Australian Housing Affordability Discussion

[Moody]

Here's a nice graphical view of housing affordability in Sydney - https://cityfutures.be.unsw.edu.au/cityviz/affordability-index/

It compares 2005 with 2015, using indexed wages and the amount that banks will lend you for a house. Or should that be for a shoebox in t' middle o' road?

 

[whatmeworry]

Predications that Trump presidency might collapse the housing bubble or cause a global recession.

But according to the bond market reaction, he will burst Australia's east coast housing bubble by causing interest rates to rise.

That would be the relatively nice way to prick the bubble. The more common fear is that he could start a trade war with China that would cause a global recession – one we wouldn't escape. That definitely would not be a nice way to achieve lower housing prices. So let's hope there is enough sanity left in Congress to prevent such madness and just consider the more benign interest rate story.

Is Donald Trump going to burst Australia's housing bubble?

 

[JohnK]

Nothing wrong with higher interest rates. That will help people save for their deposit.

 

[RAM]

Nothing wrong with higher interest rates. That will help people save for their deposit.

..and push out those leveraging to the hilt as banks demand lower leverage and the over-supply of units stops the leveraged investors being able to put up rents.

Unofficially (odd that) rents in Port Melbourne/Docklands have been flat for 6 years. Nobody in their right mind has paid the asking rent, and often moving costs are covered for the new-build units.

Wonder why that has not been reported....

 

[cove]

Interest rates have started stirring in Australia so it could be time to consider locking a great fixed rate on a portion of a home mortgage.
We did that on our social housing this week. No one really knows where rates will go but Donald Trump's policies may create some world inflation rather than a huge recession.
I saw our new 30 year Government bonds moved from 3.25% to 3.45% in a couple of days.

 

[RAM]

Interest rates have started stirring in Australia so it could be time to consider locking a great fixed rate on a portion of a home mortgage.
We did that on our social housing this week. No one really knows where rates will go but Donald Trump's policies may create some world inflation rather than a huge recession.
I saw our new 30 year Government bonds moved from 3.25% to 3.45% in a couple of days.

I suspect (hope) everyone here knows this but just in case...

How do you compare the break-even point between a variable rate vs fixed rate mortgage?

• Make a couple of assumptions about likely interest rate future.
• Use current rates available to calculate break-evens between V vs F.
• If you assumed future movements of interest rates are better/worse than break-evens - you know what to do.

It is most important to WRITE down, rather than vaguely think about, the future path of mortgage rates. Otherwise human bias will ruin your results (same with fund managers from other sectors being 'experts' in your sector - unless they write down their predictions and date them (and pay $5 for the bet).

If it is not written down, and kept in a notebook for future reference then you do not have a starting point for realising how good/bad your financial skills are (or what work on them you need).

So using simple numbers, not current rates, for an example....

Variable = 4.75%
2 Yr fixed = 5.40%
3 Yr fixed = 5.75%

So {1+.0475)^2 = 1.097256250
2 yr Fixed, {1+.0540)^2 = 1.110916000

So {1+.0475)^3 = 1.149375922
3 yr Fixed, {1+.0575)^3 = 1.182608859

Do I choose fixed vs floating?

What is the effective interest rate for the 2 Yr fixed v variable rate (aka break-even rate)?

If no move for 1 yr?

= (1.110916000 / 1.0475) - 1 = .06054 aka 6.054%

Qn: Do I expect variable rates to move up by more than 1.30% in 1 year from now?

Yes: So fix
No: Stay Variable

If I am wrong, fix and mortgage rates don't move then I have paid (effectively) a 1.30% insurance premium to protect me from the risk of rising rates. Am I happy to pay that premium for not worrying about rates rising for the next 2 (3) years?

Qn: How long should I fix for?

How to choose between 2yr fixed vs 3 yr fixed

What is the effective interest rate for the 3rd yr on the 3 Yr F vs the 2 Yr Fixed (aka break-even rate)?

= (1.182608859 / 1.110916000 ) - 1 = .0645 aka 6.45%.

So do you think interest rates will be higher than 6.45% on variable rate mortgages in two years from today?

Yes ==> Fix for 3 years
No ==> Fix for 2 years

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[cove]

Very good RAM. In the past few years the interest rates have drifted lower but nothing like our Government cash rate. Our main banks are keeping their margins on home mortgages at around 2.0% on average so the lowest variable rates have a 3 in them as the first number.Fixed rates have a low 4 in them as the first number.
You should only consider locking the portion of your mortgage that would hurt you if the rates jump.
Use the low rates to get your mortgage loan down to a lower number as quickly as you can.

 

[PDog]

Very good RAM. In the past few years the interest rates have drifted lower but nothing like our Government cash rate. Our main banks are keeping their margins on home mortgages at around 2.0% on average so the lowest variable rates have a 3 in them as the first number.Fixed rates have a low 4 in them as the first number.
You should only consider locking the portion of your mortgage that would hurt you if the rates jump.
Use the low rates to get your mortgage loan down to a lower number as quickly as you can.

