Opinions on Mortgage Affordability

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59 posts

Master Geek
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#2384789 3-Jan-2020 21:07

eracode:

The first quote box is from me - as showing. Are you also attributing the second quote box to me? It doesn’t say who you are quoting. It might be inferred or implied that it’s from me - but it’s not mine.

The second box is from the link given in the quotebox.

Nothing to say about the subject matter?

eracode

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#2384790 3-Jan-2020 21:08

dolsen:

eracode:

The first quote box is from me - as showing. Are you also attributing the second quote box to me? It doesn’t say who you are quoting - but it’s not from me.

It may have been edited (I can't tell), but, it's showing to me that it is quoting https://nzhistory.govt.nz/culture/the-1970s/overview

Edit - it's in your quote that it is referencing the site, but, may not be clear to all.

It is not my quote at all. I never made a post referencing that site.

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#2384791 3-Jan-2020 21:22

noddy76:

eracode:

The first quote box is from me - as showing. Are you also attributing the second quote box to me? It doesn’t say who you are quoting. It might be inferred or implied that it’s from me - but it’s not mine.

The second box is from the link given in the quotebox.

Nothing to say about the subject matter?

OK - how about: You selectively quote the words from that website “In 1975 the average weekly wage was $95 (equivalent to $920 in 2018). This rose to $157 by 1979,”. Why did you chop off the end of the second sentence that adds “...but because of inflation the average Kiwi was no better off”?

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Handle9

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#2384798 3-Jan-2020 21:25

eracode:
noddy76:

eracode:

The first quote box is from me - as showing. Are you also attributing the second quote box to me? It doesn’t say who you are quoting. It might be inferred or implied that it’s from me - but it’s not mine.

The second box is from the link given in the quotebox.

Nothing to say about the subject matter?

OK - how about: You selectively quote the words from that website “In 1975 the average weekly wage was $95 (equivalent to $920 in 2018). This rose to $157 by 1979,”. Why did you chop off the end of the second sentence that adds “...but because of inflation the average Kiwi was no better off”?

Perhaps because in the context of this discussion it is not relevant. Yes there were high interest rates but year on year the percentage of your income spent on housing significantly decreased once you bought a house.

noddy76

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Master Geek
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#2384800 3-Jan-2020 21:29

Handle9:

Perhaps because in the context of this discussion it is not relevant. Yes there were high interest rates but year on year the percentage of your income spent on housing significantly decreased once you bought a house.

Precisely.

Sure, your food cost you 10% of your wage in 1975, and it still cost you 10% of your wage in 1979.

Ditto with transport and clothing and most other goods and services, but your mortgage payments and debt weren't inflation adjusted. they were the same in nominal dollars as they were in 1975, but your income had risen 60%+.

quickymart

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#2406531 25-Jan-2020 13:30

alasta:

quickymart:
What would you consider a fair price then? $40000? 5? 6?

Out of curiosity I just did some very rough calculations based on the following assumptions:

$80k average household income.
40% of income spent on rent.
2% capital gains.
$10k opex for the property.
7.5% ROI before tax.
The above assumptions would derive a property value of $400k.

If you can tell me which, if any, of my assumptions you disagree with then I'm happy to recalculate.

I was thinking about this thread this afternoon and upon re-reading it, I can see what you're saying - a property for sale for around $400000-$450000, I could probably work with that (purchased on a single income). If the bank would be happy with my deposit, even better :)

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alasta

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#2406636 25-Jan-2020 14:17

It has always fascinated me how so many people are anxious about their ability to come up with a deposit, but comparatively unconcerned about servicing the mortgage debt.

This implies that there are a lot of people who have a decent income but very limited capital. I would have thought that scenario would only apply to people who have recently recovered from a significant setback - e.g. a marriage breakup or significant health issue.

JimmyH

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#2406649 25-Jan-2020 14:48

alasta:

$80k average household income.

