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With record low interest rates, are homes really unaffordable?



It’s hard out there for a first homebuyer, especially if you live along Australia’s eastern seaboard. In many suburbs, the dream of owning your own home may seem about as likely as winning the lottery right now, leaving a generation of Australians wondering if they’re set to be perpetual renters.

If you want to live within 20km of the CBD in a capital city that rhymes with kidney, for instance, your only shot of getting onto the property ladder may involve a financial leg-up from your folks, or an unexpected inheritance.

And if you’re on your own, trying to get a mortgage on one income? Forget about it… If you don’t have a decent six-figure income, the banks don’t want to know you.

It therefore goes without saying that buying a house is an undeniably expensive affair in 2016 and many amongst are feeling a little put out by this fact.

But the growing number of Australians who are finding themselves priced out of property should not feel disappointed or despair, says AMP’s chief economist, Shane Oliver.

Instead, they should be patient – because, despite record-low interest rates, Oliver believes that 2016 is a terrible time to buy property in many markets across the country.

There are “several reasons” why you might be better off waiting to buy your first home, he shares, and number one amongst them is the risk that property values will soon tank.

Property prices set to stagnate

It all boils down to property market cycles, explains Oliver. Though real estate prices have been breaking growth records in cities like Sydney and Melbourne in recent years, that run won’t last forever.

In fact, at some point the market will shift in the other direction and property owners will find themselves holding real estate assets that could be worth less than what they paid.

“If you look at past cyclic patterns in house prices, periods of strength are often followed by periods of weakness,” he said in a recent media interview.

“We have seen this several times over the last decade or so now, with weakness around 2004-05, again around 2008-09 and again in 2011. Prices in Sydney fell on average somewhere between 5-10 per cent (each time).”

After such a huge run of growth through to 2015, “the likelihood is we would go through a period of weakness, which would then provide opportunities for buyers where they can buy at a much lower price than what is currently the case,” he adds.

A generation of perpetual renters

Mortgage interest rates are unquestionably low at present, but that doesn’t help a would-be buyer who can’t get a deposit together. Lower property prices, on the other hand, would allow first homebuyers to put down a smaller deposit.

So, while we’re waiting for property prices to come down, we are best of saving as much as possible – something made easier by the fact that we’re currently enjoying the most affordable rents we’ve paid in years.

The rental market is “tilting… in favour of renters”, Oliver says, adding that it’s “quite possible” that rents could go backwards in some markets, where over-supply risks are present.

“When the supply of rental property goes up, that tends to lead to weak rental growth. If you do the math, rents aren’t keeping up with prices therefore there is an argument to rent and hold off to save for a deposit,” Oliver adds.

So there you have it; this is the perfect time to keep renting, especially if you can afford to save for a deposit at the same time.

Have you got your deposit sorted and you want to buy a property before Christmas? Here’s what you need to know about your short window for success!