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Friend, I’m not going to lie: the current stage of the property market cycle is pinching. A lot. I recently managed to buy my first house, so I feel all that interest-rate and high-inflation pain too.
Weighing up all the factors, I chose not to fix my low-interest mortgage rate back when the rates were quite low. While I don’t love paying a much higher interest rate than what I started on, I also know it’s just part of the cycle. One aimed at trying to bring the cost of living back down and our wages’ buying power back up. As a former financial adviser, I’m on board with it. (Doesn’t mean it doesn’t sting, though.)
Getting onto the property ladder has become harder and harder in recent years.Credit: Dion Georgopoulos
While many things have changed since our parents and grandparents were buying houses, the economic cycle, including inflation, has not – and who knows if it ever will. What has changed, though, is the relative buying power of our income compared to the cost of housing … and this is what’s at the heart of all the bad press.
Since I always say that education is your way out of a bad situation, in this chapter we’ll take a proper look at all these terms – inflation, interest rates, the market – so you can be fully informed about the property-buying journey and its potential impacts.
Interest-rate fluctuations are part and parcel of the fun journey of property ownership – the ride you sign up for if you choose to board this particular train – so let’s find out more.
Property with She’s on the Money.
How inflation affects real wages
Let’s say, last year you earned $70,000, which, after tax, leaves you $55,000 – roughly $1,000 a week – to support yourself. This year, if you were lucky, you got a pay increase in line with “normal” inflation (2.8 per cent), so your salary rose to nearly $72,000 (after tax, $56,693) or about $30 extra a week.
But at the same time, while last year your favourite loaf of bread cost $5, this year, the same loaf of bread costs $7.50 – a total increase of 50 per cent. But your salary’s only risen 2.8 per cent, leaving you a whopping 47.2 per cent behind.
Or, to look at it another way: last year, if the only thing you purchased with your weekly salary was bread, you could have bought roughly 200 loaves of bread each week. This year, even though your wage went up, you can only buy 145 loaves a week. Your real wage has gone down, and you are 55 loaves of bread behind. Rude!
That is what we mean when we say that “real wages are not keeping up with inflation” and why many must choose between heating or food in times of high inflation. And property, too.
Obviously, like any other product, the rising cost of money affects property prices. It forces interest rates to rise and forces the cost of everything – including builders and building materials – to go up. This ultimately affects the price of construction, which eventually forces property prices up across the board. Yes, even that decrepit rundown shack at the end of the street that hasn’t seen a tradesman in 20 years, because, as I also often like to observe, a rising tide lifts all ships.
In May 2023, AMP Capital’s chief economist, Shane Oliver, reported that spending power for the average income earner was down nearly 30 per cent. This is why, even though your boomer parents/uncle/neighbour keeps harping on about the extreme interest rates they had to pay back in the 90s and the devastating effects of the 2008 global economic crisis, today’s mortgage affordability (how much of your after-tax income is directed towards paying your home loan) is just as bad – if not worse – if we consider several additional impacts we’ll look at below.
So, no, you are not imagining it. Looking to buy a house in today’s conditions is a very real challenge. But as with every financial decision, I want you to be educated and empowered to make your own choices.
With all this said, it pays to remember that no one – not even the experts – can ever guarantee what will play out in the future.
So why bother with property at all?
Over the long haul, property has historically been an asset that increases in value. Therefore, if you can somehow afford to get in and buy a property, it may be a worthwhile investment.
However, as my podcast community knows, my main goal is simply to help millennials like us get ahead financially. I’m not advocating that you should get into property, but rather, looking to make you fully aware of your options, so you can make investment choices that are right for you.
There are many good reasons that property is so appealing, but the biggest one may be that it is the only investment that you can live in. As old mate Maslow’s Hierarchy of Needs model illustrates, shelter (aka, a home) sits on the foundational level of the most important things humans need to keep us safe and happy.
Maslow’s model is a way of representing what we need to live our best lives. Needs placed lower in the hierarchy must be satisfied before individuals can attend to higher needs. He describes “shelter” as being essential for basic survival (hard yes from me).
Anyone who’s watched the TV series Alone Australia will see that shelter is a contestant’s top priority. Perhaps more interesting is that the longer we go without a basic human necessity, the more motivated we are to get it. This means that having a place to call home is hardwired to be front of mind. As is security. And that’s why, although renting is one strategy for shelter, for some people, it may not fulfil all their essential needs.
As we’re all too aware, while renting may give you a place to live, it’s not necessarily secure. In Australia, at least, tenants have limited rights or protections, which can leave them quite vulnerable to the changing economic conditions and whims of their landlords.
The same situation applies to any dependants living in a home they don’t personally own. As such, for many, working towards homeownership becomes a high priority. What’s more, investing in property feels different to buying a share in a company because it’s tangible (we can see it, touch it, even taste it if you want – do not recommend!).
The real cost for women
With all we’ve learned so far about the current economic climate, there’s no denying that for those yet to break into the housing market, especially on a single income, the opportunity appears pretty far out of reach. I mean, when we can hardly afford to eat, how on earth can we afford to allocate any extra percentage of our salary (let alone nearly 50 per cent!) to paying off a loan we’re not even sure we want?
The real question, though, is, can you afford NOT to? My mission with everything I do at She’s on the Money is to help put people in the driver’s seat of their finances. I stress how important it is to be financially independent, especially because when we look at the stats in Australia, millennial women have some catching up to do.
Research from CoreLogic tells us that in 2023, 26.8 per cent of Australian women own a home, compared with 29.9 per cent of men. Since, in general, houses go up in value over time, that means that 3 per cent more women than men are potentially missing out on a decent slice of wealth and financial security.
It is not just the short- and medium-term picture we should think about, either. Research from the Australian Institute’s Centre for Future Work found that women in Australia earn $1 million less over their lifetimes than men (read that again – sickening, right?) and retire with $136,000 less in superannuation.
Many Australian households rely on accessing the equity in their family home to bulk out their retirement savings, which is why purchasing your first home could make a real difference to your comfort and security later in life.
The reason I am so committed to empowering women to gain financial freedom is to give us choice and the opportunity to safeguard our futures. We all want to assume our lives and our choice of partners will work out for the best.
However, the sobering stats are that one in six women have experienced physical and/or sexual violence, one in four have experienced emotional abuse.
As women, we can’t downplay the importance of being able to get out of a harmful situation. Even the most loving and supportive relationships can be hit by unexpected health and work hardships. We just don’t know what’s around the corner, so the sooner we start securing our financial future, the better.
Owning property can be just one tool to help us do that, as are the many approaches to financial management and wealth creation we talk about in the She’s on the Money community.
This is an edited extract from Property with She’s on the Money ($19), available now for purchase from all good book retailers in-store and online.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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