Interesting- I used to think you should only lock away what would hurt if it jumped, but now am not so sure.

We're about to lock in 3 years at 3.79%- I can't see rates averaging less than that for the next 3 years. We'll lock in the full amount and shovel the extra we would have paid into super or offset against an investment property (@ 4.3%) and then dump that on the mortgage in 3 years. 3.79% is almost free money!

 

[Flashback]

For my recent lock in the fixed rate over 3 years was less than the variable anyway so it was a no brainer. Given we're nearly at a cash rate of 0 it's an easy choice.

 

[pauly7]

Well it's started, rates are going up independently of the RBA.

House prices have really flattened in Melbourne as well, despite an estimated reduction in inventory of about -20%

http://www.abc.net.au/news/2016-12-09/interest-rates-on-mortgages-likely-to-rise/8106180

 

[whatmeworry]

A 20 month government into Housing affordability probe proposes no changes to increase housing affordability.

A Coalition-dominated parliamentary committee handed down a report on home ownership on Friday which - in a rare departure from the norm - failed to make any recommendations to the government for reform.
The committee, chaired by Liberal MP David Coleman, concluded there was no structural problem with housing affordability.

'It's laughable': Government slammed for housing affordability probe that proposes no changes

 

[GarrettM]

I suspect (hope) everyone here knows this but just in case...

How do you compare the break-even point between a variable rate vs fixed rate mortgage?

• Make a couple of assumptions about likely interest rate future.
• Use current rates available to calculate break-evens between V vs F.
• If you assumed future movements of interest rates are better/worse than break-evens - you know what to do.

It is most important to WRITE down, rather than vaguely think about, the future path of mortgage rates. Otherwise human bias will ruin your results (same with fund managers from other sectors being 'experts' in your sector - unless they write down their predictions and date them (and pay $5 for the bet).

If it is not written down, and kept in a notebook for future reference then you do not have a starting point for realising how good/bad your financial skills are (or what work on them you need).

So using simple numbers, not current rates, for an example....

Variable = 4.75%
2 Yr fixed = 5.40%
3 Yr fixed = 5.75%

So {1+.0475)^2 = 1.097256250
2 yr Fixed, {1+.0540)^2 = 1.110916000

So {1+.0475)^3 = 1.149375922
3 yr Fixed, {1+.0575)^3 = 1.182608859

Do I choose fixed vs floating?

What is the effective interest rate for the 2 Yr fixed v variable rate (aka break-even rate)?

If no move for 1 yr?

= (1.110916000 / 1.0475) - 1 = .06054 aka 6.054%

Qn: Do I expect variable rates to move up by more than 1.30% in 1 year from now?

Yes: So fix
No: Stay Variable

If I am wrong, fix and mortgage rates don't move then I have paid (effectively) a 1.30% insurance premium to protect me from the risk of rising rates. Am I happy to pay that premium for not worrying about rates rising for the next 2 (3) years?

Qn: How long should I fix for?

How to choose between 2yr fixed vs 3 yr fixed

What is the effective interest rate for the 3rd yr on the 3 Yr F vs the 2 Yr Fixed (aka break-even rate)?

= (1.182608859 / 1.110916000 ) - 1 = .0645 aka 6.45%.

So do you think interest rates will be higher than 6.45% on variable rate mortgages in two years from today?

Yes ==> Fix for 3 years
No ==> Fix for 2 years

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Very good RAM. In the past few years the interest rates have drifted lower but nothing like our Government cash rate. Our main banks are keeping their margins on home mortgages at around 2.0% on average so the lowest variable rates have a 3 in them as the first number.Fixed rates have a low 4 in them as the first number.
You should only consider locking the portion of your mortgage that would hurt you if the rates jump.
Use the low rates to get your mortgage loan down to a lower number as quickly as you can.

These are pertinent issues for us, as we prepare to choose and sign our pre-approval early next week. I'll have to read work through your equations a few times RAM, as my English is better than my maths, but an early look at our likely options has me leaning towards a fixed rate for now.

 

[cove]

Fix the portion you don't want to pay back over the fixing period might work unless you win Lotto. There are break fees so you need to know it can be costly if you want to trade out of your new home after a year or two.
We fixed the rate on a big piece of our social housing finance for 5 years a couple of months ago.

 

[GarrettM]

I don't buy Lotto tickets, which means my chances of winning are only slightly lower than those who do.
We intend to make this home - when we eventually find one to agree on - the one in which current and future BabyGM(s) grow up in.

Mortgage broker has only just emailed us a list of likely lenders, which I will look at after work later today.

