in the "big 4" areas of melb, syd, perth and south east qld. an average home in an average area will be 1.1mill according to alot.

good for owners but can anyone really see this happening?

 

[Pornstar]

I think the biggest factor in house prices rising so rapidly was the change in bank lending. In the mid-late 1990s, my wife and i were double income, no kids or debt and the banks would only lend us something like $230k. 5 years later we could have borrowed $700k. That is what really scares me about house prices. If the banks go back to those measly lending practices, property prices will get spanked.

 

[Scotland]

It's a matter of the appearance of low supply and high demand.

Rising real estate prices are in part a self fulfilling prophecy. Tell people that prices always go up and they have to get in now enough times and they start panic buying and pushing prices up.

Real estate values can not and will not continue to increase at a rate well above inflation for all eternity. Anyone who believes they either can and/or will and that is is sustainable is a complete muppet.

 

[cynical]

cynical, I think your suggestion overlooks the home saver accounts I mentioned earlier. That gives you well over 10% p/a returns, 100% safe too And in terms of getting to $40k, putting $20k ($5k per financial year) into one of those accounts will get you close to $30k in 2 years (4 financial years) ie 30 June 2010 - 1 July 2012. I think you'd be mad not to get in on it.

You are right I forgot about those silly government schemes, home savers account is def free money if you can wait 4 years before buying a house.

 

[fondest tozzy]

given we are all anonymous here, what are the financial plans/deals that you guys have going both at the moment and long term? can exchange ideas etc>>>

 

[Lyyynnnchy]

It's an interesting gamble, this whole notion that property will continue to go up forever, or for as long as Lynchy needs to buy 20 places.

On the one hand I keep thinking "it can't keep going up at this rate before nobody will be able to afford it", while on the other hand I see that the population is expected to gain 16 million people in the next 40 years.

Lynchy, I'd be interested to hear your thoughts on future property prices. I gather you've read a few books which preach exactly what you're doing but do you spend a lot of time researching property prices? What makes you feel comfortable that they'll keep going up?

20 years ago 80% of all home loans were paid by 1 income. That has changed now with 80% of all loans being repaid with 2 incomes. Take the avg house price of $450,000 (or $500,000 if you use the median) - say a $50,000 deposit being paid off by 2x avg wage ($55-60k??) and thats very sustainable with plenty of room to move.

Another reason...

Assume the following is true:
Let's say that FHBs have 1.5 times their salary as a deposit, plus 3.5 times as a mortgage. They can then afford a house worth five times salary. Salaries rise by 4% per annum and house prices by 7%.

Now lets look at what happens over time!!

The "average" first home buyer in year 0 is NOT THE SAME as the "average" first home buyer in year 10 - because the guys from year 0 has had capital appreciate and mortgage reduction help him build up equity... unlike the FHBer from year 10, who only has a deposit.

I'll try and simplify.....

• Lets say that your FHB (lets call him Joe) in year 0 buys a $100k house, 20km from the CBD. His salary is $20,000. His deposit is $35K, and his mortgage is $65k (3.25 times salary)
• In year 10.... Joe, that bought his $100k house in year ZERO has now paid down his mortgage by say $20k (1/3rd), and his house has INCREASED in value by $96k up to $196,000.
• He now has a sizeable chunk of equity ($141K). His salary is now almost $30k, in line with 4% increase of the average wage.
• Based on the metric of 3.25 times salary is what mortgage he can afford, he can now afford a $97,000 mortgage... plus his $141,000 equity as deposit... so he sells his old house, and moves into a swanky house closer to the CBD at just 15km from the CBD worth $238,000.
• At the same time, in year 10, Tom is a FHB and is looking for a house to buy. His salary is also the "average" of the day, being $30,000. He has a $45,000 deposit (1.5 times wage), and can afford a mortgage 3.25 times his wage... $97,000. This equates to buying a $142,000 house.
• Of course Tom cannot afford to buy Joe's original house....... well derrrr!!.
• The city has naturally grown in size in 10 years, so Tom has to look further out for WHAT HE CAN AFFORD TO BUY, at around say 30km from the CBD.
• ..... now lets fast forward to year 20.
• Joe's new house, 15km from the CBD, has increased in value from $238K to $468K. He paid down his mortgage by 1/3rd (mortage now only $65K), so he now has $403,000 in equity. (niiiiice!)
• Tom's house has also increased value from $142K up to $279K. He also paid down 1/3rd of his mortgage (like Joe, only $65K remaining)... so he now has $214,000 in equity.
• Both Tom and Joe, being the SAME average wage earners of the day, now both earn $44,400pa. Therefore they can both now afford a $144,000 mortgage (using the 3.25 times wages "metric").
• Joe can therefore now upgrade to a $547,000 home.
• Tom can now upgrade to a $358,000 home.
• ... and Joes first home, bought for $100,000 in year 0, is now worth $387,000 in year 20.... so Tom can now *almost* afford it.

