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Do Affordable Quality Homes in Sydney Still Exist?

affordabilityThe present stage of the property cycle presents an interesting scenario. The first home buyers are all but elbowed out from the race despite low interest rates. This has got a lot to do with the uncertainty in the job market, not-worthy-talking-about employment rate and abysmal rate of growth in income in relation to growth in property prices. So, once the FHBs are out of the race, the property marathon gets constricted between owner-occupiers and the investors.

Mortgages should be read in the context of 30 years

The investors find the present cash rate and constricted supply two really good reasons to rejoice. In a way, it however does not seem too wise a thing to revel over low mortgage rates. Why? Simply because mortgages are spread over 25-30 years and low rates may be a very short affair. I give the present state of affairs a maximum run of a year before interest rates begin to correct themselves and climb.

What should you factor in while pondering on affordability

Prices have risen by more than 15% in Sydney over the course of 2013 and when such things happen the question of home affordability inevitably pops up. When you think of property prices as ‘cheap’ because of the easy going mortgage rates, do not forget to factor in market volatility (a-sure-to-happen phenomenon at least once or twice in a decade) and average costs; both spread over the course of 30 years on an average.

Let us take up the case of an average Australian

Let us take up the case of averagely earning Australian couples looking for affordable quality homes. Let us assume that a couple earns $70,000 each annually. Deducting tax payments and Medicare levy which sets them back by roughly $15,000 each, we will come to a figure of about $110,000 a year. If I reduce from this figure, their lifestyle bills, gym expenses, health cover, recreation, weekend expenses and holiday costs, among other things, I will come to a figure of about $30,000 under the column ‘savings’.

Now, if I go by the sheer power of statistics which reveal the median property price to be in the vicinity of $540,000, I come to this conclusion: an averagely earning couple requires 18 years of their combined income to service a loan which asks for zero interest. So I guess this answers the question of home affordability one way or the other.

When and how do you think the FHB scenario may improve?