Sydney Property Conundrum - almost FI vs high prices, family offering money?

[Sandia]

Hello Mustaches, long time listener, first time caller here. I discovered MMM about 10 years ago when I was just taking my first steps into the real world, soaked it up like a sponge, and got the partner fully on board too. We've both been lucky and made pretty good decisions before we met each other, and then spent the past 10 years together aiming seriously for FI with low incomes, and then finally ramped up as we got proper jobs in the last ~3 years. Now looking at what to do next and hoping for some advice.

Life situation: Australians, in our mid 30s, living in Sydney now, married, renting an apartment near the city centre, zero dependants (but trying to get pregnant this year).

Gross wages: me = $100,000 AUD, partner = $70,000 AUD.

Pre-tax: normal super, partner has a little bit of HECS debt that's almost paid off.

Other income: earnings from index funds and savings interest = ~$20,000 AUD last year.

Current expenses: We have tracked every cent of expenses since 2013, and these are our averages over that long term. Note, we lived in Perth all those years with extremely low rent in sharehouses, but in mid 2020 moved to Sydney (partner's family is here, plus better jobs). We're now renting a place just the two of us since Jan 2021 (absolutely BLISSFUL by comparison) so our rent and total averages will go up by the end of this year.

Needs (rent, utilities, doctors/health insurance, phones, etc. - pretty happy we've optimised/shopped around for everything we can here) = 1050
Groceries (food and toiletries, since the lockdowns we don't hold back here and buy a lot of comfort/entertainment in food) =370
Transport (car everything, bikes, public transit - with the lockdowns, this average will just keep going down!) = 360
Fun (eating out, alcohol, gifts, clothes, entertainment, etc. - might be able to reduce this some) = 450
Travel (primarily visiting close family overseas once every ~2-3 years, plus mostly cheap hiking trips around Australia, but in general travel has been important to us) = 450
Average total yearly expenses to date = 34,000


Expected ER expenses: Expect the averages above are a pretty good estimate. Therefore, we expect to need ~$850,000 in assets in order to reach FI using the 4% rule. In general, we don't plan to fully retire early, but would like to work much more part time in order to maybe have kids and/or travel the world (when it's possible again).

Assets: (all numbers below in AUD, rough round numbers, but we track everything to the dollar in a master spreadsheet)

Super partner: 100,000
Super me: 90,000
Savings, term deposit at 2.75% which is due in 2024 = 100,000
Savings for FU money/house deposit = 110,000 (this started as just emergency savings and then just kept growing as we swept the "change" into it each week from the transaction acct)
Vanguard, index funds ASX = 100,000 (that's how much we've nominally put in, it's worth ~145,000 right now)
Vanguard, index funds international = 100,000 (that's how much we've nominally put in, it's worth ~135,000 right now, opened it more recently)
Vanguard, bonds = 25,000
plus some misc accounts, small savings accounts, and a few individual shares

Total currently across all accounts = ~$640,000

No house, car is worth 2,000 but will run forever if we're lucky.

With these assets and our expenses to date, we calculate that we're 74% towards FI. Last year we were able to save more than $100,000, and expect to get close to that again this year.

Liabilities: None, hooray!

Specific questions:
Broadly: the perennial Sydney Question, should we buy a place to live and for how much? It is literally impossible to live in this bloody town without every social conversation including discussion of real estate. My partner's parents are extremely motivated to see us buy property; as people who lived their whole lives in Sydney, they reckon it's the only way to build wealth, and they feel very deeply that they need to see their children on the property ladder as soon as possible.

I would normally not care too much about other people's ideas and just focus on our MMM plans, but ay here's the rub: they are offering us $200,000 - $300,000 to us (and their other two married children, who are also considering it but haven't done anything yet) for a deposit. This money would come out of their super, but they assure us they have plenty to live on without this money and want to see it "used well" before they pass, i.e. early inheritance. They would only give us this money now for a deposit on a property, with stipulations in a contract. We have explored how we would get a formal legal contract to do this, and so far no big red flags other than my general reluctance/anxiety about mixing (in-laws) family and money. It seems stupid to not at least consider it, but no money is worth wrecking the family relationships. There are no signs so far the money would wreck the relationships, but I've read a lot of horror stories, including on these forums. My partner has a great, close and warm relationship with his family, and expects no troubles, and that's probably true. In general, he is very sunny/optimistic, and I am more anxious, and often we're both right.

For the suburbs we're considering currently (inner west, or slightly north of the Shire), it looks like a minimum $800,000 spend for a 2 or 3 bedroom unit, up to $1,200,000 for a house in those neighborhoods - you get more room/amenities for your money further out, of course. Right now, we're leaning towards aiming for no more than ~$900,000, and do: 300,000 from the parents, 300,000 from our savings/Vanguard, and 300,000 from the bank. The bank we'd probably go with is offering 1.95% fixed interest for 3 years, or up to ~2.6% interest with an offset account. We're currently renting for $400 per week, and can confirm that any of the places we're looking to buy would themselves rent out at ~$400-500 per week (if, for example, we want to rent it while we traveled abroad or something in the future).

