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Financial pathways to buying a home require planning

In the six months of my ongoing battle with brain cancer, one part of financial markets has fascinated me whenever I find time to read. It’s probably not what you think. Sure, the Reserve Bank’s ongoing debate about inflation and interest rates has filled economists with anticipation, and global wars have horrified us, making the conflicts almost unwatchable. But one subject that has led the pages of my reading is real estate, especially residential.

The question that hits me every day is: where is all the residential money coming from? Whether it’s $4 million in the inner west, $20 million for a penthouse on the north shore or a $50 million mansion in the east, it’s a continuous surprise to see how much money people have access to.

Real estate is not even my specialty, but the last six months have been both bemusing and fascinating. It’s often difficult to believe that the numbers are true. For example, according to Domain, the average house price in the 2024 March quarter for Sydney is $1.628 million dollars, up from $1.465 million a year ago and up 11.1% in that time. Perth, Adelaide and Brisbane are up even more. Rents have risen almost 8% across Australia, the biggest increases in 15 years. In one year, Sydney’s median house price has risen over $160,000.

It would not have seemed possible a couple of years ago in the face of interest rate increases, of which there were eight in 2022 alone. During COVID, with lending rates falling as low as 2%, a rise of 1% to 2% seemed likely. Homebuyers were doing their numbers as high as 4%, locking in rates for a couple of years where possible. But inflation drove 13 rate increases since April 2022 and have taken cash rates to 4.35%, where rates have stayed since November 2023. Plenty of lenders are now charging 6% or more and cash rates are not forecast to reach below 4% until the end of 2025.

The latest data for 2024 shows the dramatic increase in inflation for the period 2022 and 2023, and the stubborn refusal to fall as much as anticipated this year. Many economists expect only one or two reductions by the end of the year, but some are at zero. The return of inflation to the central bank target range is a long way off.

As a sign how much the market has reassessed its interest rate expectations, the ASX 30 day Interbank Cash Rate forecasts little movement by even the middle of 2025, perhaps a full year with no changes. Reserve Bank Governor Michele Bullock expects not to tighten again, but nor does she see easing conditions yet. Let’s hope the new structure of the Reserve Bank board does not push her to act before she needs to.

New building is at decade lows, with many trades attracted to the certainty of long-term government contracts rather than the unpredictability of housing. The Albanese Government’s promise of 240,000 dwellings a year looks impossible, even with banks keen to lend. The shortage of materials and inflation on supplies does not help.

Yet there is no shortage of home demand despite supply problems, and home prices, especially for houses, have continued to rise rapidly. This is where new solutions are surfacing.

Borrowers access increasing amounts

First, borrowers are willing to increase their loans with the bank, almost to whatever limit is allowed to secure a home. Whereas 20 or 30 years ago, borrowers relied on accessing three to four times as much of their income, the house price now represents as much as seven to eight times earnings (and it used to be more when rates were lower). Many borrowers will be paying off their principal for decades. The biggest shock for new home buyers has come in construction costs, requiring renegotiation of terms to prevent builders going broke.

There’s more to come. Oxford Economics estimates that between 2025 and 2027, median home prices will hit $1.3 million with Sydney at $1.9 million. Home units will exceed $1 million on average. Thousands of people will need to make the ‘rent versus buy’ trade-off, with a move to new apartments likely given many old houses are in bad condition.

A similar trade-off decision will come from the payoff of student loans, as a debt of $100,000 will go a long way to paying off a home loan. Australia covers three million former students with loans of almost $80 billion. It’s a massive burden to carry (and I come from an era of free university education, which was a major bonus).

Major population growth depends on home and infrastructure building (toilets, roads, sewerage, etc). The Housing Industry Association advised recently that the cost of labour, concrete and materials will delay any increase in the amount of high-rise development for at least another year.

So, borrowers will increasingly look beyond their own financial resources, and with rents at new record highs, people will want to buy rather than face the terrible hassles, short leases and scarcity of renting.

Bank of Mum and Dad

Second, the increase in the role of the Bank of Mum and Dad has changed the market. In prior years, as recently as five to 10 years ago, parents might provide some money to help with extra needs, and maybe as much as a deposit. Now, it is not uncommon to hear a group of people bidding to buy a house and each couple has their parents with them with significant support.

It is becoming so common that parents are now more sophisticated in the ways they lend or give money to their children. Increasingly, terms are negotiated to ensure money is retained if a family breaks up. Parents don’t want to give their children $250,000 only to see it disappear in a marriage split.

Such documentation may upset one of the children. Terms and conditions are written down with clear definitions of obligations each way. A gift to the son or daughter might be split in the event of a divorce. Except for the wealthiest of families, parents should check their eligibility for pensions and income streams is not affected, and their will should be checked and amended. These agreements often require documentation to cover issues such as capital gains tax, and not simply an assumption that the marriage will last forever.

Multigenerational families

Third, it is becoming more common for mutigenerational families to buy and live together. A large house worth say $5 million might not normally be considered by one family. But where they are looking to care for grandparents, cover the long hours that a parent works while also allowing for the needs of the children, homes with three generations living together are becoming more popular.

Of course, they might be living close to family rather than in the same house. Australia is unique with a high proportion of dwellings for people who live in urban areas rather than rural and is at the top of the world at over 90% urban, often due to people wanting to live near or with parents.

