Get Out Of The House Now!

Australia's suburban property markets are heading for a shake-up. In any suburb at any time there is a transition going on: children grow up, leave home and Mum and Dad find themselves ambling around a house that is much too big. The difference in 2005 is that the number of over-sized half-empty houses is about to rocket.

The baby boom of the 1940s and '50s is set to suppress prices in large sections of the home market in the coming decade. Population experts estimate that five million people will retire in the next 10 years: that's one in four people on the street today. Looking at the figures another way, about 12 per cent of Australians are now over 65; by 2035, that figure is expected to be 22 per cent.

Many of these baby-boomers will eventually think about selling their houses at the same time. If you want to be ahead of the market, now is the time to plan what you will do with the family home. After you consider the implications of negative gearing and capital gains tax (CGT) '” not to mention the challenge of trying to rent out an aging house in an aging suburb '” the numbers point towards selling up.

To maximise your chances of selling '” and getting a decent price '” you must act decisively. Here, we take you through a step-by-step strategy to help you make an informed decision.

Step 1: Separate your emotions from your finances

Deciding whether to sell or keep a long-held family home can be extremely stressful. The logistics might seem difficult, but the emotional connection is even more daunting.

When you are in this situation, it is essential to remember that property is, first and foremost, a financial asset. The decisions you make can have a major impact on your finances and, therefore, your quality of life.

The fact that you have lived in a property should not influence your thinking about whether to sell or keep it. Think back to the last time you moved house. Once you moved out your furniture and personal belongings, it became a house, not your home. Hard as it may be to believe, the same applies this time around.

You may be tempted to keep your home on the basis of emotional attachment, and then justify it by saying, "We're going to rent it out, so it'll be a good investment and bring in income as we get older". It may be an investment, but it may also be a very poor investment that could cost you tens of thousands of dollars each year. This is why, if your home has outlived its usefulness, you must adopt a pragmatic approach.

When you borrow money, the tax office classifies debt in one of two ways: deductible '” money borrowed to buy income-producing assets, such as an investment property that produces rental income (the interest component of the loan is generally tax deductible at your marginal tax rate); and non-deductible '” money borrowed for personal use, such as a family home, and you cannot claim the interest as a tax deductible expense.

If you buy your new home without selling your old one, you won't be able to put the equity towards the new loan. You will probably have to borrow the whole amount and the whole loan will be considered non-deductible.

Take the example of a home worth $500,000 with no debt outstanding. The owners don't sell it before buying their new home '” missing out on about $10,000-15,000 a year in tax benefits. (Your accountant or tax adviser will show you how this relates to your situation.)

By selling your old home and putting the proceeds towards your new one, you will minimise the amount of non-deductible debt, and this will make a substantial difference to your hip pocket as you head towards your retirement years.

Step 2: Think for the long term

It's all too easy to make the wrong decision '” or, worse, make no decision at all '” by thinking in the short term. For example, you may not want to sell your home because you don't want to pay for estate agent and advertising strategies.

No one likes coughing up money to estate agents, but a skilful agent should more than compensate for their fees by extracting the maximum sale price from the purchaser. What's more, when selling the family home, you're exempt from CGT '” so you avoid the biggest short-term expense of all.

A look at the changing face of the suburbs also underlines the importance of thinking long term. In the 1950s and 1960s, a revolution swept through the property market. Young parents, busily doing their bit to replace our decimated population, wanted more space to raise large families. At the same time, mass production meant more people could afford to own a car. Newly mobile and with kids aplenty, young parents headed outwards to snap up cheap land and housing in the fledgling suburbs some distance from the city centre.

These suburbs are now the middle suburbs. Most of the homes are 25 – 40 years old and in need of renovation. But who's going to do it? Many owners are nearing retirement and confronting empty-nest syndrome. Their adult children are experiencing the excitement of life in the revitalised inner suburbs or building homes of their own in burgeoning outer suburbs.

There is less demand for homes in the middle suburbs. This means fewer buyers are prepared to take on the expense and effort of renovating ageing post–war homes. There is no evidence that this trend will stall or reverse in the foreseeable future.

As an example, let us compare the Melbourne municipalities of Monash and Yarra.

Monash, about 20 kilometres from the CBD, includes areas such as Glen Waverley, Mount Waverley, Oakleigh and Clayton, typified by brick-veneer homes built during the 1950s and 1960s.

Yarra, 3-5 kilometres from the CBD and one of the city's oldest areas, includes the suburbs of Richmond, Abbotsford and Fitzroy, typified by Victorian and Federation–style period homes. It also has a substantial number of units and apartments.

Sources: Melbourne In Fact 2001; A Guide to Property Values 2003, City of Monash website.

Between 1991 and 2001, Monash experienced a substantial fall in the number of people under 24 and an increase in people over 50.