Specific questions, any advice on any of these and/or whatever else leaps out at you is much appreciated:
1) If we buy a property, right now it feels like it sets back our FI calculations significantly. Are we wrong about that?

2) Is there a solution to the Sydney Property Mystery, i.e. why is everything so very expensive compared to what you get for it? These are not lovely apartments we're looking at for these prices, it's hard to find anything that isn't dark, noisy, and has neighbors so close you could spit from your balcony onto theirs. (I grew up pretty rural, the noise and density are weird for me, and the thought of people being able to look in my windows at me makes my skin crawl a bit - I guess I just have to get used to that if I want to live in Sydney, or I keep looking for the unicorn property that isn't overlooked.)

3) Ultimately, our goals are to be mostly FI in the next ~5 years, so we can both work part-time with a kid, and/or to spend time travelling the world (when the pandemic is no longer a factor). We want to slow travel (or live and work) in North America and Europe at some point in our lives before we get too old. Neither of us love our jobs much right now, though we're endlessly grateful we've kept these well-paying jobs with pretty good companies and can work from home. They're both just very long hours and high stress, and one day we want to be able to live more. Do you think renting vs owning offers the best chance of reaching this kind of goal/lifestyle?

4) If you were offered $300,000 from your parents under the conditions I've laid out, would you take it? Why or why not?

5) If we got a $900,000 property with a mortgage at 1.95% fixed for 3 years, we have broadly three options for deposit vs mortgage:

a) us $300,000, parents $300,000, and mortgage with bank for $300,000
b) us $300,000 and mortgage with bank for $600,000 (no parents)
c) us ~$1-200,000 (and leave the majority of our investments in the market to grow there), and then either combo of parents vs mortgage for the rest.

What would you do?

Looking forward to any facepunches, musings, or experiences you might share!

[MrThatsDifferent]

Ok, I’ll throw my 2 cents in although you’ve both done incredible for your ages and income, wish I had been focused so early. Your current expense threw me off because I couldn’t figure out your Needs with those numbers living in Sydney. Personally, I’d try to work out your real current expenses living in Sydney and not the Perth expenses, that’s throwing things off. As for your direct questions:

1. Possibly a set back but it’s all subjective. You may find you only want to partially retire and work PT jobs, that’s ok. You’ll still technically FI, especially if your plan is to be FI in 5 years.
2. Hmmm, well, yes and no. I think the solution is to pay a little bit more and manage your expectations. Although the market is crazy right now and I’m not sure if it’ll get less crazy. If you want a house with a yard, prepared to spend or commute, unless you can WFH most of the time and don’t mind living far. You’re in the Shire right, still good options there. I’d aim for a 2-3 bedroom unit. Kinda depends on how many kids you want too. Once piece of advice I got was to make a list of top 10 most important features of the home and then consider anything that checks 7 out of 10 boxes. Do your homework and visit as many as possible and review strata reports for all the ones your serious about.
3. This is another tough one. I was set on the rent and invest and travel the world plan too. Then Covid hit and what became more important was security and a comfortable place of my own, especially with all of this lockdown craziness. Traveling the world isn’t going to be as easy as before and who knows what this pandemic will do. I think even if you buy a place you can still rent it out and travel, or make it a pure investment property. Sydney’s one of the few places where rent and mortgage aren’t too far apart. Also, I worked out this type of thinking, which isn’t exact and might not work for you but definitely worked for me:

Ok, let’s say you buy a $900k place and use $400k ($300 from parents, $100 from you), your mortgage is around $2000/month. You’re currently paying $1200/month in rent.
A. 100% of your rent money leaves your pocket and you never see it again.
B. 2/3 of your mortgage goes to the bank, 1/3 goes to your equity so roughly you’re keeping $600-700 of that each month.

Now there’s insurance, maintenance and strata fees sure but roughly renting and buying is around the same , except with buying you can: 1. Make it your own, 2 have something that appreciates in value, 3 diversify your portfolio with something you can use and leverage if you want

4. Yes. Look, it’s great to do things on your own, but gifts are great too. If the parents aren’t jerks who will try to control you, then sure, of course. That accelerates your plans. Wish I had that option.

5. You have lots of options. The one I’d do is: $300k parents, $100k me, $100k me in the offset account. I’d split the loan between variable and fixed. This way you haven’t modified your strategy tremendously and you still have a property. Remember you can get something manageable now, live in it for the next 5 years and then go overseas and sell it or rent it out and return later and buy something somewhere else that fits the lifestyle you want later.

Bonus: if you don’t have them, get wills for you and your partner, update the wills when you buy property and update again when you have a kid. Every major life event, review and update your will as needed.

All the best!

[reeshau]

I agree you have done well for yourselves, particularly if you did a lot of this before coming into larger incomes!