More people working longer

Fourth is the other side of the generosity of the grandparents. They may delay retirement beyond 60 or 65 by one of them working longer, perhaps while the other looks after the grandchildren. They may now owe more on their house as they borrow for their children, with a third still servicing loans where once they thought it might be time to relax.

Warren Buffett at the age of 93, and before him, Charlie Munger at the age of 99, show that it is possible mixing work and play well into retirement. Many people work beyond 70 (with brain cancer’s permission) with a few days mixing it up. It should be part of the funding discussion with a spouse on financial intentions, even if there is 20 years left to live.

Lots of choices

The days are long gone when the only alternative for a couple saving for their first house was to scrimp for 20 years and then live further away than they want to when they buy a home. Many families now accept that if they want their children and perhaps even more importantly, their grandchildren, to have a good life, the older people will need to make a decent contribution. Where once it was common for grandparents to pay for school fees, the same now applies for homes.

It means a lot more planning. Parents may be approached by their children for financial assistance, and a big step is required on legal documentation. Living with multiple generations on one piece of suburban land will come with its challenges but will suit many.

With property increasingly scarce and demand outstripping supply, more people will need to face up to the decisions about living alternatives.


Graham Hand is Editor-At-Large for Firstlinks.


May 21, 2024

In a lot of heavily populated countries the people live in apartments that they rent having given up the dream of home ownership. Not everyone will be a winner in a big Australia. We already face issues with housing , water restrictions, compettition camping and fish restrictions either by price or regulation. No talk yet about sustainable population in terms of quality of life and the enviroment.

Milan Shah
May 19, 2024

Thanks Graham - a good insight.
Easiest way to fix this is by abolishing negative gearing. The equation will automatically balance.

May 20, 2024

All economic studies show that eliminating negative gearing will reduce supply.
You should know what occurs when supply is reduced.

May 18, 2024

House price changes are not measured by an "average". They use a "median", in this case a "stratified median". There can be a big difference in certain markets and conditions.

Real talk
May 18, 2024

The answer to housing is simple - get house prices down a lot. But that will never happen because 70% own homes and politicians know it and therefore they have no intention of reducing prices.

George B
May 18, 2024

Not sure its that simple because if house prices were to fall a lot (not sure how that would be achieved without massively increasing supply or massively reducing demand) you would have a lot of highly leveraged owners going bankrupt and even the currently insufficient supply would evaporate because nobody would want to invest in or develop assets that were falling in value. It would likely create an economic disaster that would make the GFC look like a picnic. A perennial problem with grandiose socialists ideals is that nobody has a clue how to make them work.

Real talk
May 18, 2024

Nah it would just take out the highly leveraged, the weakest links, and that's how capitalism works George.

May 18, 2024

Where would the supply come from though?

Very hard to supply new houses these days.

May 18, 2024

"get house prices down a lot":

A credit strangulation would do that - despite the system fighting back.

A large accumulation of debt that becomes unsupported.

Wilbur E
May 18, 2024

What about those that don't have the Bank of Mum and Dad - what happens to them?

May 18, 2024

They save alone.

Those starting with no bank might look to land well paying employment with free board and lodging and absence of vice vendors.

Jon Kalkman
May 18, 2024

The bank of Mum and Dad has access to a lot of money. This family bank has access to the whole tax-free super balance of Mum and Dad once they reach age 60. The youngest boomer (born in 1964) reaches age 60 this year and the next the generation of mums and dads will have even more super to dispose of after years of higher contributions.

A tax-free lump sum withdrawal from super can be spent on anything without restriction. Retirees can upsize their family home to maximise their age pension because the family home of any value is disregarded as an asset in the pension asset test. A super withdrawal can be gifted to children because when retirees qualify for the age pension at age 67, it is no longer subject to the 5 year restriction of the gifting rules.

Tax-free lump sum withdrawals from super are concessionally taxed savings that can be seen to boost housing prices for both generations. Moreover, the family home can then pass to beneficiaries as a tax-free inheritance underwritten by the taxpayer, as there is no CGT on this asset. And the taxpayer also foots the bill for the increased age pension and age care costs as well. Everybody wins except the taxpayer.

May 18, 2024

Yes, everyone bar the well off loses, and entrenching inequality.

May 18, 2024

"Everybody wins except the taxpayer.":

The taxpayer who pays for all the Age Pension loses once again when not receiving the full Age Pension.

"everyone bar the well off loses":

The poor off get a saving free, tax free, effort free Age Pension for life.

May 19, 2024

"The poor off get a saving free, tax free, effort free Age Pension for life."

True, but hardly enviable! The Age Pension is a good safety net for everyone I guess (for if or when "the wheels come off"), and for that we should all be grateful!

I know I'd rather be entirely self sufficient and I'll try. Now if only they'd stop moving those pesky goal posts! Realistically that'll never happen given the nature of governments (spending, vote seeking addicts).

May 19, 2024

"hardly enviable":

How much risk free capital does it take for returns to equal the Age Pension?

= (26 * 1682.80) / ((1 + 5%) / (1 + 3.6%) - 1)
= $3,237,707.20

No extra tax on capital exceeding $3,000,000 - highly enviable.
The poor off don't know how well they have it.

