Is there any value?
Marvin the Martian 18 comments
As most of you know I've been living in Melbourne Australia for the better part of two-and-a-half years. My original idea was to spend 5 years here before I made a decision to stay here permanently or to eventually move back to Toronto. The greatest barrier I've seen in staying in Melbourne is that of property ownership.
In Melbourne there is a great deal of construction going on in an attempt to deal with the massive and continual influx of new residents. Melbourne is an absolutely beautiful city. It is clean, friendly and frankly a pleasure to live in.
Year over year, the annual population in Melbourne has been growing at a rate of 1.4% (or 120,000 people) per annum for the last 20 years. Unfortunately the housing market has not kept up. Because of this discrepancy, the demand for new homes has outstripping the supply causing the average price to grow at a annual rate of about 10-20%. This means that an apartment that was on the market 10 years ago for $270,000 is now worth just over $635,000!
As a potential home owner this is an alarming issue. It means that the greatest barrier to entry is the down payment and secondly, the value, both short term and long term of the property being purchased. Each year that I wait (saving to get that down payment), I have to save an additional 4%. This is not just to cover the down payment to the bank, but also to help cover all of the sundry expenses live moving my possessions, new furniture, moving sundries like internet, water, electricity (an each has a fee attached), legal fees, stamp duty, insurance etc...
Now in Australia, the government will provide assistance in the form of a grant to help first time home-owners with the cot of stamp duty. Unfortunately as the price increases at the such a high rate and the stamp duty is a fixed amount, the grant helps less and less every year.
I own property in Toronto. I own a two bedroom plus den, two full bath apartment in the centre of the city. I purchased it for about $245,000 almost 10 years ago for my father to retire to. That property now is worth around $300,000. Fantastic. That same property in Melbourne would cost about $600,000 - $750,000 in today's market. Frankly I don't see the value.
The more and more I look at properties in Melbourne, the less I feel attracted to the market. Interest payments alone on a $400,000 property (which is a decent 1 bedroom in the inner suburbs or a 2-3 bedroom home in the outer suburbs) would cost approximately $2200 per month depending on the interest rate, down payment, terms etc.
In order to save enough money as a down payment for that $400,000 mortgage, you would need about $50,000 - $60,000. This would allow you to avoid having to pay additional mortgage insurance (a penalty for anyone wanting to borrow more than 80% of the value of the property and must be paid in advance of the mortgage payments themselves). It would also help to cover some of your sundry costs mentioned above. Stamp duty would cost you about $17,500 in Victoria but the government grant (even under the best possible terms) is presently only about $7,000.
This means that in addition to the minimum $40,000 deposit to the bank, you need another $10,000 in taxes, plus sundry expenses. This is how I come up with a minimum down payment of $50,000 - $60,000 being necessary. Even saving this amount will put you in a little bit of a financial bind.
Currently interest rates in Australia are about 6.5% - 7.5% for mortgages. Depending on your credit history (thankfully mine is perfect) you may have to pay more. When you are looking to buy a mortgage, you need to take into account the cost of that loan over a long period of time. Currently, the most popular type of mortgage is a split rate mortgage where 60% - 70% is fixed and the balance is variable. The second most popular type is interest only where the repayments are made only to service the interest on the mortgage but never actually repay the principal back. Interest only mortgages are only available in a variable format.
If we look at the cost of this $400,000 mortgage, current rates will mean a monthly repayment of about $2,200 per month just to service the interest. Over the next 5 years interest rates are expected (buy may or may not) increase about 2% - 3%. This means your interest only repayments will now be about $3,000 per month. For most people this is a huge burden. As a single person, this means that about 60% (based on an annual salary of $100,000 per year) of your monthly income would be spent on repaying only the interest on a property that still only houses a single person (or perhaps a couple down the road).
Based on these calculations, I can't see the value of buying property here. Even if we assume that the values of property continues to increase at the same pace (a premise I hotly contest), in the end, you are still left with a single bedroom property.
Personally I feel that the continued increase in property prices is unsustainable. Eventually we will get to the point (and I think we are very close) where people simply will not be able to afford the cost of the loan. Australians are known to have the highest rate of personal debt than any other country in the world (sorry Americans), but eventually, this will have to give. We cannot live in perpetual debt without every have to pay the piper.
I wonder if anyone else can shed some light on this issue. I don't want to live in another city in Australia. I don't want to live more than 45 minutes from work. Anyone have any ideas or have I simply missed the point?
Hi Marvin...Prior to moving to Mexico in 2006 (back in the States now) my partner-at the time- and I bought and sold seven houses in a three year period, and made tons of money. As the tide started to go out, we were stuck making payments on a brand new empty house for a year. We finally did sell if for a slight profit. We got lucky. Many people who were living in the houses they bought during this boom are now finding out they paid way too much. Their houses are not worth anything close to what they paid...very sad. Though the market has flattened out in the past year, it would seem that the days of automatic good investment in a home to live in have gone by the way side.