I was until yesterday unaware that Virgin Money has also moved into the mortgage market. On the surface some competitive rates and fees there, but I can't see myself taking that option.
More likely to see us go with one of the traditional majors, while P&N, ME, and Teachers were also discussed yesterday.

 

[drron]

Another possible issue that I don't think has been mentioned before-
Is Airbnb fuelling an Australian apartment bubble? - Government News

 

[RAM]

These are pertinent issues for us, as we prepare to choose and sign our pre-approval early next week. I'll have to read work through your equations a few times RAM, as my English is better than my maths, but an early look at our likely options has me leaning towards a fixed rate for now.

If unsure with the maths - then:

• reproduce the example I listed
• get a clean sheet of paper, and some sort of calculator (mobile phone and turn it to landscape turns most calculators into scientific (exponents etc) mode)
• make a rough estimate of the likely outcome of your calculations (if difference between the two rates is 0.25%, then over three years it is roughly 3 x.25% etc)
• write out your figures (old school yes but less likely to make an error) exactly in the format I presented - much easier to see something you've done wrong than on a computer screen

Do the answers look reasonable.

If after a decent attempt the answer does not seem reasonable (as opposed to what you want) then you can always PM me for a "I do not know your personal circumstances and make no suggestions about how you should manage your finances" maths check.

 

[cove]

If you go ME use me as a referral and go direct. I will send you all the reference fee. Do not go thru a broker for this one nor U Bank.
I think it was $200 last time so that could help you celebrate your move.
ME was easy for my eldest son and the ME loan officer was pretty good.
U Bank tends to be competitive as well if you go direct....it might be a bit harder as it is DIY.

 

[Jeffrey O'Neill]

Country wide rental yield down to 3.1%, or in investment speak if buying a share of a company you'd be paying a PE of 32 ie the rent would take 32 years to pay the purchase price off.

Generaally high PE companies have high income growth, but property in straya ain't heading in the right direction. Since the boom began yield has plummeted from near 8% in 96 to the current 3.1%

Keep in mind that the last Census showed that units were more than two times as likely as houses to be rented. A proportion of all these units under construction will go into short-term accommodation, some will be owner occupied and some will be left vacant however, if history is a guide many of these properties will enter the rental market.

Investors may need to strap in for a very bumpy ride, though I think I'd prefer to get through the exit before the panic sets in.

S&P reported earlier in the month

The Standard & Poor’s Performance Index (SPIN) for Australian prime mortgages was 1.14% in September, unchanged from August. It fell 4.5% during the third quarter (Q3) of 2016 from 1.19% in June. We expect arrears to fall between June and September, with Q3 normally being lowest point in the arrears cycle. However, arrears in Q3 2016 were up 25% from the same time last year–a common theme this year. Arrears at this point in the cycle have not been at this level since September 2012, when interest rates were considerably higher than they are now

The rate of underemployment started to rise in mid-2014 (chart 2A and chart 2B). Part-time employment has continued to increase since late 2014, while full-time employment growth has been in sharp decline since around November 2015. Interestingly, prime arrears commenced their upward climb in November 2015 and continued to head north until May, when they started to decline as part of the normal cyclical pattern, albeit a bit later in the year then we would normally expect. This trend could be influencing arrears performance if more borrowers have to shift from full-time to part-time employment, given the falling growth in full-time work. The Reserve Bank of Australia (RBA) has attributed the weakness in full-time employment nationwide during the past few years to the subdued demand for labor in the mining states. The arrears performance in the nation’s states and territories provides further evidence of the divergence in economic prospects between the mining and nonmining states as well as metropolitan versus regional areas of Australia.

Queensland’s arrears were 1.45% in Q3, up 29% year on year.
Western Australia (WA) in Q3 again recorded the nation’s highest arrears, up 47% from the same time last year
Tasmania’s arrears are up 14.8% year on year

Prob explains why the AOFM has had to hold onto the RMBS they bought during the GFC.

With house price inflation down to 3.5%, I wonder at what point the NG specufestors decide loosing money every month, with limited chance of inflation making the speculation pay off down the track, and they decide to try and find a mark willing to take on the losses.

 

[ComeFlyWithMe]

GarrettM - possibly a good move sticking with majors as they have more realistic valuation mechanisms than the smaller lenders who are very conservative and will likely value below what you are paying.

As for rental yield, that is only one small part of property investing. Capital growth in the absence of yield is just as important.
The key is location location. For example our properties within 5km of Sydney CBD have performed well, but our properties within 1km of Brisbane CBD have good rental yields but poor capital growth.
Like many things, these are long term investments and a potential couple of years of stagnation don't really detract from the end goal.

 

[cove]

In Perth it is currently easy to buy and hard to sell so it is quite different from Melbourne and Sydney. Prices have slid a bit and if you get stuck with having to rent out your home the market has fallen about $100 a week for the median 3 bed home compared with 2 years ago.
Good luck with your buying and selling GarrettM.