I don't know Australia at all, so I don't have advice, but I do have a couple of questions to ponder:

1)  Is there a time limit on this offer?  I'm thinking of this for two reasons (and maybe a third, in the next question)  The Covid pandemic has played havoc with many things, including where people think they want to live.  Some places have gone up, and some have gone down.  Are you looking at the former?  Perhaps it will cool off as people reconsider, particularly close in vs. suburban with a garden.  At the same time, if the offer was made to all the kids, you can observe any funny business around whoever goes first:  formal or informal strings, etc.  Speaking of which, have you talked with the siblings about their thoughts of the offer?

2)  What would your housing needs and wants be when you do FIRE?  First off, you wouldn't need to commute.  You mentioned there is better value farther out--would farther out suit you better when FIRE'd?  Again, if you could take some time to consider--coincidentally the same amount of time you need to reach FI--then you also have the time to consider this question.  Being out in the sticks may be harmful for access to culture, etc., but being an hour's drive is still a lot closer than Perth.  And the offer gives you options while you think on this:  if some opportunity comes up, like a market shock or the perfect place, then you could act on it early, even if you won't be moving in for a year or two.  Maybe you could start with it as a rental, with plans to come in, when it's time.  Farther out probably also reduces your spend, at least in part making up for the drawdown on your investments.

[yachi]

It is literally impossible to live in this bloody town without every social conversation including discussion of real estate.

This for me is a huge billboard, with blinking lights and flashing arrows all pointing to real estate being priced too high.  When everyone says "this is the way to build wealth" be careful.  I searched everywhere for voices to counter the "you should buy a house" message I was hearing in 2006 & 2007.  This was as a recently graduated, unmarried (but engaged) worker in a professional job less than 2 years.  I could not think of a worse time to buy a house, as I didn't know where my spouse would find employment. But my coworkers were blinded by recent gains they made in their houses.

Do your in-laws know where your finances stand, and that you've chosen to rent all this time?  It makes sense that they believe real estate builds wealth, because it did for them, but you should consider starting and ending valuations: how much was rent vs purchase price when they bough, and how much is rent vs purchase price now?  How much did a house cost relative to income when they purchased, and how much is it now?

[deborah]

The SMH and The Age ran this article a couple of days ago, where Jessica runs the numbers that Mr Green did a couple of posts ago, but for her in Sydney.

https://www.smh.com.au/money/borrowing/is-it-better-to-rent-or-buy-i-ran-the-numbers-to-find-out-20210813-p58ij6.html

It was an interesting read, and included just about everything.

House prices are rising obscenely at the moment, all over Australia.

https://www.domain.com.au/news/house-prices-in-sydney-melbourne-brisbane-adelaide-and-hobart-hit-record-high-1075331/

It’s not sustainable, given that the number of immigrants and students needing accommodation has fallen and will continue to be lower for years because of the pandemic and the changes in China’s education policy.

[ChpBstrd]

One of the reasons homes are so expensive in Sydney is because one can make an assload of money while working there. You seem to be an example of a couple doing exactly that. People will pay big money in exchange for that opportunity.

However, when you retire from your big city jobs and start living off of investments, that opportunity becomes nearly worthless to you. You aren't working any longer, and so are not exploiting the main benefit of a home in Sydney: a high salary. The PT work you are considering would only partially compensate for the higher costs, lower luxuries, and hassles of big-city life. When you start traveling post-FIRE, you won't even be living in this very expensive abode for long periods of time.

So what the in-laws are offering you is a subsidy on something you won't need for much longer, which is kind of like getting a lucrative coupon for dog food when you don't have a dog. On the flip side, a period of weak market returns could extend your careers and make you wish you'd hopped on the property bandwagon when you had a chance. A free $300k is not something to turn down! Yet you also don't want to be forced to buy a financial albatross only to move in a few years.

I recommend you have a frank and grateful conversation with the in-laws about your life situation and the terms of this gift. They are no doubt imagining your lives are like theirs were, and that you have the same desires, opportunities, and limitations they had. They are probably thinking, "if only someone offered to help us with a house when we were their age...".

Your situation is much different than theirs probably was (74% to FIRE vs. maybe scraping by), your desires are much different (FIRE and travel vs. home ownership), and your limitations are different (sky high RE, low rates that might not stay low, poor rent vs. buy decision metrics vs. market conditions decades ago). Their main concern may be keeping the family geographically located together, so it doesn't drift apart as everyone chases jobs in different cities. You'll need to discern their motivations for the gift before negotiating.

Prior to this conversation with the in-laws, hash out with your spouse exactly what solutions you would be OK with negotiating. Here are some examples you might find acceptable:

1) Ask if they will put the funds in a custodial account, invest the funds, and agree that you will use them to buy a house within 8(?) years or it goes back to the in-laws, if those are the terms they prefer. This lets you exploit the favorable rent vs. buy conditions in place right now, and the investments will probably outperform property anyway. Downside: housing prices could rise faster than markets, as happened in Japan.

2) Ask if they are OK with you selling the property you buy with the money after retirement, or if that is reneging on the agreement. Keep in mind, you don't necessarily know what you will want in 5 years. For all you know you might be bouncing all over Australia or the world renting places. Downside: closing and moving costs.