May 19, 2024

@Dudley: "No extra tax on capital exceeding $3,000,000 - highly enviable.
The poor off don't know how well they have it."

Sort of missing the point, as they don't actually have any CAPITAL to dip into if they need it, for large unexpected expenses for instance! Like I said, it's a good safety net for everyone and obviously a life saver for the poor.

May 19, 2024

"they don't actually have any CAPITAL to dip into if they need it":

They don't need capital or invest it to generate income - the Commonwealth does that for them.

In addition to the capital provided, free, by the Commonwealth, with no effect on Age Pension payments:
They can have:
. A home of any capital value.
. $451,500 Assessable Assets.
. Commonwealth operated reverse mortgage.
. Free this and thats.
. 26 * 360 = $9,360 Assessable Income. [ 9360 / 451500 = 2.07% ]
. 26 * 460 = $11,860 Assessable Work Income.

If does not provide adequate capital, they can SAVE.

Further, the expectation of the Age Pension means they do not need to save for retirement and can lavish any surplus disposable income on their home.

All so enviable that the Commonwealth had to make saving for retirement compulsory.

Michael Sandy
May 19, 2024

Like the calcs!

May 20, 2024

"How much risk free capital does it take for returns to equal the Age Pension?
= (26 * 1682.80) / ((1 + 5%) / (1 + 3.6%) - 1)
= $3,237,707.20"

Looks like an overestimate?

(A) Not a perpetuity

That calculation assumes you'd need capital to fund a perpetuity. If you were self-funding a pension stream there's an argument for funding on the basis that you'll live forever, since you don't want to run out. However the govt is funding a portfolio of individuals, not just one, so overall they'll only be paying out the average attained lifetime for each individual.

Life expectancy for a 65-year old female is 22.47 according to latest Australian life tables. (I'm using 65 for comparison with part (B) below.) Probably tending to be lower (due to socioeconomic factors) for someone who will qualify for a full pension, but on the other hand higher because those tables are based on 2015-2017 data whereas we are looking forwards. Let's say 25 years.
In that case the calculation (using your assumptions where applicable) is something like

1. For convenience:
R = (1+5%)/(1+3.6%)
A = 26 * 1682.80 = $43,752.8

2. Value of perpetuity
V(perp) = A / (R-1) = $3,237,707 as you said,

3. Value of 25-year pension stream
V(25) = A / (R-1) * (1 - (1/R)^25) = $922,984.

(B) Actual cost of a corresponding lifetime annuity is far less than $3m

Today (19 May 2024) a 65 year old female can buy a $4,987pa ($5,643 for a 70 year old) inflation-protected lifetime annuity from Challenger for $100,000, as per their website. So the corresponding value of a $43,752.8pa initial payment stream
= 100,000 * 43,752.8 / 4,987 = $877,337
which is the same ballpark as #3 above. (Presumably not always the case!)

The pension would be worth more than the equivalent Challenger payment stream for various reasons. Credit risk, obviously. Different frequency of payment. I can see arguments either way for which one has better inflation protection in the long run, but probably the pension wins on that.

Also, part of the Challenger payment stream would be taxable. As I understand it, only the excess above the capital component of 877,337 / 22.47 = 39,045 would be taxed so initially that would be 43,753 - 39,045 = $4,708 taxable income. (Not sure if 22.47 is the exact number used by ATO.) Even with inflation increases to the total payment, no indexation in the capital component, and no increases in tax thresholds it would be a long time before any tax is levied if this is the only income (as it may be for the poorest recipients), so I wouldn't think this tax impact is large in expectation.

Both of these approaches suggest the value of a pension is probably less than $1m, rather than $3.2m. $1m is still a big number, but obviously not nearly as big as $3m.

May 20, 2024

@Dudley. You cherry pick somewhat Dudley. OK you're single, own your own home and have $30 k in the bank. That's it. How are you better off than having a lot more money? Your examples describe the tangential "sweet spot" where someone has just below the threshold in assets, to be eligible for a full couples pension. A very different calculus .

If enough people did this (sink excess funds into PPOR to deliberately qualify for a full pension), guess what, governments move the goal posts to alleviate pressure on the budget! Very PPOR asset rich retires on full pensions will become a target. Not to mention stoking intergenerational resentment and animosity. There's only so much money to fund essential and desired services and a forecast decreasing number of net tax payers in the future means somethings gotta give (notwithstanding that governments heinously waste tax payer money that could be used better, but hell will freeze over before that changes)

IMHO, better to have more, spend more freely enjoying retirement and eventually qualify for a part or full pension if things go wrong. Life is not a rehearsal and if I wanted to be an ascetic I'd be a monk in the Himalayas (at least the view would be good)!

