Why let Hockey be only one to get family help?

Families buying homes together may be the only way forward.

 

Joe Hockey unleashed a storm this week with flippant comments on high house prices, suggesting people might simply get a better job and borrow more to enter the residential market.

But that is not the only way to enter the house market. There are several alternative ways into residential property and they mostly involve “family help”.

Just thinking about the notion of family help — that is assistance beyond banks and mortgage ­brokers — it’s worth noting the Treasurer himself had family help when he bought his ­Canberra home.

Madonna King — a former columnist on The Australian — writes in her biography of ­Hockey that the man-who-would-be-treasurer was driving through the suburb of Forrest in 1997 and saw an amateur’s “for sale” sign on a home.

The seller did not want real estate agents or lawyers involved. Hockey got his father — a real estate agent — to buy the house for him. And as King’s book Not Your Average Joe explains: “The Hockeys scored the house for land value: Joe’s father didn’t mention he was a real estate agent buying the house for his lawyer son.”

You can view this anecdote in several ways but, from an investment perspective, it’s a classic tale of working with the wider family to get a better deal.

With average Sydney house prices around $900,000 and Melbourne prices about $700,000, many people have to now accept that a young person — son or daughter — will not be able to buy a home if they are on anything like average wages. Just for the record the average industrial wage is $76,000.

So what can be done? Not everyone has the good fortune to have a dad who is a real estate agent ready to go beyond the call of duty for their offspring. And ­indeed not every family can — or may be willing — to engage in the level of commitment a property investment requires.

But assuming the wider family is keen to work together in buying a home, here are some ideas that are well established and are very likely to become much more popular before this property surge comes to its inevitable end.

• The Family Equity Guarantee:

This might be the best option for many people. The parents offer the title deeds of their home as security for their child. The purchaser then has two loans: One loan secured against the parent’s house and one against the purchased property. As payments progress the equity builds and the parent’s house will no longer be necessary as collateral. What is neat about this arrangement is the son or daughter owes the bank — not mum and dad. It’s a strong arrangement.

• The Gift:

Here the parents make a ­direct gift of funds to help ­younger family members achieve a ­deposit.

A few words of caution. If you are willing to make a gift or any form of financial intervention for one child, you should be willing to do it for every child. Also be ­certain you will never want the money back. This is a great ­arrangement for the offspring, not great for the parents.

• The parents and children share ownership:

The advantage here is that the parents have equity in a new property rather than debt. Once again the arrangement presumes the offspring will pay the parents back, leaving a real risk that if repayments are not made or are made too slowly, tensions will arise. Nonetheless, the arrangement allows everyone to benefit from rising prices.

• A “Parent Assist” loan:

It’s hardly a surprise to see ­financial products being launched to match the new realities in the housing market. St ­George Bank (a subsidiary of Westpac) and mortgage provider BlueBay (which has links with Bendigo Bank) are among the operators offering these specialist loans, which typically allow the offspring to borrow a deposit from their parents and take out a mortgage for the balance.

The proclaimed advantage here might be a “discounted ­interest rate” but the outstanding advantage of this elaborate arrangement is that an intermediary is placed between the kids and the parent, sidestepping the potentially fraught situation where there is inter-family borrowing.

●The Double Block:

In many areas local governments are actively encouraging the development of second dwellings on single blocks. In most urban areas in our bigger cities it is the land, not the houses, which carry the real value. Under this scenario, the financial arrangements may be relatively simple. The social arrangements, however, can get very complex.

In spelling out these various arrangements it has to be pointed out there is a price in everything and each of these variations have the potential for family upsets — a significant number of marriages will end in divorce and the question of who is ­entitled to property in those circumstances can quickly end up in the courts.

From a strict investment perspective, the more professionally any of these arrangements are settled, the more successful they will be, but professionalising family relationships is never easy.

Perhaps Treasurer Hockey might give some guidance here when he next holds forth on the art of purchasing a home.

www.eurekareport.com.au