That feels light to me. Probably OK for a single person or household where only one person works. But if there are two people working full time (40 hours/week) but only earning minimum wage ($17.70), then that gets a household income of $73,632. I have seen figures that the average wage is $56,700 for a man and $47,500 for a woman. So call it $94,000 average household income for a couple. Plus, if they have children, Working for Families and other supplements would probably top this up somewhat.

alasta:

40% of income spent on rent.

That doesn't seem unreasonable.

alasta:

2% capital gains.

So about in line with the Reserve Bank's inflation target. Probably too low in the short term given migration and the market demand/supply imbalance, but OK as a conservative long-term assumption.

alasta:

$10k opex for the property.

Probably a bit light, rates and insurance alone will take over $5k for many properties. Then you have painting every ten years or so, and many sundry expenses (roof, carpets, plumbing, electrics, stove, heating etc - things wear out and there's usually something that needs doing).

alasta:

7.5% ROI before tax.

That works out to a pre-tax ROI of over 11%. I imagine many investors would be happy with less than this in the current low interest rate environment. I don't know many other safe-ish lower risk investments that could be sensibly expected to sustainably return over 11% at the moment.

mattwnz

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#2406656 25-Jan-2020 15:18

alasta:

It has always fascinated me how so many people are anxious about their ability to come up with a deposit, but comparatively unconcerned about servicing the mortgage debt.

This implies that there are a lot of people who have a decent income but very limited capital. I would have thought that scenario would only apply to people who have recently recovered from a significant setback - e.g. a marriage breakup or significant health issue.

I think it is part of the culture in NZ that keeps the whole housing market going. eg. Once you are on the 'housing ladder' you will be set for life. People don't seem to realise that with these low interest rates, it has pushed up prices, and that debt has to be paid back, and that interest rates may not stay at record lows forever. If rates go up to 8%, which is still very low historically, I think a lot of people will struggle to service their mortgages. But people don't seem to worry about borrowing huge sums of money, even though their incomes to pay it back are relatively low.

mattwnz

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#2406657 25-Jan-2020 15:23

JimmyH:

2% capital gains.

Except house prices are excluded from inflation, and over the last 20 years, house prices have been well above 2% growth per year. People seem to expect houses prices to double every 10 years. But I can't see how that is sustainable, as a two working person family can only afford to service a mortgage of a certain size. I guess if interest rates go down to 0%, or even negative, and banks actually start paying people to take out mortgages. They are already giving people free holidays. It just seems that something is going to break, as this lowering of interest rates can't go on forever, but we seem to be stuck in a vicious cycle where they can't be raised. But because inflation has increased recently, they may have to stop dropping them.

noddy76

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Master Geek
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#2406716 25-Jan-2020 16:02

mattwnz:

Except house prices are excluded from inflation, and over the last 20 years, house prices have been well above 2% growth per year.

No, that's not true

https://www.stats.govt.nz/information-releases/consumers-price-index-december-2019-quarter

From the December 2018 quarter to the December 2019 quarter, the CPI inflation rate was 1.9 percent.

Housing and household utilities increased 3.0 percent, with rentals for housing up 3.1 percent, property rates and related services up 5.0 percent, and purchase of housing up 2.4 percent.
Food prices increased 2.5 percent, with restaurant meals and ready-to-eat food up 3.4 percent.
Alcoholic beverages and tobacco increased 4.9 percent, with cigarettes and tobacco up 9.1 percent.

https://www.stats.govt.nz/assets/Uploads/Consumers-price-index/Consumers-price-index-December-2019-quarter/Download-data/consumers-price-index-december-2019-quarter-selected-classes-summary.pdf

Purchase of housing has a 5.5% weighting in the CPI, and rental housing has a 9.1% weighting in the CPI. Not sure if the weighting of housing excludes existing housing, but since the sale price of new housing tracks what is happening with existing housing pretty well its not really that relevant IMO

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mattwnz

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#2406796 25-Jan-2020 17:20

noddy76:

mattwnz:

Except house prices are excluded from inflation, and over the last 20 years, house prices have been well above 2% growth per year.