May 20, 2024

"the govt is funding a portfolio of individuals, not just one, so overall they'll only be paying out the average attained lifetime for each individual.":

The Commonwealth is funding, with long term bonds, one Age Pensioner after another; each requiring the same amount of capital, and the capital need to yield more than inflation. Perpetual capital, which must preserve value after inflation.
Using 30 y bond yield of 4.6%:
= (26 * 1682.80) / ((1 + 4.6%) / (1 + 3.6%) - 1)
= $4,532,790.08

Should the prospective Age Pensioner know, or arrange, a fixed date of demise 25 years hence then they could, with confidence, spend their capital without consideration of yield; only factoring inflation (eg cash under mattress):
= PV(1 / (1 + 3.6%) - 1, 25, (26 * 1682.8), 0)
= -$1,789,186.63 (- = invested, not 'in hand')

Considering risk-free 5% yield and also spending all capital:
= PV((1 + 5%) / (1 + 3.6%) - 1, 25, (26 * 1682.8), 0)
= -$922,984.45

But neither is equivalent to the Commonwealth's 'investment'.

"lifetime annuity":
Value during life: Depends on provider meeting guarantees using market linked investments.
Value after death: $0. That appears to be Guaranteed, but not risk-free.

No tax in a Superannuation Disbursement ('Pension') account.

May 20, 2024

"single, own your own home and have $30 k in the bank. That's it. How are you better off than having a lot more money?":

Rather than having saved 'a lot more money', might have SPENT more in ways thought by a younger self to be more valuable than 'a lot more money' to their older Age Pensioner self.

The older Age Pensioner self might prefer to have $451,500 and full Age Penion and, perhaps also, a more valuable or lower running cost home, so SAVED more.

May 20, 2024

"having a lot more money": Just to have the same withdrawals as the Age Pension (26 * 1682.8) but only qualify for a part Age Pension after 25 years requires: = PV((1 + 5%) / (1 + 3%) - 1, 25, (26 * 1682.8), 1012500) = -$1,486,103.56 invested at start withdrawals. Having $0.00 Assessable Assets results in the same cashflow. Thus the extra $1,486,103.56 is worth-nothing. Having Assessable Assets of $451,500 generates extra real income of: = ((1 + 5%) / (1 + 3%) - 1) * 451500 = $8,766.99 tax free. To have the same real cashflow as Age Pension + yield on Assessable Assets of $451,500 requires: = PV((1 + 5%) / (1 + 3%) - 1, 25, (26 * 1682.8) + 8766.99, 1012500) = -$1,658,441.81 Thus the extra (1658441.81 - 451500) = $1,206,941.81 is also worth-nothing. An extra $1 in real future value after 25 years is worth $0.6183. Equivalent to a marginal tax rate of: = 1 - 0.6183 = 38.17%

May 20, 2024

"But neither is equivalent to the Commonwealth's 'investment'. "

I initially read your earlier comment as meaning that poor pensioners are being subsidised by the commonwealth to the tune of about $3.2m. I commented because I didn't want to leave that conclusion unchallenged. I think the support provided is actually less than $1m even in the most expensive case which is for a female taking full pension as early as possible, and I wanted that to set out that position as a counter to the $3.2m number.

Sorry if we were talking at cross purposes. However I still don't understand how your $3.2m number is useful in thinking about "how well [the poor] have it". The only thing that matters in that assessment is the amount of pension they receive. That amount is how well they have it!

I also don't understand why the $3.2m number, as some measure of the capital needed to support ongoing cohorts of pensioners' payments in perpetuity, is useful. Anything to do with funding future new pensioners just doesn't seem relevant to me when thinking about the amount of capital that we can consider is allocated to support an individual pensioner in the current cohort.

In your response to my comment, I think discussion of pensioners needing to know or arrange their demise after 25 years is missing the mark. On the one hand, the Commonwealth can rely on average outcomes because they have a large portfolio of pensioners. Some will live longer than average, some will die sooner than average. Same for Challenger. Either way the capital needed is only for the average expected outcome (plus a regulated capital safety margin in the case of Challenger; the Commonwealth can adjust taxes or payment rates so doesn't need a margin). On the other hand, the pensioner (or annuitant) doesn't need to arrange a fixed date of demise, since they are not self-funding and will be paid however long they live.

I agree with your comment about credit risk, and I did mention that in passing. It doesn't make much difference to the comparison of value, because expected credit loss are a pretty small proportion of the value of an annuity payable over 25 years. My reasoning is that a 25-year A-rated instrument with payments in the same pattern as an annuity stream (ie no separate lump sum repayment at the end) would have expected credit losses less than 3%, assuming default rates implied by the ratings haven't changed much since last time I looked carefully at longitudinal credit default rate studies, which was admittedly a few years ago. And policyholders rank ahead of bondholders if there's a problem so their expected credit event impacts would be less.

The uncertainty about credit default is (or could be) an additional weight on the minds of annuitants, with negative value separately from the expected monetary losses. I don't think this invalidates the ballpark comparison of annuity cost vs the value provided by the pension. The certainty is some additional value provided by the pension in comparison to the annuity, but it's not monetary value.

Again, the point of all this is just to say that I think the first-mentioned $3.2 might be misunderstood as the subsidy provided to support each person's pension, and I think that a value less than $1m would be a more relevant number for that concept.

May 20, 2024

Reposting to return paragraphing:

"having a lot more money":

Just to have the same withdrawals as the Age Pension (26 * 1682.8) but only qualify for a part Age Pension after 25 years requires:
= PV((1 + 5%) / (1 + 3%) - 1, 25, (26 * 1682.8), 1012500)
= -$1,486,103.56 invested at start withdrawals and $1,012,500 at end of 25 years.