3) Ask if you can buy your retirement house with the funds now (not in a HCOL area) and rent it out while you finish your careers in Sydney. This gets you into home ownership, but avoids the unfavorable geographic lock-in problems. Downside: moving away from family.

4) Plan to coast-fire from your future retirement home in a LCOL area. Your wages would go down, but with help from this gift you might be living mortgage-free. You might have to work longer or shorter in this scenario, but at least you get settled and enjoy the benefits of the gift. Downside: moving away from family.

5) Commit to Sydney life and take the gift. Let the chips fall where they may, but at bare minimum don't miss out on a $300k gift because the grass might be greener elsewhere.

One risk with this "talk to them" plan is that they might realize you don't need this gift to thrive. They might resent or be jealous of the amount of wealth you've squirreled away at a young age. Play that by ear. You don't necessarily have to reveal your wealth other than your hopeful retirement timeline.

Last... how do the in-laws feel about the possibility of watching half this money leave the family in the event of a divorce? I bet they're not thinking about it. The custodial account option may be supported as a good idea on the basis that it keeps the money in their family in the event of divorce.

[chasingthegoodlife]

Re: the money from your in-laws.

My parents offered my sister and I cash gifts to help us get into the Melbourne property market. Nearly ten years on and neither of us have any regrets. It was an amazing leg up for me and there has never been a speck of bad feeling or any strings attached. That property is now an IP and that hasn't changed their feelings about it- they are excited to see us doing well.

Your partner probably knows best what emotional pitfalls might follow from such a gift. I definitely would have been reluctant to take the money if I thought it might cause financial hardship for them down the line. 

In my case, they did seek legal advice and structured it to protect from any future partner's claims. Try not to take it personally if your in laws go down this road - it will likely be the advice of their lawyer rather than any concerns they have about you as a partner.

Re: the loan structure

If you do buy, consider borrowing the maximum you can and putting your contribution into an offset account. This gives you maximum flexibility later on if you decide to rent out the property (e.g. withdraw the funds from the offset and claim a greater interest deduction).

Congrats on everything you've achieved so far.

[Zamboni]

Parents offering a down payment on a home for a young couple is pretty normal.

In your shoes, I would likely buy something on the small side using the parent's money with very little additional down from my own stash. Since you don't have kids yet, maybe a 2 bedroom? 2-3 little kids can happily share a room, so that means you are good to go for ~10+ years. I'd thank them profusely for their generosity.

Owning a home means paying interest, taxes, insurance, maintenance etc. instead of rent. I wouldn't think of it as the main you are going to build wealth. But, if you are primarily using their money as the down payment, you've got the added bonus that you can sell the home and get some/all/more? of the cash later.

Anyway, that's what I would do. YMMV.

[Sandia]

Ok, I’ll throw my 2 cents in although you’ve both done incredible for your ages and income, wish I had been focused so early. Your current expense threw me off because I couldn’t figure out your Needs with those numbers living in Sydney. Personally, I’d try to work out your real current expenses living in Sydney and not the Perth expenses, that’s throwing things off.

Thanks for your comprehensive response.

It is difficult to calculate our average expenses in Sydney, because we only have 8 good months of data where we are living just the two of us. Before that we were living with the parents for a few months and before that we were in our Perth sharehouse. In between we sold a lot of stuff in Perth and bought a lot of stuff in Sydney, which throws off the averages.

For 2021 we are averaging $3200 per month. $1600 per month is rent, so $1600 is the remainder of the spending.

[Sandia]

I agree you have done well for yourselves, particularly if you did a lot of this before coming into larger incomes!

Thanks a lot. It has been encouraging to read this comment on the forum.

1)  Is there a time limit on this offer?  I'm thinking of this for two reasons (and maybe a third, in the next question)  The Covid pandemic has played havoc with many things, including where people think they want to live.  Some places have gone up, and some have gone down.  Are you looking at the former?  Perhaps it will cool off as people reconsider, particularly close in vs. suburban with a garden.  At the same time, if the offer was made to all the kids, you can observe any funny business around whoever goes first:  formal or informal strings, etc.  Speaking of which, have you talked with the siblings about their thoughts of the offer?

There is no time limit. The parents are unwitting Mustaches themselves and they have said that there is nothing better that they want to do with the money than help us find somewhere to live. So they get excited to have us buy something as soon as possible.

They had a similar, smaller, deal with one sibling many years ago that went perfectly well. But they are aware that things can possibly go badly between family members so we will formalize the deal.

2)  What would your housing needs and wants be when you do FIRE?  First off, you wouldn't need to commute.  You mentioned there is better value farther out--would farther out suit you better when FIRE'd?  Again, if you could take some time to consider--coincidentally the same amount of time you need to reach FI--then you also have the time to consider this question.  Being out in the sticks may be harmful for access to culture, etc., but being an hour's drive is still a lot closer than Perth.  And the offer gives you options while you think on this:  if some opportunity comes up, like a market shock or the perfect place, then you could act on it early, even if you won't be moving in for a year or two.  Maybe you could start with it as a rental, with plans to come in, when it's time.  Farther out probably also reduces your spend, at least in part making up for the drawdown on your investments.

