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So who can buy a house in Sydney for $1,076,000
Topic Started: 30 Oct 2016, 06:30 PM (4,803 Views)
Rufus
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So who can buy a house in Sydney for $1,076,000

Along with everyone else I have been watching the house prices in Sydney rise and rise and rise, driven mostly by high demand and falling interest rates.

Falling interest rate drive loan repayments lower and thus when new buyers compare repayments to rents the repayments begin to look far more attractive in a market where rates are falling. In addition buyers can access higher loans as their serviceability position improves. Buyers who may have been locked out of buying because they couldn’t get a loan large enough for them to buy a house that satisfied their needs, suddenly find they can buy that house, and so they do.

It’s quite intuitive that when a large number of people who couldn’t previously afford a house, but suddenly can, it adds impetus to the market for a basic necessity such as housing.

So what’s different this time?
This time APRA have set a floor on the serviceability rate used to assess all loan applications. That means that all loan applications must be serviced at rates above 7.00% regardless of how low rates actually fall. Most lenders are servicing at rates higher than 7.15% with ING servicing at 8.00%. Had APRA not intervened some time ago with that floor, lenders would still be using an assessment rate about 1.5% to 1.75% above the borrowing rate. That means that lenders would be assessing loans at around 5.15% to 5.50% instead of 7.15% or more. That makes a huge difference to the number of buyers allowed into the market. APRA instituted this floor quite some time ago and there is no doubt that it will make the market more robust when we do see interest rate increases, whenever that may be.

What this floor on the assessment rate does is set a barrier to buyers in all markets in Australia, but in particular to buyers in our most expensive cities because that’s where the APRA floor will be stopping the most buyers entering the market. If rates fall any further, it won't make one iota of difference to peoples capacity to borrow larger amounts.

Markets such as Brisbane, Adelaide and Hobart are not affected greatly by the APRA assessment rate floor.

The caveats to this are:-
1. Foreign buyers who may be borrowing in overseas markets, or simply may not need to borrow at all. Australian banks have curbed their lending to this sector significantly, but it’s still an unknown factor as far as actual numbers go.
2. Investors who may be in a very strong financial position. APRA have also set limits on this sector of the market. I doubt that investors alone can keep the Sydney market levitated.
3. Buyers receiving assistance from family either in the form of cash gifts or family guarantees. I don’t see this as being a large enough segment to hold up the whole market, but it’s a factor.
4. SMSF borrowings – not significant enough to be a market price setter.

What do I need to get a bank loan near $1M
If we look at an Australian couple who might want to buy in Sydney for a price around the median of $1,076,000, what is the minimum that they would need to earn, and what is the minimum savings they would need to cover the deposit and costs?

I ran an imaginary scenario through my calculators for a couple with two young children. He earns $90,000 pa gross and she earns $75,000 pa gross, with no loans but they do have a total of $10,000 credit card limit, which is about normal for a couple these days. That’s a credit card each with just a $5000 limit. (For the more politically correct those incomes could be reversed, it makes no difference.

According to the serviceability calculators they can borrow 90% loan up to $968,000 absolute maximum with one of the big four. That would put them virtually at their dollar limit and the loan may not be approved, but it is within their theoretical limit. Their credit history and other risk indicators would need to be very strong. I have also assumed that they don’t have any private school fees, car loans etc. Also the income is assumed to be a salary, it does not include overtime, commissions or bonuses as they are not always included at 100% by all lenders.

In addition they would need the following in savings or family assistance at a minimum.

• Stamp duty and legals etc of $47,306
• A deposit of $107,600

Total required by buyers would be $160,000 which would leave just $4557 to cover incidentals such as moving costs and connection of utilities.

So to buy a house in Sydney for around the median price a household of two adults and two children and no other loans other than modest credit cards would need a combined income of $165,000 gross and savings of $160,000.

That’s a big ask for most young couples. Most simply don’t have that earning capacity, and nor do they have the savings. In the current lending climate if a loan doesn’t service, the lender can’t and won’t lend. There are people who claim they will, but experience tells me that isn’t so.

There are thousands of people in Sydney with higher incomes and larger savings, but how many of them haven’t yet bought?
How many people are there in this category who are waiting to buy?

What about 5% deposit loans?

Good question. The answer is that banks and mortgage insurers are very particular with high value high LVR loans, and mortgage insurers have a limit of $1M for these loans in Sydney. You can check that for yourself on the Genworth Underwriting Policy on page 5 (see link below)
For most postcodes the limit is lower. We have hit the limit for 95% loans in Sydney. Even 90% loans become quite hard to get when we rise above the $1M threshold, and the mortgage insurance cost is at nosebleed levels.
http://www.genworth.com.au/pdf/LMI%20Underwriting%20Guidelines%20(Australia)%20-%20(20161024)%20v1.0.pdf

I think the majority of people in Sydney who would like to buy a house are at peak borrowing capacity, or near to it, so exactly who is holding up the Sydney market, or can it be held up much longer? Basic maths are hard to beat.


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Terry
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Are you asking yourself questions and answering them yourself?
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Khaderbhai
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Rufus
30 Oct 2016, 06:30 PM
That’s a big ask for most young couples. Most simply don’t have that earning capacity, and nor do they have the savings.
I would just point out that while the median freestanding house price is over $1M, the median dwelling price is around $800K and the median unit price is around $700K. And obviously half of all dwellings cost less than the median. A typical young FHB couple would not be looking for homes costing the $800K median. They would be looking at starter homes for $500-600K or less.