Having $0.00 Assessable Assets results in the same cashflow from the Age Pension.
Thus the extra $1,486,103.56 is worth-nothing during the 25 years.
It could have been invested in home improvement for a better real tax-free, but not risk-free, outcome of roughly:
= FV((1 + 6%) / (1 + 3%) - 1, 25, 0, 1486103.56)
= -$3,046,246.82

Having Assessable Assets of $451,500 generates extra real income of:
= ((1 + 5%) / (1 + 3%) - 1) * 451500
= $8,766.99 / y tax free.

To have the same real cashflow as Age Pension + yield on Assessable Assets of $451,500 requires:
= PV((1 + 5%) / (1 + 3%) - 1, 25, (26 * 1682.8) + 8766.99, 1012500)
= -$1,658,441.81
Thus the extra (1658441.81 - 451500) = $1,206,941.81 is also worth-nothing during the 25 years.

An extra $1 in real future value after 25 years is worth $0.6183.
Equivalent to a marginal tax rate of:
= 1 - 0.6183
= 38.17% over the 25 years.

May 20, 2024

"I initially read your earlier comment as meaning that poor pensioners are being subsidised by the commonwealth to the tune of about $3.2m. I commented because I didn't want to leave that conclusion unchallenged. I think the support provided is actually less than $1m even in the most expensive case which is for a female taking full pension as early as possible":

Cashflow: The welfare paid to an Age Pensioner couple is 'less than $1M' over 25 years.
Capital: An initial investment required to generate such risk-free cashflow over 25 years is 'more than $3M'.

"On the one hand, the Commonwealth can rely on average outcomes because they have a large portfolio of pensioners. Some will live longer than average, some will die sooner than average. Same for Challenger."

The comparison is risk-free tax-free capital investment required to provide Age Pension equivalent cash-flow - without consuming capital through withdrawals or inflation - because when one Age Pensioner shuffles off another shuffles in to replace them in the simplest model.

Mick D
May 19, 2024

Jon re super withdrawal , can you give an example of “ when retirees qualify for the age pension at age 67, it is no longer subject to the 5 year restriction of the gifting rules.”

May 19, 2024

A super withdrawal can be gifted to children because when retirees qualify for the age pension at age 67, it is no longer subject to the 5 year restriction of the gifting rules.
Gifted after "condition of release", eg age 60+, and before age 67 - 5 = 62.

Jon Kalkman
May 20, 2024

The gifting rules are as follows: A pensioner cannot give away more than $10,000 per year and no more than $30,000 over 5 years. Anymore than that is regarded as a deprived asset and continues to be counted as part of the assets test and will reduce the pension. Any gift made prior to claiming the pension will have this effect.
A withdrawal from super at age 60 can be gifted to the kids. 5 years later the gift no longer affects your assets when you apply for the pension at age 67.

Mick D
May 22, 2024

Would a gift of say $200k at age 65 not be assessed as a deprived asset if age pension was not applied for until age 70 ( 5 years later ) ?

James L.
May 17, 2024

Great article, Graham, and congratulations for such concise and clarifying treatment of the subject. I trust in it being more evidence that doing what one loves is one of the great antidotes to cancer. Best wishes for continuing strength.
With the “new order” in dwelling increasingly endemic and social-changing, you prompt reflection on how much of the “RotW” live in greater concentrations of high rise in their urban areas. By contrast, much of Australia is being “dragged screaming” from its love of (very) large homes, on dedicated, non-communal plots of urban land - which we are being forced to reconsider.

Jeff O
May 17, 2024

Thanks Graham
Good to see you enjoying sharing your expertise & insights on such an important issue - funding the housing stock
One way to analyse is funding by tenure…
1. Outright home owners make up about a third of the stock and about a further 10% is fully paid off and owned by non-occupiers ( arguably investors)
2 About another third is owned by owner occupiers with a mortgage
3. Investors with a mortgage with deductible interest partly funded by tax breaks - mainly lived in by renters - both for long term stays and to a lesser extent air bnbs for short holidays
4 social/ public housing funded mainly by govt and some not for profits

But the housing crisis is arguably not about the supply of funding…. It’s the supply of new homes /land , construction costs, planning costs, availability of builders…….as well as excess demand in the short run

That said, long run demand is an issue - esp due to household formation, immigration etc

It’s complicated and political - across insiders/ owners v outsiders/ renters, state v feds and intergenerations ( young v old)

Indeed, younger people, families, older single females et al …should be marching in the street - to get govts to respond….. otherwise off to see the mum n dad funds to bridge the deposit gap & help with debt servicing

And then they will probably have higher real incomes but work longer to fund their homes/ payoff larger mortgages

May 17, 2024

Tremendous article Graham and good luck with your health battle.

I’m your vintage and relatively financially comfortable as a self funded retiree. Recently however our daughter is separating from her 20 year partner and the complexities you mention are rearing their ugly head.

We have already provided funds to her ex who owes us and a lot of ongoing cash injections when funds are tight for them. Now we are working out how our daughter can finance a house in our local area where kids go to school and where their networks are. It’s a real dilemma and I can see the bank of mum and dad being heavily leant on.