For now we are working from home, so we are not commuting anyway.
This city is so large that it takes a long time to see anyone. In Perth we were able to cycle, but Sydney is not bike friendly.
We want to be close enough to our relatives so that the distance to visit them isn't a chore, especially if we have our own kids one day.

[Sandia]

The SMH and The Age ran this article a couple of days ago, where Jessica runs the numbers that Mr Green did a couple of posts ago, but for her in Sydney.

https://www.smh.com.au/money/borrowing/is-it-better-to-rent-or-buy-i-ran-the-numbers-to-find-out-20210813-p58ij6.html

It was an interesting read, and included just about everything.

I agree. Those are the sorts of numbers that we have been calculating, and synthesising from this forum. It seems like the rent v buy calculation leaves you pretty much breaking even, numerically. After that you are just left with the qualitative aspects, which are different for everyone.

[Sandia]

One of the reasons homes are so expensive in Sydney is because one can make an assload of money while working there. You seem to be an example of a couple doing exactly that. People will pay big money in exchange for that opportunity.

However, when you retire from your big city jobs and start living off of investments, that opportunity becomes nearly worthless to you. You aren't working any longer, and so are not exploiting the main benefit of a home in Sydney: a high salary. The PT work you are considering would only partially compensate for the higher costs, lower luxuries, and hassles of big-city life. When you start traveling post-FIRE, you won't even be living in this very expensive abode for long periods of time.

We are working from home, and one job is in another state, not even in Sydney. So we don't need to be close to the city for work, just for family.

So what the in-laws are offering you is a subsidy on something you won't need for much longer, which is kind of like getting a lucrative coupon for dog food when you don't have a dog. On the flip side, a period of weak market returns could extend your careers and make you wish you'd hopped on the property bandwagon when you had a chance. A free $300k is not something to turn down! Yet you also don't want to be forced to buy a financial albatross only to move in a few years.

Good point.
They are possibly offering something else. From a Mustachian perspective, quantitatively, what they are offering is a subsidy for childcare.
If we have children, and if we still have to work at our jobs, we will have to pay for childcare.

Qualitatively, having relatives around seems like a benefit. For example, it's good for kids to have grandparents, and it's good for grandparents to have grandchildren.

2) Ask if they are OK with you selling the property you buy with the money after retirement, or if that is reneging on the agreement. Keep in mind, you don't necessarily know what you will want in 5 years. For all you know you might be bouncing all over Australia or the world renting places. Downside: closing and moving costs.

If we sell the property, we give them back whatever they put in. We are writing this up formally.

Last... how do the in-laws feel about the possibility of watching half this money leave the family in the event of a divorce? I bet they're not thinking about it. The custodial account option may be supported as a good idea on the basis that it keeps the money in their family in the event of divorce.

If we get divorced, we give them back whatever they put in.

[Sandia]

But, if you are primarily using their money as the down payment, you've got the added bonus that you can sell the home and get some/all/more? of the cash later.

Anyway, that's what I would do. YMMV.

Thanks for the encouragement.
If we sell the property, we give the parents back what they put in.

[Sandia]

Re: the money from your in-laws.

My parents offered my sister and I cash gifts to help us get into the Melbourne property market. Nearly ten years on and neither of us have any regrets. It was an amazing leg up for me and there has never been a speck of bad feeling or any strings attached. That property is now an IP and that hasn't changed their feelings about it- they are excited to see us doing well.

Thanks, it's encouraging to know that it worked and you have no regrets.

Your partner probably knows best what emotional pitfalls might follow from such a gift. I definitely would have been reluctant to take the money if I thought it might cause financial hardship for them down the line. 

We have not questioned them too deeply about their own finances. However, as far as we can tell, they won't have financial hardship down the line. They have their super, they hardly spend money themselves, and they just want to make use of what they have to spare on us now.

In my case, they did seek legal advice and structured it to protect from any future partner's claims. Try not to take it personally if your in laws go down this road - it will likely be the advice of their lawyer rather than any concerns they have about you as a partner.

Thanks for the reminder. It can be tempting to take it personally sometimes.
We know intellectually that this is the wise thing to do. It is a bit stressful, mainly because we have not done something like this before.

Re: the loan structure
If you do buy, consider borrowing the maximum you can and putting your contribution into an offset account. This gives you maximum flexibility later on if you decide to rent out the property (e.g. withdraw the funds from the offset and claim a greater interest deduction).
Congrats on everything you've achieved so far.

OK good tip.
Interest rates are low, so we're working hard to convince ourselves that it is OK to borrow money and pay interest, rather than save money and earn interest. It will take some getting used to.
If the rates spike one day, we can probably pay off the difference quickly.

[Sandia]

Thanks to everyone for your thorough replies.

There is one theme that was woven through many of the replies, which I didn't address individually: the threat of a property bubble.