 

[Scotland]

20 years ago 80% of all home loans were paid by 1 income. That has changed now with 80% of all loans being repaid with 2 incomes. Take the avg house price of $450,000 (or $500,000 if you use the median) - say a $50,000 deposit being paid off by 2x avg wage ($55-60k??) and thats very sustainable with plenty of room to move.

What happens next?

Joe can't afford a house, so he gets married to Jane and between them they can just afford one. Fast forward a few years and it's Jim and Janet looking to buy. If prices can continue to outrun wage growth (they can't) then logically there will be a point when two incomes aren't enough for a house.

Accepting that owning a modest home requires two full time wage earners to service a mortgage is dangerous ground.

Assume the following is true:
Let's say that FHBs have 1.5 times their salary as a deposit, plus 3.5 times as a mortgage. They can then afford a house worth five times salary. Salaries rise by 4% per annum and house prices by 7%.

Why would you assume that?

I don't know too many average wage earners with $90k sitting in the bank, and there aren't too many homes available for $300k.

Now lets look at what happens over time!!

The "average" first home buyer in year 0 is NOT THE SAME as the "average" first home buyer in year 10 - because the guys from year 0 has had capital appreciate and mortgage reduction help him build up equity... unlike the FHBer from year 10, who only has a deposit.

Your simplified scenario is not sustainable. It assumes unending population growth and that first home buyers will continue to move further and further away from the cities. There's a limit to how far out people can move.

Let's look at the scenario you posted about yourself in the other thread. I'll assume you're an average income earner for the sake of simplicity.

$340k unit, $307k loan (back calculated $33k deposit), $60k salary and say 6% interest which is historically fairly low. In year 0 IO payments are 39% of net income. Assuming 7% pa capital growth, 4% pa wage growth and 4% deposit growth in year 10 IO payments are 56% of net income. In year 20 they are 81%. Year 26 is when the reach the 100% mark. Push the interest up to 7% and you hit 100% in year 20.

How is that sustainable?

 

[Lyyynnnchy]

Satellite City's for 1. Joondalup is growing at a huge rate. Another satelite city, Shorehaven, is being developed about an hr from the Perth CBD, new houses going for less then $300,000. Housing will continue to drift North/South as it has for...well forever.

Looking at a mapbook from 20yrs ago, any further then Osborne Park and you would have been considered "out in the sticks"

Not many places under 300K you have to be kidding? Some people need to lower there expectations. You can build a NEW house 30 mins from perth for just over $300,000. Plenty of 2 bed villas/apartments for under $300,000

I can see a 3 1 bath stand alone house in balga for $299k - Balga, personaly wouldnt want to live there but should see plenty of growth in the next few years.
http://www.realestate.com.au/property-house-wa-balga-105781742

Plenty of 2 bed villas/townhouses for around the $320 - $350 mark 8 - 10ks north/south of the Perth CBD. I could buy a 2 bed townhouse in Wembley or Churchlands for under $300k. 5 mins to Perth CBD and 10 mins to the beach...what more could you want.

I dont see how your repayments are growing larger if the interest rate stays the same (which it won't) but you are saying some how it becomes 100% of your salary?

In year 10 my loan is still $307,000, my house is now worth $660,000 and my wage has been climbing by 4% a year. Points to a smaller loan - wage %

 

[Scotland]

Whatever loan you have today you have in 10 years time.

The issue isn't what happens to you, it's the situation others just like you will find themselves in in 10 or 20 years time.

Following your example, we will reach a point where people in your position cannot afford to buy a place to live, 1 bed, 50km out of town or otherwise.

How is that sustainable? There are plenty of below average income earners, singles, old couples etc. and they've all got to live somewhere.

 

[cynical]

Unfortunately everyone just gets less.

People live in crappy apartments and townhouses instead of 1/4 acre blocks but pay the same amount.

Most people become miserable in big cities without enough personal space, thats life unfortunately.