Mark B
May 17, 2024

Great to hear from you Graham. An additional aspect of high priced residential real estate is the high cost of downsizing - trading 4 bedrooms for 2, a big garden for a courtyard and if you are lucky you might have some money left over. My parents spent more and we had to lend them money to downsize, another crazy stat in this crazy market.

May 17, 2024

Wow, that’s a new one, lending to your parents so they can afford to downside. As you say, markets gone crazy.

May 19, 2024

I am ready to downsize and agree with Mark and Lyn. Perhaps getting rid of stamp duty for downsizers would make things easier and free up more family homes. I will have to borrow from my son to downsize to a villa from my 4 bedroom home.

May 18, 2024

Welcome Graham, chin up. Mark B, not surprised your post, checked downsizing last week as something caught fancy re no garden, associated costs horrendous... stamp duty, full service pack/unpack, future body corporate fees etc. Best to stay, put dust covers in unused rooms, employed gardener and unpriceable factor---known good neighbours not unknown. Had no idea until researched.

May 18, 2024

"downsizing ... associated costs horrendous":

Gilding the unused rooms can result in a guaranteed 7.8% return per year for life on expenditure in the form of increased Age Pension - in addition to any increased capital value.

Bank in the Bank of Home&Hearth.

May 20, 2024

Helen, agree, welcome to Dust Cover Club! Stamp duty plus CGT for letting room which net yield was far below CGT amount now and of course tax paid on rent along the way and younger people think we have tax breaks. The CGT is eye-watering. At least when CGT paid won't be here to see what goes to ATO at death. I wonder how many do $300,000 downsizer super contribution after high sell/moving costs, doubt many bank of Mum & Dad donations either for same reason. Kept mortgage for donkeys yrs with $10 on, will use for next generation deposit help, rather pay interest to help off rental than new set of stamp duty.

May 17, 2024

Hopefully new rules will soon prevent residential property being used as a means launder money. Whether it is has a material impact on house prices will remain to be seen but can't hurt and long overdue.

Wayne mckay
May 17, 2024

Graham I wonder the same thing, that is where does all this money for real estate come from. I guess a lot of it is from our local banks and financiers. Given that the average mortgage would now be one million and climbing I pray that financial institutions are doing due diligence on home loan applications and a borrowers ability to repay and not it will be ok because prices of houses always rise. We don't want a mess like the US found themselves in through poor lending practices which led to the GFC. I do worry about it because prices have reached ridiculous levels with no end to price rises in sight. There is so much money tied up in the Residential Real estate market if something goes wrong Australia would have its own GFC.
Thank you for your always interesting articles.

May 17, 2024

Thanks for writing this thought-provoking piece, Graham.
I wish you all the best in your cancer journey - may you recover fully!

Sad grandfather
May 17, 2024

My daughter married a coercive controller who only reluctantly allows us to see her and our grandchildren a couple of times a year. There is no way we can structure any support for them that works in a way that would prevent him from financially benefiting at her and their expense. We'll work something out in our will via a testamentary trust but that's for years into the future.

So we're not part of the bank of mum and dad phenomenon!

And this is really common.

Dad Bank
May 17, 2024

I sympathise with your not uncommon dilemma, Sad grandfather. With similar concerns, I followed legal advice to register a (consent) caveat on the property being purchased/developed by my child and spouse. The property cannot be sold without me ensuring repatriation of my loan (itself documented by a Loan Agreement) or moving the caveat (again, by consent) to a different property if they relocate. While consent was granted by both (perhaps reluctantly by one party), a caveat can be registered without consent.

May 17, 2024

I'm surprised that there are not more multi- generational households. My son had the option of living in poverty by spending his entire income on rent/food / etc or stay at home and save most of his income. Despite his misgivings about staying at home I eventually convinced him that financially it was the best way. Today he lives at home and assists with household chores and is great company. The benefit he has received is that he invests on the ASX200 regularly and has watched his investment compound into extraordinary and amazing amounts of money. (not to mention the passive income from dividends) When I die, through inheritance he will probably be able to pay for a freehold home at that time. I am surprised more families are not doing this.

May 16, 2024

Where could the money come from?
For those with no money it comes from selling labour, the capital for buying a home from savings.

Home price 6 times single average disposable income, price growth 6% / y;

Couple, save 90% of combined disposable income, income growth 4% / y; net nominal 3.5% / y interest rate;
Time to save to buy home: 3.5 y.
Save 75%: 4.5 y.
Save 50%: 8 y.
Save 30%: 21 y
Save 29%: 24 y
Save 28%: Never.

Avoiding the sirens songs of marketeers allows purchase of home without mortgage.

May 17, 2024

Dudley, that is such a cogent calculation! It must make distressing reading to many young couples. Given the escalating cost of everything, especially shelter and food, many couples and especially those with children, would find saving those proportions for so long disheartening at the very least.

And yet I’m reminded of that old adage: Nothing fixes high prices like high prices. The potential for this market to end badly must be elevated.

And thanks Graham for precipitating this discussion though I’m not convinced you fully answered the question you challenged yourself with: Where’s the money coming from? Bon chance mon brave to Albo and his 240,000 homes too!