This is a topic that has probably been covered in many other threads on this forum and other forums.

In brief, there are definitely signs of a bubble in the property market in Sydney. There are not definitely signs that it will pop. We have tried to digest everyone's opinions on this and we are left to hope that we can probably handle foreseeable outcomes.

• House prices collapse - that's OK, we just keep living in the one we have. We're not taking out big mortgages on investment properties, we're just owning one place to live and avoiding rent. In 10 years, if it's worth a bit more or a bit less, that seems like a fair risk.
  
• It really is a very bubbly bubble - that's OK. For other qualitative reasons, we are inclined to jump in at some point. It might pop next year, or prices might go even higher next year. We don't know, but it suits us to buy soon for other reasons.
  
• Interest rates spike - that's OK. We just sell shares and pay off the mortgage.
  
• Interest rates go negative - who knows what to do then? May as well have a small mortgage.
  
• We won't be flexible enough to travel - when you're renting, it's not always easy to leave a place either. You still have to extend or break leases between deadlines. You have to find somewhere to put your stuff while you're away.
  
• There's an opportunity cost for not investing elsewhere - true, but we're not predicting the future. We currently have assets in shares and cash, with nothing in property. With one purchase, even if it might be a bubble, we're spreading the risk into one other asset class. The share market could also crash, or the dollar could plunge in value.
  
• Rents plummet and we can never rent it out to anyone - that's OK. Then we just do the stupid Australian tax dodge of negative gearing and take the subsidy from hard working people.
  

[Zamboni]

How do your parent feel about these clauses to "give them back what they put in" in certain possible future situations?

If my kids proposed that, I would say "Nope, nope, nope. This is a gift. You are never giving it back."

For example, I hope you don't get divorced. It's not a fun thing to do. But it's also extremely financially stressful for many people. I wouldn't want my distressed children who are divorcing and going through all of that emotional and financial trauma and instability trying to give me a big chunk of money during the process. Heck, For the only time in my life, I borrowed $2K from my Mom during divorce because cash flow was so impacted temporarily. I paid her right back, of course, but giving back our parents $20K (or whatever amount): that would have been really difficult at a time when we were at the ends of our ropes already. YMMV.

[happy]

It is literally impossible to live in this bloody town without every social conversation including discussion of real estate.

As an ex Sydney-sider I chuckled at this. A lot. So true. Its one of the reasons I moved out: there is more to life than angst-ing over housing. I too still struggle with having too much of my net worth tied up in  my PPOR, so its an issue I have long pondered and not yet entirely solved.

I've been predicting the Sydney property bubble will burst since 2013. Go figure. This makes me reluctant to prophesy any further, but consider that its not just supply and demand that drives the market but also interest rates. If/when interest rates start to rise more than just a little there will be a massive unravelling and the market may go from cappuccino to flat white. Gubmint can't afford too much of a crisis and probably try to intervene in some way but who knows.

I do see a number of folk concerned about how they will ever buy a house ( both on the forum and IRL) but there is a tendency to be looking at way too much or too fancy for a first home. The problem is not a new one - when I was trying to buy in, interest rates were 17-18% and the Sydney market pretty much doubled in 12 months as soon as they eased slightly by 1 or 2 %. But lifestyle marketing around the home seemed to take off in the 1980s and expectations of what is an appropriate PPOR have altered dramatically.

The formula really hasn't changed over the decades. To get into the market, its necessary to buy a small and cheap fixer-upperer, in a suburb you probably don't really want to live in longterm, live frugally and do as much of the work your self as you can. You could decide to flip every few years, or  upgrade more slowly. As others have said you have to watch the stamp duty and buying/welling costs to make sure you aren't going backwards.

The other option, which seems to be often overlooked is to buy a rental unit as an investment, as close to neutrally geared as possible ( or positively geared if you can find it). This can act as a placeholder in the seemingly ever rising market preferably for at least 7-10 years and the equity tapped at some point to buy a PPOR if desired.

As far as the free gift goes...I think you've gotten good advice already. Personally I would worry about hidden strings like wanting to keep the family around and/or invested in the way the parents thought it should be done but this may well be completely irrelevant since I'm just a random internet stranger who know nothing about how your family/inlaws work.   When I was separated I needed to buy my ex out of our house, and totally unexpectedly my parents offered me a gift of 50k to do that. I was pretty well at the end of my tether, and the thought of working more to pay the extra mortgage I would need to  get, was enough for me to gratefully accept.   My folks were not in the habit of gifting and to some extent were a bit controlling, but I never felt constrained by this gift...most likely because what they wanted out of it and what I wanted  were exactly aligned... keep the family home and have some breathing space to raise my kids whilst only working part-time.

[Moomintroll]

Quick thought that others have touched on above: if you don't need to be in Sydney for the work commute so much as the people, and going to see people across Sydney takes ages, could you look further up or down the coast or inland for somewhere cheaper/nicer? If you were somewhere on the train line south or north could that work?

