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Are million dollar suburbs destroying the average Australian family?; It's time for a reality check
Topic Started: 30 Aug 2014, 05:04 PM (4,407 Views)
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Are million dollar suburbs destroying the 'average' Australian family?

Kevin Lee | 28 August 2014

A recent RP Data report stated the number of suburbs across Australia with a median price of at least $1 million has increased by more than 33% in 12 months - and it looked as though they were suggesting this is a good thing.

Make no mistake - this revelation of 417 suburbs should sound warning bells for the 'average Australian'. Our state and federal governments rabbit on about the need for affordable housing - since when did house prices of $1 million fit that bill?

As you might expect, many of the suburbs that made the list were in the major capitals - Sydney, Melbourne and Perth. The combined population of these three cities is approx 11 million, or 46% of Australia's total.

So let's do the math for a 35 year old working Sydney couple with one child. They're buying a home in a Sydney suburb for that median price of $1 million and they don't want to pay lenders mortgage insurance (LMI).

Suppose they met and fell in love eight years ago and started saving for their 'average home' pretty soon after. Our 'model couple' married, had a baby and have been super diligent too - saving $250,000 i n that time. That's an average of $31,000 a year for eight years.

Nice one! Who do you know that can do that? Not many? Mmmm - thought so.

Let's stop here for a minute: what buying a home for $1 million plus is doing is sucking the life out of people who are in the prime of their life, just so they can buy an average home in one of those 417 suburbs.

Out of that $250,000 deposit, they need to allow:

A little over $40,800 for stamp duty + associated fees in Sydney
Around $3200 for their legals and conveyancing
And $500 or so for their bank fees

By the time they add removal costs and a few other incidentals, they've just burned $50,000. Leaving this lovely couple $200,000 to put towards the purchase: their deposit. This means that they need an $800,000 mortgage. No problem, book that appointment with your friendly bank manager or mortgage adviser.

Oh dear ... do they qualify for an $800,000 loan? A quick calculation suggests that with the current 'super low interest rates' on offer, our couple with one child, two cars and a car loan only need to earn a combined $130,000 a year to be approved for this loan.

For this exercise I'll assume a split of: $85,000 for the breadwinner and $45,000 for the person who most carries household and child responsibilities. These two incomes deliver $64,000 and $38,250 after tax. A quick monthly calculation tells the real story: they have $5,324 & $3,189 net monthly income after tax.

It's time to celebrate - your loan is approved!

But now it's crunch time people! At just 4.69% (the super low rate currently on offer) the $800,000 loan to purchase that average home will cost our average family $4,145 per month.

That's monthly until they reach 65 years of age. $4,145 a month for the rest of their working lives! Almost 49% of their combined net income goes towards making their minimum loan repayments. And if our friends can't pay it off faster, they will have paid more than $1,000,000 in bank interest during t hat time.

What will happen though when their interest rate increases to just 6.6%? That monthly repayment jumps by a grand to $5,157 - ouch. I think you can work the rest of this math exercise out?

So our average couple bought an average home in one of 417 average suburbs with an above average deposit and above average sized mortgage...

And pretty much gave up their opportunity to become an average family of two adults and two kids.

Listen up people. Unless he's Walter White they can't ever afford to have baby number two.

The mysterious world of finance can be honed down to just three questions:

Can you pay back the loan?
Will you pay back the loan?
If it goes pear shaped, what can we sell?

If you fail to meet any one of the three criteria questions you will not be approved for finance.

Here's what hurts the feelings of so many people: the primary reason a couple wants to purchase one of these million dollar homes is to keep up appearances - I see it all the time.

Shelling out almost half your net income each month for a roof over your head is not the smartest move for most couples. Lose your job, become ill or have an accident that stops you from working and you're in trouble. This kind of financial stress kills even the strongest relationships.

People who need to keep up appearances aren't thinking about their financial future at all. They're all about 'I want it and I want it now'. Dangerous ground indeed - especially when interest rates increase in 2015 and beyond.

Many a credit rating (CRAA File) has been severely damaged over the years by this scenario and the resultant relationship breakdown.

It's articles like that RP Data Report that feed ego driven decisions and encourage people to believe that it's a 'fantastic' idea to purchase these types of properties.

Because we all know the mantra: "Property values always double every seven to 10 years."

Yeah right! Pigs might fly too.

It kills me to know that so many people fall into the trap of buying the wrong type of property, when the investors I'm working with are buying their first, second and third investments just weeks after getting started.

It's time for a reality check.