May 17, 2024

"distressing reading to many young couples":

Average weekly earnings: $2,000 / w = $100,000 / y

Net weekly earnings: $1,442.08 / w = $75,033 / y

Couple save 90% = spend 10%:
= 2 * 10% * 1442.08
= $288.42 / w
= $14,997.63 / y

Doable if not renting.
Bunk of Dad&Mum makes Bank of Dad&Mum unnecessary.

May 26, 2024

Formula for calculating time to save price of home - without mortgage - with growing income.

Home price:
growth 6% / y, inflation 0% (for nominal rate), growing for 3.94 y, initial price / single average disposable income 6:
= FV((1 + 6%) / (1 + 0%) - 1, 3.94, 0, -6)
= 7.55 times initial single average disposable income after 3.94 y.

Net nominal savings interest rate 3.5% / y, inflation 0% (for nominal rate), saving for 3.94 y, disposable income growth rate 4% / y, couple disposable income saving rate 2 * 90% = 180%:
= FV((1 + 3.5%) / (1 + 0%) - 1, 3.94, 0, PV((1 + 4%) / (1 + 0%) - 1, 3.45, 2 * 90%, 0, 1))
= 7.55 times initial single average disposable income after 3.94 y.

Set couple disposable income saving rate, vary time until both 'times initial single average disposable income' are equal.

May 26, 2024

= FV((1 + 3.5%) / (1 + 0%) - 1, 3.94, 0, PV((1 + 4%) / (1 + 0%) - 1, 3.94, 2 * 90%, 0, 1))
= 7.55

Glenn Homan
May 16, 2024

Great to see you up and about Hand.

As for some other questions, in my APRA days there were some data about the proportion of overseas based buyers of housing at a time when ( erroneously) a particular ethnicity was being blamed for driving up prices. The data the bank used was founded in transactions requiring FIRB approval and suggested such proportions were always about 10-15% of all resi approvals: but note that the most significant cohort of this was good old fashioned ( I think they meant Caucasian) ex pats returning home- retirement and/or children schooling issues- and didn’t try and didn’t try and split out ethnicity. Sure overseas interest, or migrant based purchasing, in many cities has an enclave point about it.

But usefully it precluded a major bank senior manager from directing his staff to attend as many auctions as they could on Saturday and record how many purchasers “looked Chinese”. One of my tragically funnier days in the regulator.

And of course since then we’ve been through a period where prices have risen/ fallen without any OS money at all.

May 16, 2024

Good article Graham and wonderful to see you writing! We have done the "bank of Mum and Dad" thing with Loan Agreements in place but we still see a very different mentality in many of today's it expectation, entitlement, not sure. There is much taking of "gap year or years", getting out and enjoying the world before starting to focus on the debts of life. Probably we are jealous as we simply did not have an option to think about not working at a couple of jobs simultaneously in our 20's to cover the 17% interest on our mortgage. We do believe that our Government needs to place Australians first, not international wealth coming to Australia, otherwise hopelessness will become worse than it already is in attaining the "Great Australian Dream"!

May 17, 2024

"17% interest on our mortgage":

Thanks most kindly. More particularly, USA FED Chairman Volker and his merry fellows.

Matt A
May 16, 2024

As always, thought provoking and well written stuff, Graham. I share your bemusement. It's great that you're still writing, long may it continue.

May 16, 2024

Let's stop beating around the bush here because we don't want to discriminate against certain groups. Around my area in the Eastern suburbs of Melbourne, almost all of the buyers of housing are the following:
1. Cashed up Chinese who are getting their money out of communist China,
2. Cashed up Indians who are getting out of poverty stricken India for a better life in Australia,
3. Cashed up older people who have sold their big home for a whopping profit or gotten access to their Super and are downsizing.

This leaves little hope for young(er) Australians to compete against these groups to buy housing and they are consigned to renting on an ongoing basis (or until they get rescued by Bank of Mum & Dad or receive an inheritance).

May 18, 2024

Spot on Muz - I know for a fact these are the main drivers :)

May 16, 2024

Hope you recover from cancer. That you could write this article bodes well.
Other factors; 1. shortage of trades increasing building costs. Eg Recent $400 per hour charge for basic electrician labour in Adelaide (which I disputed ) , recent $100/hr for roofing plumbing labour (was $65/hr 2 years ago ) seems the market rate. 2. well publicized bankruptcies of building companies 3. Federal industrial relations laws becoming ridiculously complex and so increases costs for building companies.
Makes established housing relatively more attractive and hence expensive

Martin Mulcare
May 16, 2024

Thanks Graham - valuable insights on a fascinating "asset class" (a debate for another day). What I would love to see are facts on who the buyers are. Is there any reliable research for, say, the last 12 months on the proportion of buyers that are, for example: First home buyers; Buying a new home (and selling the other); Buying to rent (as investors); Overseas buyers v Australian residents?? The composition of purchasers might help understand what is happening. Such facts might help validate theories such as Mart's or Limor's.

May 16, 2024

Thanks Graham. I wanted to suggest another explanation.
Australia is an immigration country. Many immigrants (especially skilled migration) will transfer assets from the country they came from to Australia. It can be their pension money / inheritance / previous savings.
I believe a research will show that these are significant amounts.