Lifestyle outside Sydney is definitely better for most people, and services like childcare etc are cheaper. Personally we found frugal/Moustachian lifestyles in general became more achievable when we left inner Melbourne & weren't surrounded by so much pressure to spend, spend, spend on everything from cosmetic surgery to cars to private schools.

The bubble would worry me. We moved from Australia to Ireland in 2015 and there's nothing like spending time in Ireland to help you realise how bubbles can burst and how the fallout can last years. Although as you point out, the large deposit options you have with or without parents will shield you from negative equity and rising interest rates etc.

I also wouldn't discount how your desires would change over time with kids in the mix. Young kids are happy enough in an apartment but as they grow we found the space needs do too, either living by the beach, parks etc or having a bigger backyard grows in importance, as does the need to avoid annoying neighbours with noise. Working from home starts to demand a separate room so toddlers don't crash your meetings constantly. With kids you tend to spend more time at home, so might be happier than you think further out in suburbia or a smaller town. A nice place outside Sydney but commutable within an hr or two by train or car will still be very rentable while you go travelling and might be an option worth considering.

[urbanista]

About 10 years ago we were in exactly same situation in Melbourne.

Firstly, take the money. We took the money from parents and have no regrets. We intend to pass it down and provide a house deposit for our son.

Secondly, don't repeat our mistake, don't be scared of the large mortgage! We read MMM and were scared of debt. Only to realise that the house we bought was not good enough to raise the family. Had to sell an buy again in only 5 years, wasting $100K on transaction costs and $300K in market appreciation.

Your salary is 170K combined. With the 300K + 300K cash, the bank will loan 170K x 6 = 1M, so potentially you can buy 1.6M property. Now, maxing out your borrowing capacity may not seem wise but I would absolutely consider a 3-bed single storey unit at least. I would not consider apartments as they are generally grow less in value in comparison with houses and single storey units.

[LonerMatt]

Posting to follow. Feeling the exact same drama at the moment. Housing is high which makes every decisions harder, the idea of buying something we don't want and cycling through high transaction costs doesn't sound better than renting. The idea of taking on loads of debt to live somewhere nicer doesn't sound better than renting. The idea of renting doesn't sound great.

Unfortunately we are not in a position to divorce living location from work, and probably won't be, so it's good to read about some of these other options and opportunities.

Also, can I just say, how fucking boring is the social conversation about real estate? It is, by far, the lowest interesting:frequency ratio of any conversation topic that's just everywhere. I'm convinced 30% of home buyers just buy so they never have to hear about it again!

[ChpBstrd]

Unfortunately we are not in a position to divorce living location from work, and probably won't be, so it's good to read about some of these other options and opportunities.

The concern is that a decent percentage of other workers are suddenly able to divorce living location from work. They will be beating a path to the suburbs, then exurbs, then small towns. For confirmation of the trend, look at commercial real estate:

According to a new report from real estate data firm CommercialEdge, average sale prices dropped to $284 a square foot on office buildings in central business districts nationwide this year. This comes after prices hit a peak of $400 a square foot in 2019 and $379 in 2020.

Source:https://www.ibtimes.com/empty-space-office-building-prices-drop-across-major-us-cities-3280263

How long will big city home prices continue to be valued like they are when people can live in cheaper places? At what point do vacant office buildings and a race to the bottom in office rents create a cascading effect that reduces home values in cities? I would not want to own a HCOL area condo for the same reasons I wouldn't want to own an office REIT like EOP right now. Technology is about to make commuting obsolete for just enough people to move the market, and the pendulum for big cities is swinging into another 30 year decline cycle after 30 years of renewal from the 90's until 2020.

Also, can I just say, how fucking boring is the social conversation about real estate? It is, by far, the lowest interesting:frequency ratio of any conversation topic that's just everywhere. I'm convinced 30% of home buyers just buy so they never have to hear about it again!

When people were eager to talk about their investments in unprofitable dot-com stocks, it was the time to do the opposite of what the herd is doing.

[LonerMatt]

Honestly, I don't think those dynamics and trends are nearly as pronounced in Australia, there is no big flight, great resignation, etc, happening here.

[marty998]

Late to the party. Shire boy checking in, nice to see someone from my neck of the woods!

Take the money, consider buying a house in the shire rather than a unit in the Hurstville area. Inner West is gonna be above $1.2m for anything decent. I reckon you’ll regret a unit once you’re raising a family.

 I love having the National Park on my doorstep, especially in lockdown it’s been a wonderful distraction.

Happy to answer any specific questions you might have about suburbs in particular.

[Sandia]

I'm convinced 30% of home buyers just buy so they never have to hear about it again!

LonerMatt, hahaha, way too true, we have to deliberately remind ourselves we're not allowed to do exactly this, say yes to buying a house just because we're tired of the whole slog!


About bubbles, you've all hit the nail on the head - it seems there's a lot of contradiction about whether Sydney property is a bubble or an endless ladder. Like Happy said, it seemed ready to burst since 2013 but it's still skyrocketing.

LonerMatt, why do you think there dynamics of a run for the suburbs is not happening in Australia?

