Don't we already have the choice of fixed rate loans for at least 15 yrs (eg commbank).
Is that what you mean ?
Record mortgage stress ahead of rate cut
- Thread starter Alex P Keaton
- Start date
Is that what you mean ?
Theres nothing wrong with renting so long as you have sufficient self control to invest the difference in payments. Im 34 this year, i only purchased a PPOR early last year (and this only a one bedroom apartment in the cbd) once rents started to increase materially.
Before last year i was a happy renter for 10 odd years. I was paying $260 a week for a nice 2&1/2 bedroom apartment in east brunswick (the rent went up only $10 in 4 years). Compared to the amount of capital that would have been tied up had i been an owner occupier, it was great.
I think this is a major falicy(spelling?) caused by looking at historical trend analysis.
I very much doubt that future prices can continue to increase 7% whilst rent increases only 4%. I can nearly guarantee that in the next 15yrs or so their will be some form of exogenous shock factor that swings the equilibrium back into place.
I always wondered how can 30% be considered mortgage stress? In Sydney no one in my group of home owning friends or work colleagues (who are Gen X or Gen Y) pay less than 50-60% of their primary income and a few of my mates are at around 75%. I thought this was normal but it appears that is not the case.
As incomes rise, the relative cost of essentials such as bread and milk go down.
So, it's easier for a $100k earner to use 70% for the mortgage and live on $30k essentials than it would be for a $50k earner to use 70% for the mortgage and live on $15k p.a. for essentials.
I went through a lovely period last year where I was using 95% of my income for mortgage payments and investments, but that's because at the time the income was high, so that made 5% more than enough for essentials.
-Ian
Keith, I appreciate your comments. It's always good to being challenged in an intelligent and articulate manner. Kudos to you.
It comes down to a difference of opinion about affordability. Increases in disposable income mean nothing when the average income earner is forced to pay 70-80% of their income for a bottom rung house. They've got more disposable income to service the house, but that's really no benefit if the mortgage eats up 70% of your income(and HEC's takes another 7-10%).
At what point would you agree affordability is worse than in the past? What about the point when the monthly repayments on the worst house in the worst suburb costs 100.1% of the average single income earners monthly wage? Disposable income offsets don't make a lick of difference in this scenario? Even the RBA is in agreement that house prices have risen, and it takes a greater % of your wage to service this debt than in the past. They just believe this is more than offset by an increase in disposable income. I see a BIG problem for the single income earner in this country heading into the future…..
It comes down to a difference of opinion about affordability. Increases in disposable income mean nothing when the average income earner is forced to pay 70-80% of their income for a bottom rung house. They've got more disposable income to service the house, but that's really no benefit if the mortgage eats up 70% of your income(and HEC's takes another 7-10%).
At what point would you agree affordability is worse than in the past? What about the point when the monthly repayments on the worst house in the worst suburb costs 100.1% of the average single income earners monthly wage? Disposable income offsets don't make a lick of difference in this scenario? Even the RBA is in agreement that house prices have risen, and it takes a greater % of your wage to service this debt than in the past. They just believe this is more than offset by an increase in disposable income. I see a BIG problem for the single income earner in this country heading into the future…..
I'm stumped everytime I hear how easy it was in our parents day and how affordable it was to buy a home on one income. If we lived as frugally as some of the previous generations I'm sure we'd be twice as wealthy.
Ask a few oldies how long before they were able to furnish their homes with 'real' furniture, and how many had 2 cars?
So many lived on handmedowns, recycled, cooked from scratch and lived week to week. The further back you go the harder it was. Tertiary education was not the norm and most jobs were not high paying.
Another thing, you don't see too many people buying is second hand anymore either? I tried giving away some nice (and hardly used) baby furniture to other young couples starting out, after I had my babies, and honestly, they wouldn't take it
.
Resorted to advertising the more expensive items, and sold only the cot with a brand new mattress to some grandparents. The rest went to the Salvos.
Part of the problem in how some people view things now. They compare what they have and can afford to people of this same era, mistakenly thinking that's how it was in the good old days on one income. Not so.
If people have extra stress now it's because they want everything, yesterday, just like the Joneses. We all like nice things, myself included, but shouldn't we get them after we put in the hardyards and have earned it?
Ask a few oldies how long before they were able to furnish their homes with 'real' furniture, and how many had 2 cars?
So many lived on handmedowns, recycled, cooked from scratch and lived week to week. The further back you go the harder it was. Tertiary education was not the norm and most jobs were not high paying.
Another thing, you don't see too many people buying is second hand anymore either? I tried giving away some nice (and hardly used) baby furniture to other young couples starting out, after I had my babies, and honestly, they wouldn't take it
. Resorted to advertising the more expensive items, and sold only the cot with a brand new mattress to some grandparents. The rest went to the Salvos.
Part of the problem in how some people view things now. They compare what they have and can afford to people of this same era, mistakenly thinking that's how it was in the good old days on one income. Not so
.If people have extra stress now it's because they want everything, yesterday, just like the Joneses. We all like nice things, myself included, but shouldn't we get them after we put in the hardyards and have earned it?