Monash's population has stagnated, while Yarra's has increased substantially. Monash has a much higher proportion of baby-boomers than Yarra, and more couples without children. It has fewer adults aged 18-24, the ages at which many young people leave home. It also has fewer adults aged 25-34, ages at which many people buy their first home. What is more, the proportion of Monash residents who own their homes outright is more than double that of Yarra.

The young adult children of Monash's baby-boomers have moved out, leaving their parents in half-empty houses. The baby-boomers have substantial equity in their homes but, with fewer younger people (25-34) willing to buy and renovate these homes, the pool of potential buyers is shrinking.

The writing is on the wall. The longer you hold onto property in the middle suburbs, the harder it may be to sell it. This could make it more difficult to move onto the next phase of your life. Think carefully about whether you are prepared to take that risk.

Step 3: Decide whether your next home will be your last

Is your next home the one you plan to stay in for the rest of your life, or is it a stepping stone to your ultimate destination?

If it is a stepping stone, and there's a chance you may return to where you live now, it's probably best to keep a foothold in the market place. This means keeping your present home as an investment and renting for a while in the new location.

For example, if you move out of the metropolitan area and into an outlying "lifestyle area" with natural attractions and a slower pace, renting allows you to see whether the sea change really is right for you.

This is a less expensive option than selling your home, buying in the new location and then finding that the lifestyle is not what you wanted. In this case, the asset you purchased may not have kept pace with the market you left, making it harder to buy back in.

Step 4: Review your finances

This will help you decide whether you can afford to do what you want to do. You should look at:

• The value of your home. What is it worth in today's market?
• The debt on your home. Do you still have a mortgage on it? If so, how much do you owe?
• Your equity position. Your "equity" is the value of your home minus any outstanding loan amount.
• The purchase price of the new home. If you are buying a new property, how much are you likely to pay?
• Your tax situation. If you keep your home as an investment property and buy another dwelling to live in, how much of your debt will be tax deductible and how much will be non-tax deductible?
• Rental income. How much rent are you likely to achieve if you lease out your home? How does this compare with your loan repayment amounts on the home you are thinking of buying? Remember that any rental income that exceeds the interest expense is taxable at your marginal rate.
• Will there be a cashflow surplus, a shortfall or will you break even? If there's a shortfall, how will you bridge the gap?
  Remember, too, that many tenants prefer to rent in the inner suburbs. This may make it hard to find a tenant; and it could increase the vacancy periods between tenancies.
• Required borrowings. How much will you have to borrow to buy the new property?

If you can afford the lifestyle you seek, then hop to it! If not, you may need to reassess your goals.

Step 5: Evaluate your new lifestyle

Once you've found a home in your desired area, take a long hard look at your new lifestyle. Is it everything you wanted? Is your new home the right fit for your lifestyle? If not, you can always rent a different property in that area, or go back to your original stamping ground while you plan your next move.

Step 6: If you're happy with your new lifestyle, sell your old home

If your new home and lifestyle are exactly what you want, there's no reason to keep holding your old home. Why leave all that equity sitting in an asset that no longer meets your needs? And why restrict your cashflow year after year by missing out on substantial tax benefits? Bite the bullet and sell.

Selling enables you to release the equity and put it towards the loan on your new home, thus minimising non-deductible debt and significantly improving your financial outlook.

Step 7 (optional but highly desirable): Plan to purchase a quality investment

With your lifestyle settled and your finances in order, you are in an excellent position to further improve your financial situation. The substantial amount of equity in your new home could give you leverage to purchase well chosen assets and hold them purely as investments. They will grow in capital value over the medium to long term '” further increasing your equity and maximising your cashflow through optimum tax effectiveness.

Action Plan

Decide whether your current suburb fits the profile of a "middle suburb" whose population and demand is in decline. Were your home and surrounding homes all built between the late 1960s and early 1980s? Do they look very similar to each other? Do they appear architecturally dated and in need of substantial renovation? Are your neighbours in a similar dilemma to you '” empty-nesters with large, under-utilised family homes?

Determine the market value of your property. Find out the recent sale prices of homes in your immediate area by following auction results and calling estate agents to find out the prices of properties sold outside the auction system. Alternatively, pay an independent professional to determine your property's value.

Scrub up. Presentation is important when selling because you are appealing to buyers' emotions and laziness! Most buyers want to move straight into a property without having to undertake improvements. If there are dozens of other vendors in the local area, paying attention to the small things can make all the difference. For example, repaint that peeling fence. Change the old lino in the kitchen. Update benchtops and tiles. Overhaul the garden. You get the picture!

Appoint an agent. Interview several agents in your area. Compare their experience in selling your kind of property; ask for evidence of recent sales they have transacted; look closely at their commission rates but remember that the cheapest is not necessarily the best value for money!

Stick to your guns. The agent's interest is, full stop, to sell your property. Your interest is to sell at a price that enables you to make your desired move. Don't be pressured into selling at a price that limits your opportunities.