May 16, 2024

Still at a bit of a loss as to the original premise of the article. It seems nearly all of the source of additional funds is from wealthy parents/grandparents? Is it that simple? It is a significant headscratcher for sure but are there that many wealthy parents out there? Surely the banks could throw some light on how people are funding their mortgages? Also not sure why a drop in interest rates is considered virtually obligatory; was this not part of the problem by allowing a surge in demand? They are still modest compared to historical rates and clearly with a housing shortfall predicted to last some years yet, throwing more fuel on the residential property fire would not be a smart thing to do until demand/supply imbalances ease. If cheaper money simply allows people to bid more for a property it solves nothing.
Last thing, I recall hearing the old reserve bank governor being interviewed some time back on the prediction interest rates would stay low for a couple of years. AT THE TIME he gave that "assurance" he said that they were being advised a covid vaccine could be 2-3 years away, so clearly in that context there was no tightening envisaged. The vaccines came much faster, the economy opened up and some pent up spending fuelled inflation. The context of the "assurance" is often overlooked/forgotten/not even known.

Avid FirstLinks reader
May 21, 2024

Well Steve, it seems obvious to me but let me explain.

The rise in house prices seems to be against all predictions of what would happen with higher interest rates. (Graham doesn't mention it in the article, but the very cocky forecaster Chris Joye dined out on his gloom and doom for house prices predictions for a while until the egg covered his face.) So Graham is wondering, what financial phenomena may have caused that.

He then posits several reasons - not just the bank of mum and dad.

Clear now?

May 21, 2024

"what would happen with higher interest rates":

Larger real interest rates have not been commanded, so 'nothing has happened'.

Year; Weighted average interest rate paid to households on all new term deposits, Tax rate, CPI change, Real interest rate:
2019; (1 + 1.40% * (1 - 31.5%)) / (1 + 1.80%) - 1 = -0.83%
2022; (1 + 3.10% * (1 - 31.5%)) / (1 + 8.40%) = -5.79%
2023; (1 + 4.40% * (1 - 31.5%)) / (1 + 4.10%) = -1.04%

Happenings would require real interest rates at least +2%; +4% be smashing.

Andrew B
May 16, 2024

One of the easiest and best ways for the Bank of Mum and Dad to secure the loan in the event of a marriage split is to put a first or second mortgage on the property being financed for their child.

David O
May 16, 2024

If a lending institution(bank) is also involved, they may have agreed to their loan on the basis there is no one else involved. So it may not be possible to have a second mortgage.

This was the case with our son a couple of years back. So, we simply have a proper loan agreement in place. The agreement was drawn up by our solicitor.

Nina Harris
May 16, 2024

Hi Graham
Good to see you writing again. We were recently pushed to try to organise bridging finance. My husband and I have been with different banks all our lives and were both told we were ineligible because we were a) retired and b) didn't currently have a loan with them, in spite of having had loans with both lenders in the past (paid off long ago) and in spite of owning a property valued at over 2 million! A reminder of what a blessing the bank of Mum and Dad was in helping us to acquire the asset we have today.

May 21, 2024

Agree bridging for retirees takes effort. Forget Macquarie, who never bridge. Or so they tell me. Forget ANZ, who will suck you dry for every aspect of your financial affairs, constantly asking for more, then finally admit they don't bridge retirees. At age 70 and retired for 8 years, we secured a renewable $2.3 m bridging facility with CBA, revisited every 6 months while we hunt for a downsizer. We won't sell before buying, as we might get locked out of our suburb, so bridging will be required. We own our circa $3m home outright and each have maxed TBCs and TSBs. Kudos to CBA for a rational decision.

Andrew H
May 16, 2024

Peter Thornhill said it best believing that Australians had a genetic defect when it came to residential property.

With REA majority owned by NewsCorp and Domain 60% owned by Nine who own Fairfax, the mainstream press now has control of the narrative.

With the banks lending, the politicians gearing/owning and the state government coffers bulging all off the back of one asset class, it has to be a bubble.

What pricks it?

May 16, 2024

Hi Mart, yes, I also worry about the media whipping up a residential price frenzy. We read in detail of one auction, how many bidders, how much price exceeds expectation, etc. But then we hear 800 places were auctioned that day and many not cleared, so is it really that buoyant? There are lots of dumps in Sydney for less than $500k. Still, if anyone wants a decent place, the numbers sound surprisingly high. Where do they find $1.5 million, $2 million, etc?

May 16, 2024

Graham - firstly, wonderful to see you penning a finance article, bravo, and keep fighting ! You've nailed this one for me but I'd add a couple of extras: one is that it's really tough for the 'average punter' (whatever that means these days) to actually get a property loan from a bank. The hoops that need to be jumped through to get or increase a loan given tightened risk management procedures are beyond onerous - Elliott (ANZ) and Comyn (CBA) are but 2 bank execs that have pointed this out recently. I have some baffling recent examples amongst family / friends and scratch my head ! The second extra is the vast reported amount of 'China' money that seems to be in the market (as per numerous media reports of "Chinese folk have managed to extract their money from China to avoid perceived risk there and are buying into the Aussie housing market"). This obviously adds fuel to the property price fire, but if this phenomenon is true then I do wonder how (a) China allows so much wealth to flow offshore and (b) how so many Chinese appear to have so much more capital than I do ! Of course this may all be a media beat up (and hopefully there are no racist undertones in the reporting) but it does make me scratch my head again !


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