Good questions...... probably worthy of a new thread
.My answer to most questions like this.... 100% of income required to service a 1st percentile prop is v. unlikely to happen as at some time an equilibrium will be reached & the market will restore the balance somehow.
In answer to the first question - what would I consider unaffordable ? The world is constantly changing.... what is 'normal' today wasn't normal 10 or 50 yrs ago.
20 yrs ago, a single income was normal, 70 yrs ago it was normal for my GMIL to walk 5 miles to work each day from a 1st percentile house on the edge of an open sewer (called Parramatta River).
In 10 yrs, 'normal' may be a 60 yr P&I mortgage, or shared equity with a Super fund, or payments of principle off a PPOR can be made instead of Super contributions.
Today, affordable sometimes needs 2 incomes for a 30 yr term.... who knows what will be considered affordable in 10 yrs time. Maybe affordability is more of a mindset - there are several young 'uns here on well below average wages with an IP or two.
My feeling is that a large proportion of Australians will continue to spend excess income on whatever makes them happy..... for the last 50 yrs that has included a better house than the Jones, regardless of what it takes. I don't see that mindset changing any time soon. And I see that desire as giving a better outcome than a new car/plasma every year.
I really should let this go....
Keith, the RBA graph 6 you posted is either bullsh*t or an error.
Looking at the graph of gross household income after loan repayments implies about $20,000 a year in repayments(it doesn't specify exactly, but looks at though gross household income is $70,000 and after repayment about $50,000).
A simply calculation at prevailing interest rates seems to imply that you could purchase a $220,000 house with $20,000pa in loan repayments with 10% deposit over 25 years.
I somehow don't think 220,000 is the 30th percentile house they are talking about???? Last I checked you couldn't buy the worst dump in the worst suburb for those prices.
A 30th percentile house would be of the order of $400,000 with a $500,000 median. 10% of that is $360,000, but for the sake of argument I'll call it $350,000. That's about $35,000 per year in repayments. Plug that into the graph 6 and things don't look too rosy.
The numbers are flawed and hence, irrelevent to the debate.
Keith, the RBA graph 6 you posted is either bullsh*t or an error.
Looking at the graph of gross household income after loan repayments implies about $20,000 a year in repayments(it doesn't specify exactly, but looks at though gross household income is $70,000 and after repayment about $50,000).
A simply calculation at prevailing interest rates seems to imply that you could purchase a $220,000 house with $20,000pa in loan repayments with 10% deposit over 25 years.
I somehow don't think 220,000 is the 30th percentile house they are talking about???? Last I checked you couldn't buy the worst dump in the worst suburb for those prices.
A 30th percentile house would be of the order of $400,000 with a $500,000 median. 10% of that is $360,000, but for the sake of argument I'll call it $350,000. That's about $35,000 per year in repayments. Plug that into the graph 6 and things don't look too rosy.
The numbers are flawed and hence, irrelevent to the debate.
depends where you're looking ... in nsw there are over 200 pages of houses/units less than $250,000.
http://www.realestate.com.au/cgi-bi...1&pm=&px=250000&pme=any&pxe=250000&cat=&o=def
granted - they are not all in desirable locations - but a good portion of them ain't to bad.
It's put together by RBA, ABS & APM, so I'd say an error is unlikely
. The $20K repayments is dated for 06/07 when IRs were ~7.5%. That adds up to a mortgage of $266K... and at 90% LVR (which is what the RBAs affordability calcs assume), that's a purchase price of $296K (no stamp duty for FHB).
RBA states a dwelling, not necessarily a house, so I'd assume that includes units. I think $296K would buy you an adequate 30th percentile dwelling back in 2007. I don't have stats about what a 30th percentile dwelling costs, but $296K sounds fairly reasonable.
Since '07 IRs have risen, wages have risen in the FHB demographic, house prices have changed (eg western Syd have fallen), so affordability will have changed since then, but IMO not by a huge amount.
Perhaps lizzie could update us on how many pages of dwellings there are on REA for under $296K
.Attachments
Fair enough, even though $290,000 is not a 30th percentile house in a city.
(although my personal opinion is that $290,000 house is generally not a unreasonable starting point for the textbook definition average family on 70k family income-although as you are aware, I believe the increasing numbers of two income families skew the family income figures higher, and this is not a true representive of average.
If we plug in todays data though it's a very different story, and the trendline(by the RBA definition), would be a sharp dip downwards,even allowing for an 5% increase in wage growth. Adding to that, wage growth will NOT match inflation over the next 3-4 years, and therefore the increase in disposable income argument will become irrelevent, and in some instances, move backwards.
Sorry keith. I want to let it go, but you know how it is..
(although my personal opinion is that $290,000 house is generally not a unreasonable starting point for the textbook definition average family on 70k family income-although as you are aware, I believe the increasing numbers of two income families skew the family income figures higher, and this is not a true representive of average.
