It is no secret that property prices have risen significantly in almost every region around Australia over the last 12 months.
An accelerated rise in real property value is usually a welcome event for property owners. However, for families experiencing separation and divorce there can be additional considerations and in some cases negative impacts.
Whether you are a financial advisor, real estate agent or going through a separation and divorce yourself, you will be interested to know about these impacts and what, if anything, can be done to address the situation.
You’d think that an increase in the value of assets like the family home would be a good thing for most people, separating couples included. So, what’s the issue?
How the rising property market is impacting individuals and families going through separation and divorce
In Family Law, the Court usually treats any market-driven rise in a property’s value as a “windfall“, benefiting both parties. This will be the case when a property is acquired by the parties during the course of the relationship and also when the property is introduced by one party at the beginning of the relationship.
The Family Home
When couples separate, it is not uncommon for one person to want to keep the matrimonial home (it is often particularly desirable for separating couples, with children, to ensure one party retains the family home). Due to the unprecedented rise in property values, for homes across Australia, retaining the matrimonial home is harder to achieve. Unfortunately, this can often have an impact on children, by introducing two new home environments, as opposed to one.
Due to the current market forces and the rise in property values, it is becoming increasingly difficult for a party to secure additional borrowings from the bank in order to “buy out” the other party. A further knock on effect is that, in cases where the matrimonial home is sold, both parties are then unable to re-enter the property market. For parties who are unable to re-enter the property market, they are faced with navigating the expensive and competitive rental market. We note that Canberra, for example, has one of the highest rental prices among all cities in Australia.
This problem is exacerbated by the tightening of banks’ lending requirements. For example, a party on an income of $80,000 may have approval to secure borrowings against a property worth $600,000, in order to “pay out” 50% of the equity of the home to their former spouse. If the property rose in value to say $1,000,000, then securing borrowings to pay the same percentage of the equity, is likely to be unachievable.
Finalising a property settlement
An additional factor for parties has also arisen since the merging of the Family Courts in September 2021.
Since the merger, we have observed that the Court is taking longer than ever to consider Applications for Consent Orders. In some cases, this can take as long as four months, where previously the process took a matter of weeks.
While assisting clients who have real property in the ACT and New South Wales, we have been told by some property valuers that they will only commit to a value for the period of one month only, citing the volatility of the market.
Fluctuating valuations, in conjunction with significant delays from the Court, has resulted in both the negotiation process and reaching an agreement more difficult than usual.
The delayed timeframe can contribute to either one or both parties being put at a significant disadvantage and can result in a party withdrawing his or her consent to the agreement or a party losing their ability to secure borrowings to comply with the Orders once made.
What, if anything, can be done?
For separated parties going through the property settlement process, we recommend formalising an in-principle agreement quickly.
Couples should also give consideration (having obtained the relevant advice) to using an alternative method to document their agreement, such as by entering into a Binding Financial Agreement (BFA). While there are advantages and disadvantages to entering into a BFA, taking into account your own unique circumstances, a BFA involves two parties entering into a contract and “opting out” of the court system. For some parties, this may mean a quicker and smoother resolution.
DDCS Lawyers specialise in all aspects of family law and can help with BFA’s or guide you through the process of separation. If you need assistance, contact our team on (02) 6212 7600 to book a consultation.