[Sandia]

Hi marty998, thanks for the offer!

Is there any Shire suburb you'd recommend in particular? I'm keen on being in the walkable (or at least cyclable) vicinity of a traino.

Just looking at a map, it seems like Kirrawee and Gymea/Gymea Bay have particularly great access to Royal National Park, but we haven't been able to check it out on foot yet. Jennali/Como also seems like a good contender, too.

[LonerMatt]

LonerMatt, why do you think there dynamics of a run for the suburbs is not happening in Australia?

I mean largely because I'm not seeing it. We have green-changers/tree-changers who, I think, are basically slightly early retirees who move to a cheaper rural area in their early 50s or something. But the stuff I see from the States atm is a lot more a heavy trend: remote workers, the Great Resignation, etc. The dynamics of Australian urabnisation and distance also makes that harder, most cities here have a huge concentration of jobs and a huge sprawl, perhaps only somewhere like Darwin or Canberra could one feasibly be both in the city and rural areas and, in Canberra at least, it's not hugely cheaper.

There does not seem to be a short term trend towards permanent remote work, nor does there seem to be much of a trend towards quality workers moving away forcing workplaces to adapt.

[marty998]

Kirrawee South is a nice little area, though much of it surrounds the F6 corridor so check the maps quite closely. Same with most of Gymea.

Miranda is close to Westfields, there’s so many units coming up there it’s crazy! You may be able to stretch your budget to a three bed unit or even townhouse in Caringbah which would be the better choice.

I would pick Engadine over Jannali. Heathcote East is also quite nice. Both are well serviced by schools and services.

Menai/Illawong doesn’t have a train line so that would be comparatively more difficult to commute to the city.

[Bee21]

You will have a decent deposit if you take the offer, I would buy a house instead of a unit, especially if you want to stay there for a while. These unit blocks make me nervous...the price is just not sustainable in the long term.  I have no idea when this property bubble is going to burst, you really can't time this insanity.

Look at the schools, shops, public transport before you buy. We lived mortgage free in a very affordable suburb with ok primary schools but the high schools were scary, so we decided to move (and get a mortgage). It was worth it.

And i also have to point out the obvious: do you need to live in Sydney? You can buy a really nice house in a really good suburb for 900k in Brisbane......

[Fresh Bread]

I missed this thread so am very late to the conversation.

Is there any stipulation that the $300k must be used for a PPOR? Can you buy a house in a regional town for under $500k and include rental income into your FI plans? I'm thinking like Taree or Lismore, one of the regional centres.

[Sandia]

Hi everyone, wanted to provide a resolution to this thread. Thanks again for everyone's thoughts, it was helpful!

In the end, we did buy a unit. We're very happy with the suburb, and quite happy with the unit so far. Right now the monthly mortgage is the same as it would be to rent this place and we managed to do it without touching the index funds (but we did need to pull the bond money to help with the stamp duty). We did accept the money from the parents for a down payment (which was definitely only on the table for a PPOR), and are going to work out a contract with them shortly (turns out no lawyers will draft a contract like this until after the purchase of the property, which was frustrating).

Our rate is fixed for 3 years, so looking forward to exercising our mustache muscles again in that time to save up a lump sum if the rate jumps too high in 2024 (or if we want to pay back the parents early).

[Fresh Bread]

Congrats! It's geeky but my favourite part of our MMM journey was the bit where we owned a place and were aggressively attacking the mortgage. Good times!

[Sandia]

Congrats! It's geeky but my favourite part of our MMM journey was the bit where we owned a place and were aggressively attacking the mortgage. Good times!

Thank you Fresh Bread! Any tips or advice for this stage?

Given the interest rate is fixed for the next three years at 2.05%, our savings will be stashed somewhere else in the meantime (probably a split between cash and index funds), but I'll be mentally earmarking it for the probable future mortgage attack.

[Fresh Bread]

Congrats! It's geeky but my favourite part of our MMM journey was the bit where we owned a place and were aggressively attacking the mortgage. Good times!

Thank you Fresh Bread! Any tips or advice for this stage?

Given the interest rate is fixed for the next three years at 2.05%, our savings will be stashed somewhere else in the meantime (probably a split between cash and index funds), but I'll be mentally earmarking it for the probable future mortgage attack.

We had a variable rate loan which came with an offset account and we had our pay go directly into that offset account. That way every penny counts. We set up the payments to go weekly because that's also supposed to help but it probably didn't matter because of the offset.

The bank calculated the interest (monthly) and our statement would include the amount we'd saved by offsetting, which was really cool. We also had a spreadsheet which told us how many years or months we had left.

The only negative was that our daily cash/debit card was for the offset and that worried me sometimes in case someone stole it given there was $$$$ in there. Occasionally we'd just put a lump some into the mortgage as we had free redraw anyway.

So my tips are, get an offset account and free redraw once you are comfortable with a variable rate (assuming that sort of thing is still available, it's been quite a few years since we paid it off).

[happy]

Congrats Sandia, would love to hear updates as you go along1