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?