Those $1M+ freestanding houses are mainly bought by upgraders. For example, a couple who bought their first home a decade ago for $350K. That first home is now worth $700K, and they've also paid off a chunk of the mortgage. So when they upgrade to the $1M house they're taking $500K+ of equity with them, and they only need a $500K loan.
Edited by Khaderbhai, 30 Oct 2016, 06:58 PM.
Banks can't repossess your home simply because the market value falls. Australia's Consumer Credit Code says consumers aren't liable for things ordinarily outside their control and can't be held to obligations that could only be met by selling their home. Click for details.

"The truth is that there are no good men, or bad men. It is the deeds that have goodness or badness in them. There are good deeds, and bad deeds. Men are just men."
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Rufus
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Khaderbhai
30 Oct 2016, 06:56 PM
I would just point out that while the median freestanding house price is over $1M, the median dwelling price is around $800K and the median unit price is around $700K. And obviously half of all dwellings cost less than the median. A typical young FHB couple would not be looking for homes costing the $800K median. They would be looking at starter homes for $500-600K or less.

Those $1M+ freestanding houses are mainly bought by upgraders. For example, a couple who bought their first home a decade ago for $350K. That first home is now worth $700K, and they've also paid off a chunk of the mortgage. So when they upgrade to the $1M house they're taking $500K+ of equity with them, and they only need a $500K loan.
Yes that's quite true as a rule.


Khaderbhai
30 Oct 2016, 06:56 PM
I would just point out that while the median freestanding house price is over $1M, the median dwelling price is around $800K and the median unit price is around $700K. And obviously half of all dwellings cost less than the median. A typical young FHB couple would not be looking for homes costing the $800K median. They would be looking at starter homes for $500-600K or less.

Those $1M+ freestanding houses are mainly bought by upgraders. For example, a couple who bought their first home a decade ago for $350K. That first home is now worth $700K, and they've also paid off a chunk of the mortgage. So when they upgrade to the $1M house they're taking $500K+ of equity with them, and they only need a $500K loan.
Not looking at units, I don't think there are many house for sale for $600K where professional people would like to live in Sydney. Those who earn higher incomes will look for better quality/located homes.

I'm writing a loan similar to this scenario now, and the buyers expect to have to buy in an area that they don't really want to live in, despite being able to afford to spend over $1M

It's an issue for them.
Edited by Rufus, 30 Oct 2016, 07:15 PM.
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Khaderbhai
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Rufus
30 Oct 2016, 07:04 PM
I'm writing a loan similar to this scenario now, and the buyers expect to have to buy in an area that they don't really want to live in, despite being able to afford to spend over $1M

It's an issue for them.
No doubt, but I'd suggest if they're FHBs they should look at starter homes close to their preferred area, rather than homes priced $200K above the Sydney median. That might mean a unit. I know they probably want something better but they have to accept that they're competing against upgraders with substantial equity. If they were in London/Manhattan/HK/Singapore it would be a no-brainer to buy a unit rather than a house for their first home. Sydney is just heading that way too.
Banks can't repossess your home simply because the market value falls. Australia's Consumer Credit Code says consumers aren't liable for things ordinarily outside their control and can't be held to obligations that could only be met by selling their home. Click for details.

"The truth is that there are no good men, or bad men. It is the deeds that have goodness or badness in them. There are good deeds, and bad deeds. Men are just men."
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Rufus
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Khaderbhai
30 Oct 2016, 07:47 PM
No doubt, but I'd suggest if they're FHBs they should look at starter homes close to their preferred area, rather than homes priced $200K above the Sydney median. That might mean a unit. I know they probably want something better but they have to accept that they're competing against upgraders with substantial equity. If they were in London/Manhattan/HK/Singapore it would be a no-brainer to buy a unit rather than a house for their first home. Sydney is just heading that way too.
OK, so they are going to buy their first home/unit for $600,000.

That's at the upper limit of the starter home range according to your measure.

In that case the couple with two children and credit card limits total $10,000 and no other commitments would need to earn something like -

The male income earner $65,000
The female income earner $50,000

That's a combined income of $115,000.

It probably means that couples with a household gross income of under $80,000 in Sydney can only buy a one bed unit. I would expect that to curb the number of people who can buy in Sydney.

I don't see how this would not affect the rate of price growth at some point. As the rising market gradually excludes more and more buyers without any offsetting event such as a rate reduction, then it must have an effect.

I'm not aware that London/Manhattan/HK/Singapore have recently had similar limits placed on buyers in those cities.
Edited by Rufus, 30 Oct 2016, 08:09 PM.
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John Frum
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I'm in the market for a lot more that that.

When I see value I'll pounce.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness.
"Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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Jimbo
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Rufus
30 Oct 2016, 06:30 PM
So who can buy a house in Sydney for $1,076,000
The vast majority of house sales are to people who are moving house. I can afford a Sydney house for $1,076,000 simply because I have equity from a house sale. I bought my first house at less than 3 x my annual salary when I was a newly qualified plumbing engineer on below national average wages.

If I were a first time buyer today, no way could I afford to buy a Sydney house for $1,076,000.

I couldn't afford anything in London, Bristol, Perth, Paris or Magaluf either.

And therein lies the problem.







Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be :?: rising.
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Rufus
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Jimbo
30 Oct 2016, 09:08 PM
The vast majority of house sales are to people who are moving house. I can afford a Sydney house for $1,076,000 simply because I have equity from a house sale. I bought my first house at less than 3 x my annual salary when I was a newly qualified plumbing engineer on below national average wages.

If I were a first time buyer today, no way could I afford to buy a Sydney house for $1,076,000.

I couldn't afford anything in London, Bristol, Perth, Paris or Magaluf either.

And therein lies the problem.






According to Residex the median house price in Perth is $497,500.

I suspect that many a FHB couple in Perth could afford that.
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herbie
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John Frum
30 Oct 2016, 08:38 PM
I'm in the market for a lot more that that.

When I see value I'll pounce.
'N if ya never see value ya'll just wait ta inherit - All good.
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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