I could go on about what I think about the housing market, but I wholly agree with you, and believe the continued increase in property prices is unsustainable...actually, the entire direction of man is unsustainable, but thats another post.
Right now, I am renting, and quite happy about it. My girlfriend lives in Evanston, Illinois, a suburb of Chicago...Her payment on her two bedroom triplex unit is staggering, and she cant get out without loosing her sizable down payment, and any equity that she may have acquired over the past seven years.
Sadly, I cant recommend buying a home at this time. Why not sit it out for a while, and see what the market there is going to do. Sustainability/unsustainability are big and important words in todays world affairs. We certainly want to become a sustainable world, but I can't help but think the outlook is not very good.
f~
Marvin the Martian
Monday 6th September 2010 | 06:01 AM...in response to this comment by Rodney. Thanks guys. Appreciate the feedback.
Rodney, you are very right in saying that lifestyle has a lot to do with the decision. At the moment I am very content here in Melbourne. I love the lifestyle compared with Toronto. In many ways it is very similar, but the weather, smaller population density and overall quality of life is definately better here.
I guess in the end I really want to stay here, but I would like a little bit of security down the road. I have started very late becuase I moved here in my early thirties.
I think when it all comes down to it, I will stay here and hope for the best. Renting isn't really that bad, but I hate the idea of paying some else's mortgage when I could be paying my own.
Rodney
Monday 6th September 2010 | 10:23 AM...in response to this comment by Marvin the Martian. "...I hate the idea of paying some else's mortgage when I could be paying my own..."
That's the key, isn't it. Aside from not wanting to be "tied down", there is no sensible reason to pay someone else's mortgage off, instead of your own. A lot of people buy a house but continue to rent in someone else's, to allow themselves to get into the market, without buying a house they themselves would want to live in. Perhaps this is the starting point you need?
Marvin the Martian
Monday 6th September 2010 | 11:00 AM...in response to this comment by Rodney. Perhaps, but in the end the issue of the down payment still applies. Also, if you buy a property for investment purposes the finances are even worse as you no long qualify for the first time homebuyers grant.
Rodney
Monday 6th September 2010 | 11:54 AM...in response to this comment by Marvin the Martian. Yeah very true. I had a friend living here and he and his wife left for a job overseas and the number 1 reason the cited, other than just a bit of adventure, was that between the two of them they simply could not save up enough for a deposit. He was a well paid consultant and she was a very, very well paid lawyer - and they still couldn't get the 20% deposit required together.
Mind you, when we first bought a house, we got a keystart loan, in which the government guarantees the mortgage insurance for you. This means you only a need a 2% deposit and have to accept about a .5% increase in interest rates.
http://www.productreview.com.au/showitem.php?item_id=42522
This appears to be limited to Western Australia - although I am sure Victoria will have something similar.
Marvin the Martian
Monday 6th September 2010 | 03:57 PM...in response to this comment by Rodney. Thanks for that... I will see if there is something similar here. That would be a huge help.
G
Monday 6th September 2010 | 09:22 PMJust give it time. Whats happened in the US will happen in Australia
Henk V
Tuesday 7th September 2010 | 10:12 AMYep, the US are innovators at not understanding economics since maths and science weren't in the curriculum Goldilocks.
Obviously something will happen in Oz, the future is a long time. Its most likely tied to a US economic brain explosion. Just like every other one we have had.
So, If Oz starts cranking at 45% of GDP in loan service, its only because the president is in Beijing after buying up the good ol' US of A.
G
Tuesday 7th September 2010 | 06:49 PMSo tell me Homer
Where do the Chinese get all this money from
Economics isnt how much money you have left from buying a whopper to afford a coke and a donut Tubby boy
China cant afford to loose the US trade..........Get it yet?
Henk V
Tuesday 7th September 2010 | 07:03 PMTalking to me Goldilocks..
you dont get economics at all do you... its in a comic near you some where..
Ben
Thursday 9th September 2010 | 01:31 PMYou have to drop the attitude of "I don't want to live more than 45 minutes from work".
You can't have everything you want.
Henk V
Thursday 9th September 2010 | 01:58 PMwho works kiddo? thats for folk trying to make friends and influence people.
Conveniently, metropoli are the most energy efficient organisations of humans. The fact that australians demand massive housing at a single density is absurd.
Sure, decentralise like other countries, but dont replace valuable resources with a sprawling springfield (ie shell harbour NSW south coast).
Just think of it, a technical university town every 100km supporting local industry. A modular 100MW (e) reactor supply.
You cant get greener than that.
ps, 50 or so km is about half an hour in the trusty daihatsu electric car or the toyota biodiesel (town sewage reclaimed). Four sequential algal and phyto reclamations can yield enough nutrient to grow 10 times the amount of lipid that sewage can supply in single pass lipid extraction. Who knows, fodder for free means recycling the water until the town makes enough to desal its end run sewage.
Its all here now.. all the greens have to do is say...infrastructure
come on Tony, Katz and Rob... you guys are the greens in this government..
next?
sometimes I feel like madeleine kahn, but i have never had to suck..