If we plug in todays data though it's a very different story, and the trendline(by the RBA definition), would be a sharp dip downwards,even allowing for an 5% increase in wage growth. Adding to that, wage growth will NOT match inflation over the next 3-4 years, and therefore the increase in disposable income argument will become irrelevent, and in some instances, move backwards.
Sorry keith. I want to let it go, but you know how it is..
Loan Repayment affordability
I remember when I applied for my first home loan in 1985, the Bank Manager was working out the servicability to establish what I could borrow, and what I would need as a deposit. No FHOG back then.
There was only P&I loans available, and I don't remember the interest rates, but 9% rings a bell.
I asked him what the criteria was to establish the servicability was, and he informed me that the Bank considered repayments anything higher than 35% of your gross income as too much borrowings AND still be able to live a decent lifestyle.
This meant that everyone had to make sacrifices in their consumption to fit into the criteria for servicability, and save damn hard to get the deposit together, which was always 20%.
If it meant a crap car, or second hand furniture and clothes, or a cheaper doer-upper house or unit; so be it. Everyone accepted that.
But I think that rule is a good one generally; whatever your income, work on having your total loan repayments - that's ALL loans, at a figure of less than 35% of your total income (including rent). These days, it's not unusual to hear of loan repayments at 50% of income - and higher. Now that's a reason for mortgage stress.
Nowadays there are many more different loan products available, designed to get those, who can't meet this old criteria, into a house.
The problem is, everyone is conditioned to thinking they should be able to simply buy the decent house in the swish-o area as their first one. But that's dreamworld, and when people talk of "affordability" they always seem to use the type of house that our parents bought as their second house (if they ever upgraded).
As Lizzie said; there are millions of sub-$300k properties around the Country to buy. All FHB's can afford these if they are on a decent wage, and if they aren't then they are no different to anyone else from 20 years ago who couldn't afford a house - they can't afford to buy. Nothing new there.
I remember when I applied for my first home loan in 1985, the Bank Manager was working out the servicability to establish what I could borrow, and what I would need as a deposit. No FHOG back then.
There was only P&I loans available, and I don't remember the interest rates, but 9% rings a bell.
I asked him what the criteria was to establish the servicability was, and he informed me that the Bank considered repayments anything higher than 35% of your gross income as too much borrowings AND still be able to live a decent lifestyle.
This meant that everyone had to make sacrifices in their consumption to fit into the criteria for servicability, and save damn hard to get the deposit together, which was always 20%.
If it meant a crap car, or second hand furniture and clothes, or a cheaper doer-upper house or unit; so be it. Everyone accepted that.
But I think that rule is a good one generally; whatever your income, work on having your total loan repayments - that's ALL loans, at a figure of less than 35% of your total income (including rent). These days, it's not unusual to hear of loan repayments at 50% of income - and higher. Now that's a reason for mortgage stress.
Nowadays there are many more different loan products available, designed to get those, who can't meet this old criteria, into a house.
The problem is, everyone is conditioned to thinking they should be able to simply buy the decent house in the swish-o area as their first one. But that's dreamworld, and when people talk of "affordability" they always seem to use the type of house that our parents bought as their second house (if they ever upgraded).
As Lizzie said; there are millions of sub-$300k properties around the Country to buy. All FHB's can afford these if they are on a decent wage, and if they aren't then they are no different to anyone else from 20 years ago who couldn't afford a house - they can't afford to buy. Nothing new there.
Yes I came up against similar rules in the past. It's all a bit silly though when you think about the extremes - eg if I earn $300k per year should I be judged on the same % as someone earning $30k per year? What if I live a cheaper lifestyle then the average $30k earner? Nothing stopping me from doing that and it would really blow the 35% rule out of the water wouldn't it? I for one am very glad that not all banks look at it this way anymore...
* all numbers are hypothetical!
I think the cost of housing yourself should be limited to around 30% of income. All remaining income should be diverted to investments, such as IPs, shares, savings, etc.
Fair enough, even though $290,000 is not a 30th percentile house in a city.
(although my personal opinion is that $290,000 house is generally not a unreasonable starting point for the textbook definition average family on 70k family income-although as you are aware, I believe the increasing numbers of two income families skew the family income figures higher, and this is not a true representive of average.
If we plug in todays data though it's a very different story, and the trendline(by the RBA definition), would be a sharp dip downwards,even allowing for an 5% increase in wage growth. Adding to that, wage growth will NOT match inflation over the next 3-4 years, and therefore the increase in disposable income argument will become irrelevent, and in some instances, move backwards.
Sorry keith. I want to let it go, but you know how it is..
I think the mistake you're making is what the cost of a house is near the CBD, or inner-suburb?
30 years ago, the house on the edge of civilisation where the younger families, or FHB's lived, is now the inner-city suburb, so the distances are not the same.
But neither are the roads and freeways.
Therein lies the big problem; the FHB's want to live in the same house and position their oldies owned years ago.
The problem is, the suburbs have moved out about 20 more miles.
As usual, methinks this thread is devolving into the expectations of buyers - especially the FHB's.
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