Don't believe politically-charged claims on affordability

Posted on 31/03/2007  

Politicians and developer lobby groups have taken the egg-beater to the housing affordability debate. Alarmist headline stories which take the worst-case scenario and present it as the norm are doing nothing to improve the morale of those trying to get a foot on the housing ladder.

Recently a series of media reports appeared, purporting to show how much income would be needed by couples to keep up with mortgage payments on an “average-priced” house. These reports were based on an “analysis of household budgets” by the Labor Party (based on Reserve Bank data).

Reports showed big gaps between the income supposedly required in Sydney compared with other capital cities. But these reports contained no comparative analysis of regional centres or the outer ring suburbs of the capital cities, which are more affordable than downtown Sydney.

The Daily Telegraph reported that a couple would need to earn $145,000 a year in combined income to service a mortgage (in Sydney). Victorians (read inner Melbourne) would have to earn $110,000, while battlers in Adelaide would need to earn $79,554. The Courier-Mail extracted a family income figure for Brisbane of $92,000 a year from the Labor Party’s data.

Hotspotting has done its own research on this subject to (a) demonstrate how exaggerated some of those figures are; and (b) to emphasise that there are no hard and fast rules about borrowing to invest in real estate. It all depends on the market at the time and how much competition there is between lenders for market share.

For our purposes, we’ll assume our typical family is a double-income (80/20 ratio) household, with one dependent, a credit card limit of $3,000 and personal loan repayments of about $300 per month. (Some of the lenders we approached did not want to participate, knowing each individual case can vary wildly from the so-called “average”, depending on variables including level of personal debt, reliability of income and the stability of interest rates.)

Queensland’s biggest home lender, Suncorp, ran some numbers through its borrowing department and concluded our Brisbane borrower would need a joint annual net income of $63,360 to buy an “average family home” priced at $380,000 (on a loan of 100% of valuation). If the family managed to come up with a 20% deposit, a joint income of $55,200 would be required to service repayments. Clearly, that figure is a long way below The Courier-Mail’s headline-grabbing $92,000. Suncorp’s research showed that correspondingly lower income levels are required for similar standard homes in regional centres: for example Cairns ($51,540), Townsville ($50,136) and Toowoomba ($45,576).

Now that we have given you that example, let’s do what affordability scare stories rarely do and qualify these figures. The “average family home” prices used by Suncorp are slightly higher than the REIA median house prices in its December quarter 2006 report. Also, Suncorp advises that the minimum required income figures are “indicative”. Much depends on the level of personal debt, the reliability of income and the credit vetting that will happen.

One mortgage broker worked up a calculation for us on a hypothetical basis, also cautioning against portraying this information as a definitive example. In this instance, we used the Australian median price of $421,422 (REIA December 2006) to determine that a relatively unencumbered borrower could take on a loan at 100% of valuation with a monthly payment of $3,702 (over 30 years). The combined net income required would be $90,000 a year (on one income, the borrower would need to earn $103,000).

Borrowers who manage to come up with a 20% deposit would need a joint net income of $77,000 or $87,000 (sole income) to achieve the Great Australian Dream.

A Victorian couple earning $66,000 a year net could borrow $393,000 (the median price for a Melbourne house) from any of the better-known financial institutions The repayments on this loan would be $2,728 per month.

In each of these examples, repayments represent almost half of the household’s take-home pay. Mortgage repayments are certainly taking a larger slice out of household income than they did 20 years ago. Housing finance is considered to be the major culprit in the rising level of Australian household debt.

The Reserve Bank of Australia’s records of household finances show a steadily rising level of debt against disposable income. The ratio of debt to disposable income was just 34.7 in 1977. By 1991 (the year of the recession Paul Keating said we had to have) the ratio was 49.6. By December 2006 the figure had climbed to 158.7. Household debt has been rising at 14% a year for the decade to 2002 and about 15% a year since.

A major culprit in misinterpretations of the affordability debate is in the use of the “median” house price. In Sydney, where more than 50% of houses are in the $500,000 or more price bracket, the median represents everything from Rose Bay mansions to the two-bedroom, post-war starters in Campbelltown  The same price differentials apply in Melbourne (Fitzroy versus Ringwood) and Brisbane (Kangaroo Point versus Beenleigh).
Financially conservative people will always be able to raise enough finance to buy a home and accumulate equity in their homes. As sociologists have observed, though, they will have to start small (perhaps a modest, two-bedroom unit in an older six-pack block) and resist the urge to go credit shopping for widescreen TVs and home cinema packs, since many home buyers can no longer afford to go out to the movies.


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