Henk V
Thursday 9th September 2010 | 03:30 PMps.. the fact that most major cities in Oz are prime value real estate (coastal resorts) artificially cranks land and rental value way wau up.
Had we (yep I am kidding myself) a decent rail transport system and document to delete insane council restrictions on anything but low density housing, house prices would be way lower.
In my conversations with other americans on the net over the past decade and a half I am floored by the cheap housing over there. I realise that they are not buying in New York and a wow house in Utah somewhere is absolutely correct in its value comparison here.
I dare say a house in one of the major centres in Japan would be astronomical.
Yes you can buy a house here for 45 grand (oz) but dont expect to find a job real soon. Its why the tree changers add value to local economies. They come in and as often as not, they dont really want to come out of retirement.
The down side for an oldie moving to whoop whoop? try getting a liver, bone or thyroid scan quickly and without extensive travel.
Personally, I live near three major hospitals and have the life style just to want to use one in the future.
We need power and hospitals, education and infrastructure out in the country. Giving folk baby bonuses and first home loan grants only further inflates markets. Its a very negative and cynical way to do things.
can you imagine being a 16 year old kid wanting to do an apprenticeship when you live in galarganbone?
you'd never ever come back.
Marvin the Martian
Thursday 9th September 2010 | 05:02 PM...in response to this comment by Ben. Going outside of the 45 minutes simply means that I spend more on transportation as my work is not on public transportation routes. That means cost AND time.
Ben
Friday 10th September 2010 | 10:17 AMBy my estimate, the map at the following link shows over 200 houses and townhouses less than 20 km from Melbourne CBD.
Oh, and they're all UNDER $300,000.
No housing shortage.
Ben
Friday 10th September 2010 | 10:17 AM...in response to this comment by Ben. Yes, I forgot the link...
http://www.realestate.com.au/buy/property-townhouse-house-between-0-300000-in-vic/map-1?source=refinements&bottomLeftLatitude=-38.400872864177&bottomLeftLongitude=144.20654296879&topRightLatitude=-37.170165884645&topRightLongitude=146.17309570309&mapLevel=9
Henk V
Friday 10th September 2010 | 11:58 AMadmirable, but hardly an environmentally sensible solution.
$300,000 is still a lot of investment when compared to rental and I would start questioning the sanity of anyone who would fork this out with proclamations that there is no housing shortage. In short, its real estate agent or car salesman talk.
If you cough up with 300,000 in loan in what is declared as a "no housing shortage" market, then your house will drag you downward economically. It becomes a liability.
The very fact that house prices have started moving in Oz indicates that either there is a housing shortage or a government inspired scheme to get building going.
It takes real money to make real change, the folk with some money seem to be doing the same old tired hack work as was done 40 years ago. Only the water heaters and light fittings have changed (a little bit).
Thankfully I'll be dead soon enough and wont have to watch another 50 years of this garbage approach to housing and this woeful approach to environmental concerns with respect to utilities and planning.
Honestly, I wake up in the morning and see Paul Keating in the mirror. I wonder who he sees.
I'd like to see Penny Wong.
Rodney
Sunday 5th September 2010 | 11:04 PMMarvin, you've excellently summed up the dilemma of so many young Australians. Melbourne, unfortunately for you is one of the most expensive places in the country and will soon be the largest city (in terms of population). The West of the country has had the most drastic price hikes in housing in the last decade. Fortunately for me, I got in at the start.
However I look around me and ask myself how a 20 year old today could hope to get in to the housing market - and the simple answer is: they can't.
The old logic was that younger buyers have to pool resources (marry) and buy in the sticks (outer suburbs). However even this is starting to fail, as outer suburbs are filling up with retirees and semi-sea-changers and there is a limit as to how "outer" and outer suburb can be. No one wants a 4 hour drive to work. I already know people who drive more than 2 hours to work, each way.
Because I live in a community which requires a close proximity to one another, this is a big issue; because we can see that our youth cannot stay here and hope to settle and raise their own families. So I've talked about this very issue many times.
Here's the two bits of information I have found that might be of use. Not much use, but a little.
1) What we did: renovate massively. We turned a 3x1 unit into a 6x2 double story house. 10 years ago this was a financially idiotic thing to do. Now, it cost less than 1/5th of the cost of buying the equivalent house and the end product is just the same because it's the land that kills you.
2) When I spoke to a guy who moved here from South Africa, he told me that, yes housing costs a lot here - but he moved here for the lifestyle. For the freedom, the safety, the clean air and the knowledge his kids can walk to school and walk home and he can feel safe that they're going to make it. To know he doesn't need a 10m fence around his house and if he doesn't lock his garage it probably won't get cleaned out.
I don't know if they help - Toronto is probably comparable to Melbourne in any case, on point 2 but the key issue is that sometimes we sacrifice other things for location and lifestyle.
The only other thing is that you missed something out in your analysis above: wages have risen like made, here, too. If your wages haven't jumped with the housing prices; you need probably need to evaluate the market and push for a raise or move jobs.