 

[saj_21]

given we are all anonymous here, what are the financial plans/deals that you guys have going both at the moment and long term? can exchange ideas etc>>>

im 24 in July, i brought my first 2 bedroom unit in October last year it's about 15 km from the city in the N/E suburbs a nice area, close to shops, schools, public transport. Brought it for $310 K, put down a 65 K deposit, FHOG cancelled out stamp duty. My loan is $245K, under 80% so no lenders insurance.

I have recently put it up for lease at $300 per week, so will total $1200 per month (-$100 agents cut). Repayments are around $1550 so im $450 out of pocket a month. So im making around 4.5-4.75% return which is about par.

I am interested to get the placed valued and try to use the equity and go halves with my older sister in her first property. The beauty is, i believe i brought the place for around $20k under market value. Recently a very similar 2 bedroom property around the corner sold at auction for $350 K. There is another 4-5 similar properties in the area up for auction so once they are sold i will have a good idea of what my place is worth.

 

[footy75]

Not particularly disagreeing but IMO it's never too late to set up your financial future. When I left university I spent the next ten years teaching English overseas and traveling the world. A few years ago at the age of 35 I returned to Australia with about ten grand to my name. I now own my own home and have an investment property.

I'm not recommending what I did and you should save when you young but it's never too late. A lot of people go bankrupt in their 40s and 50s and have to start over again.

im in the same boat...but i have just returned form travellina nd living abroad for 10 years. i am 35 and am looking to to sought myslef out financially.

if i had my time again i would of finished uni brought a property lived in it for a year then rented it out and THEN travelled and did what i did.

but i wouldnt change a thing..ive had the most craziest time ever and u only get once chance at life... do uw ant too sit at home all safe and secure knowing ur going to eb well off in 30 years when u could die 2morow OR goa nd live ur life??

i say live life but be wise about it. dont be too hung up on mortgaes and being stuck in the same shit job and shit place throught the best eyars of ur life.

 

[Visions]

I'm not the expert but here are a few reasons:

1. National psyche demands that you own your own home so there's always demand. It's not like this in some other countries where kids live with their parents for ages or move out but rent forever...

2. The Government has slowly released land to drive up prices (slow supply) so that the baby boomers can feel rich.

3. Terrible ideas like the first home owners grant increasing demand.

4. Negative gearing and other tax breaks for investors (these are good ideas) leading to more investors in the market (more demand).

5. Increasing populations - a lot of countries don't get this like we do (More demand).

6. Booming mining economies leading to people moving here for work (More demand).

7. Conservative bank lending compared to other countries has meant we avoided having heaps of people who couldn't afford to pay their loans and our banks stayed healthy, meaning they were able to lend as soon as things looked even slightly better. This helped us avoid the property bubble pop which some other countries went through recently.

8. Since we have a skilled labour shortage in some places there aren't enough people to actually build houses when the govenment releases the land (slow supply); and since these builders have rare skills they ask for heaps of dollars to work meaning building a house is more expensive and that gets passed on.

There are probably other, more obvious, reasons but they aren't coming to mind right now. Someone else can add them if they like.

Not so much the FHOG but the FHOB (first home owners boost) is the worst idea the government came up with. They created a panic within first home buyer circles who had it in their psyche that they needed to buy a home before the FHOB expired so there was a rush all within a few months by first home buyers, which artificially increased housing prices by more than the grants being given out. So a lot of first home buyers paid more than they should of for their property.

If the government wanted to help buyers out they should look at stamp duty which is ridiculous in most states.

 

[Jimmy_the_Gent]

Not so much the FHOG but the FHOB (first home owners boost) is the worst idea the government came up with. They created a panic within first home buyer circles who had it in their psyche that they needed to buy a home before the FHOB expired so there was a rush all within a few months by first home buyers, which artificially increased housing prices by more than the grants being given out. So a lot of first home buyers paid more than they should of for their property.

If the government wanted to help buyers out they should look at stamp duty which is ridiculous in most states.

Considering how the RBA talks about housing prices I think there's an outside chance that affordability will be thrust into the limelight in the future and that Governments will spend a lot of time trying to make homes more affordable for the sake of interest rates.

When (if) this happens, people will look back on the FHOB and think "Jesus, how shocking ironic"; much like we look bad at Doctors prescribing cigarettes for a cough today.

 

[cynical]

If the government wanted to help buyers out they should look at stamp duty which is ridiculous in most states.

I didnt realise how bad stamp duty is until i looked at the actual rates.

The way the system is most people are paying around 4% on properties around $500k unless they are first home buyers.

I guess it just means people are stuck in their houses for a long time.

