Thursday, March 4, 2021

Financial security for new migrants

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Sharp increases in property prices has driven some first home buyers out of the market

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Over the past few years, property prices have seen a sharp rise across Australia.

Of all the capital cities, the steepest increase has come in Sydney where, according to property data company CoreLogic DP, since the current boom began in June 2012, property prices have increased by 34.8 per cent. This sharp increase has driven some first home buyers out of the market and they are left pondering as to what their options for financial security could be.

Fuelled by low interest rates and distrust of the share market, investors have driven up the value of real estate. Other factors have also been in play. In China, there has been a crackdown on corruption and it is believed that Chinese money, looking for safe havens, has found its way into real estate in Australia. Negative gearing, where your net investment cost is tax deductible, also has allowed for demand for property to increase. The changes in superannuation laws which allow for limited recourse borrowing to take place within a self-managed superannuation fund, have also fuelled this speculation. And banks and other lenders have been in a bidding war for lending funds to worthwhile investors. With borrowing rates as low as 4.24 per cent and rental yields even as low as 3 per cent, the net cost of investing in a  $1 million property for an investor can be as low as $13,000 p.a. tax deductible.

While the investor is undertaking these options, it is pushing the first home buyer out of the market. In Sydney suburbs such as Westmead, Blacktown, Toongabbie, Liverpool etc. where a large number of Indian Australians live, a four-bedroom house with a decent yard can cost up to $900,000. Five years ago, the same property would have been less than 30 per cent of this price. Not only would it be a challenge to save funds for a deposit at these numbers, it would be equally challenging to service the debt regularly, even if both partners are gainfully employed.

What then are the options for first home buyers? Should they sit tight and wait for the market to correct itself, which in other words means a sharp decrease in property value, or should they look at alternative options?

There is no correct answer and each situation will be personal to the individual and their outlook. Whatever the case may be, it is important to keep things in perspective. Do not take on more debt than you can handle. Creating a financially stressful situation can be detrimental to one’s mental health, as well as create relationship problems.

Perhaps, one option would be scale down expectations and get a foothold in the market. Rather than the McMansion, aim for a smaller property or an apartment. As you settle into your home and build up equity, you can upgrade at a later time. For those who may have funds in India, it may be worth considering transferring them to Australia. This is especially if you want to continue living here.

Another option could be to build wealth in areas other than property. While property does provide emotional security, other forms of investments can allow creation of wealth. Commonwealth Bank shares in 2005 were $42.90 per share, today they are circling around $90. Investments such as this allow you to buy on a regular basis smoothing any downturn in the market. All it needs is patience and discipline.

But whether in property or in shares, the colour of money is ultimately the same. The challenge for the new migrant is wealth creation to attain financial security in their new home.

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Pawan Luthra
Pawan Luthra
Pawan is the publisher of Indian Link and is one of Indian Link's founders. He writes the Editorial section.

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