Read more: http://www.propertyobserver.com.au/forward-planning/investment-strategy/economy-and-demographics/35029-are-million-dollar-suburbs-destroying-the-average-australian-family.html
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van
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If they are working in Sydney, they should buy a place at st marys or Penrith, it is about 1 hour travel time from there, houses are often under 1/2 a million.
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Jock
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van
30 Aug 2014, 06:53 PM
If they are working in Sydney, they should buy a place at st marys or Penrith, it is about 1 hour travel time from there, houses are often under 1/2 a million.
A bargain! but these places should be in the price bracket of a butcher working at the local supermarket, not city slickers (yes I know, a butcher is quite slick on account of all that pork fat he's covered in)
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van
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Quote:
 
Suppose they met and fell in love eight years ago and started saving for their 'average home' pretty soon after. Our 'model couple' married, had a baby and have been super diligent too - saving $250,000 i n that time. That's an average of $31,000 a year for eight years.


Actually, 8 years ago, if instead they borrowed 100k from their parents they could have bought the same house for probably under $700k, and what they were paying in rent could have gone to the mortgage.

Saving up for years to build a deposit is for suckers, that is why probably not many people do it, they just borrow the deposit from someone else and tell the bank it is their's.

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JanesAddiction
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van
30 Aug 2014, 09:47 PM


Actually, 8 years ago, if instead they borrowed 100k from their parents they could have bought the same house for probably under $700k, and what they were paying in rent could have gone to the mortgage.

Saving up for years to build a deposit is for suckers, that is why probably not many people do it, they just borrow the deposit from someone else and tell the bank it is their's.

Having poor parents is for suckers.

Simple solution to their housing affordability woes: Fratricide. Last one standing inherits the oldies house.
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hoofarted
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van
30 Aug 2014, 09:47 PM


Actually, 8 years ago, if instead they borrowed 100k from their parents they could have bought the same house for probably under $700k, and what they were paying in rent could have gone to the mortgage.

Saving up for years to build a deposit is for suckers, that is why probably not many people do it, they just borrow the deposit from someone else and tell the bank it is their's.

There is something a little sick about what you say here. Let me tell you another solution. Had interest rates stayed at double digits for eight years, they would not only had had lower house prices but at least 50% deposit. Instead, they have had to bail your over-exposed arse out buy being the sucker saving and gaining nothing for their prudence. Your attitude fucking sucks.
Edited by hoofarted, 30 Aug 2014, 11:51 PM.
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van
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Hey I am not that person, I am just saying it how it is that's all.

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peter fraser
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hoofarted
30 Aug 2014, 11:50 PM
There is something a little sick about what you say here. Let me tell you another solution. Had interest rates stayed at double digits for eight years, they would not only had had lower house prices but at least 50% deposit. Instead, they have had to bail your over-exposed arse out buy being the sucker saving and gaining nothing for their prudence. Your attitude fucking sucks.
But interest rates didn't stay at double digits and they aren't going back there for a long long time.

The reality is that your expectations were a long way wrong.

You made a mistake. Get over it and stop blaming other people for your error.
Any expressed market opinion is my own and is not to be taken as financial advice
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hoofarted
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peter fraser
31 Aug 2014, 07:24 AM
But interest rates didn't stay at double digits and they aren't going back there for a long long time.

The reality is that your expectations were a long way wrong.

You made a mistake. Get over it and stop blaming other people for your error.
I haven't made any mistakes. My comment about double digit interest is as relevant as "everyone should ask their parents for $100k..." which assumes everyone has the same parents. I just don't have the loaded parents to sponge off, as described above. Like I said, something a little sick with hitting up the old folks for cash, as a supposed grown up.
Edited by hoofarted, 31 Aug 2014, 09:12 AM.
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peter fraser
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hoofarted
31 Aug 2014, 09:09 AM
I haven't made any mistakes. My comment about double digit interest is as relevant as "everyone should ask their parents for $100k..." which assumes everyone has the same parents. I just don't have the loaded parents to sponge off, as described above. Like I said, something a little sick with hitting up the old folks for cash, as a supposed grown up.
Lets look at the facts:-

1. You want to buy a house in Sydney but want it at a good price.
2. You have been sitting on a large cash deposit since about 2008
3. You have a large income so qualifying for a mortgage would be easy for you.
4. Interest rates for depositors have been crap for years and they look like staying that way for at least a decade.
5. Conversely interest rates for borrowers have been good for the last few years and may possibly get better.
6. Since 2008 you have watched the house prices in Sydney rise from $......... to $.......... (Someone can fill in the gaps for me)

If that is your idea of being successful and not making any mistakes, then I hope that I continue to cock everything in my life up.

Although you ay have a moral issue with borrowing from Mum and Dad (and I almost agree with you on that point) the fact is that the dumb play of using a 5% deposit or borrowing from Mum and Dad in 2008/09 has been far more successful than the so called "clever play" of waiting for the crash.

Do you remember how everyone howled with laughter at those who bought in 2008 and 2009?
They are not laughing as hard now.
Any expressed market opinion is my own and is not to be taken as financial advice
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