 

[Scotland]

Considering how the RBA talks about housing prices I think there's an outside chance that affordability will be thrust into the limelight in the future and that Governments will spend a lot of time trying to make homes more affordable for the sake of interest rates.

I think there is zero chance of this happening.

House prices were falling in 2008, and the GFC came to town. The government's response was to double and triple the FHOG and lean on the RBA to slash interest rates to promote economic activity.

As counter-productive as it is, real estate underpins a huge chunk of the economy. The higher the values and turnover, the more taxes and duties that flow into the govt. coffers, and the more interest flows into the bank coffers. Banks don't want falling values, and the govt. doesn't want unhappy banks.

If the shit every really hit the fan I reckon the govt. would inflate the currency before they'd allow a sizeable housing correction.

When (if) this happens, people will look back on the FHOB and think "Jesus, how shocking ironic"; much like we look bad at Doctors prescribing cigarettes for a cough today.

I'd be surprised if anyone who bought a house with $14k in hand thinking they were getting a 'discount' or 'bargain' understands many things, let alone irony.

 

[Jimmy_the_Gent]

I think there is zero chance of this happening.

House prices were falling in 2008, and the GFC came to town. The government's response was to double and triple the FHOG and lean on the RBA to slash interest rates to promote economic activity.

As counter-productive as it is, real estate underpins a huge chunk of the economy. The higher the values and turnover, the more taxes and duties that flow into the govt. coffers, and the more interest flows into the bank coffers. Banks don't want falling values, and the govt. doesn't want unhappy banks.

If the shit every really hit the fan I reckon the govt. would inflate the currency before they'd allow a sizeable housing correction.

Agreed - I did say it was only an "outside chance".

However I'll be watching the RBA with interest. I think they could fly in the face of all this property price rises stuff because they actually want to make the country a better place to live.

Interesting times ahead.

 

[sherrin_footy]

what did you end up deciding on OP?

 

[bunsen burner]

He joined the navy and lost his cherry.

 

[Doctor Jolly]

Best advice is to invest in yourself. You're young, invest in your education, training. Travel the world to gain experience. They will all pay off far more than investing your savings.

Work hard, play hard. Aim to be broke by 30, then join the rat race and build your "empire" from there.

I made it to 29 before I kicked into a "normal" life. Quickly caught up to friends who'd worked all their life by around 35-40.

 

[haywood jablome]

Best advice is to invest in yourself. You're young, invest in your education, training. Travel the world to gain experience. They will all pay off far more than investing your savings.

Work hard, play hard. Aim to be broke by 30, then join the rat race and build your "empire" from there.

I made it to 29 before I kicked into a "normal" life. Quickly caught up to friends who'd worked all their life by around 35-40.

Very well said. Make the most of your freedom while you have it, travel, try a variety of jobs, meet new people, be with a lot of different women etc. This will teach you a lot of important lessons that will help you down the track. The truth is you never really know what is around the corner, so make the most of your time. The benefit to living this way is that future jobs and opportunities will arise a lot easier, not every thing is based on your University degree and job experience, most of the time you are working with people and in teams. Do not take this as a message to go blow every cent you have, just be smart and put a percentage of it away.

 

[DidakDelight]

You're going to be in a good position.

My advice:
With your $150k

Invest $75k into a 1 property and let the rent cover the interest.
Put $25k into diversified shares. 75% blue chip - 25% you decide

With the remaining $50k take 2 years off travelling and ro0t yourself stupid.
Latin America would be a good place to start. Good waves if you surf and amazing women handing it out like raffle tickets.

Then get yourself a 2year working holiday visa to the UK - spend 2 years there. Save some cash and spend atleast 6 months in SE Asia on your way home

Or head the ski slopes for Canada for a season and then do Camp America in the USA

When you get back to AUstralia you'll be financially secure and also have a lot more life experience.

Most of us who have travelled in our 20's wish we had have set our selves up, you've got both age and cash on your side. Make the most of both.

Good luck mate.

 

[Ghostwriter]

Stay single.
Think rich, make each time you open your wallet an investment.
Look at what businesses fail and others succeed.
Guess how rich your friends and workmates are, you'll be surprised.
Don't keep up with the Joneses.

 

[fondest tozzy]

Stay single.
Think rich, make each time you open your wallet an investment.
Look at what businesses fail and others succeed.
Guess how rich your friends and workmates are, you'll be surprised.
Don't keep up with the Joneses.

good advice there.

 

[Snag Breac]

Go see a decent financial advisor. ie. not one that's pushing a product.

In my experience they're all pushing products. Where can I find a decent one?