No, that's not true

https://www.stats.govt.nz/information-releases/consumers-price-index-december-2019-quarter

From the December 2018 quarter to the December 2019 quarter, the CPI inflation rate was 1.9 percent.

Housing and household utilities increased 3.0 percent, with rentals for housing up 3.1 percent, property rates and related services up 5.0 percent, and purchase of housing up 2.4 percent.
Food prices increased 2.5 percent, with restaurant meals and ready-to-eat food up 3.4 percent.
Alcoholic beverages and tobacco increased 4.9 percent, with cigarettes and tobacco up 9.1 percent.

https://www.stats.govt.nz/assets/Uploads/Consumers-price-index/Consumers-price-index-December-2019-quarter/Download-data/consumers-price-index-december-2019-quarter-selected-classes-summary.pdf

Purchase of housing has a 5.5% weighting in the CPI, and rental housing has a 9.1% weighting in the CPI. Not sure if the weighting of housing excludes existing housing, but since the sale price of new housing tracks what is happening with existing housing pretty well its not really that relevant IMO

I think that applies solely to new houses and not existing properties. I was meaning the property market has a whole is excluded from the inflation figures. I suspect inflation figures would be a lot higher if it did, because many areas have gone up over 10% or more in just a year, and much of that rise will be on existing houses.

New house pricing doesn't really relate that well to existing houses, as exiting ones have often depreciated a lot, and their value is often in the land. Whereas new ones, a lot of the value is in the house itself, and have a lot of margin in them that the developer has added, in order to make a decent profit. Also the price can be based on how much they know they can sell them for, based on what banks will lend to people wanting to live in the area, because developers aren't wanting to build a house that won't sell in a reasonable period of time. Buying a new house generally is quite a lot more expensive than an existing one in the same area and on the same sized land. That is one reason why when buying an existing house, the rebuilt insurance costs can be significantly more (sometimes more than double) than you pay for it, because the house itself has depreciated in value, and it costs a lot more to built now than it did when the house was first built. . So some of that increase could just be developers increasing their profit, or material cost increases, especially as people can now afford to borrow more due to interest rate decreases. Where as a private seller is often selling the house for the market value, and doesn't have the new house price premium and margin added on, unless they have added value by refurbishing or adding to it it. But the number of new houses is a tiny number, compared to all houses in NZ. Most people buying a house will be buying existing stock as well, and the inflation figure appears to excluded those, and the number of those would be significant.

alasta

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#2406797 25-Jan-2020 17:22

JimmyH makes some valid points.

The reason why I assumed 2% capital gains is that house price inflation should be in line with general inflation if demand and supply remain in balance. I know that a lot of housing investors are making a lot of money as a result of the scarcity in the market, but that is more opportunistic than a sustainable investment strategy.

The income side of things is very difficult because it depends on whether you are single or a couple, what type of job you do, whether you qualify for tax rebates, whether you have other income to supplement salary and wages, etc. The only further comment I can make on that is that I disagree with the very traditionalist assumption that only couples buy houses, because that simply doesn't reflect social trends.

Ultimately the question of 'what is a fair and reasonable price for housing' is very difficult to quantify because there are so many parameters to juggle.

Obraik

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#2406890 25-Jan-2020 21:57

I'd love to buy a house but due to my partner having a somewhat specialist job that seems to only exist in Auckland, we had to move from Christchurch a few years ago. We're now resigned to the fact that even though we earn a pretty decent income, a decent house is just well out of our reach while we live here. If we were willing to make some large sacrifices such as the neighbourhood, the size of the property and giving up some of our hobbies, then yes, we could probably get something like one of those copy-paste town houses in Flat Bush. However, I don't see the point of owning a house at the expense of all that while also having a mortgage that leaves no room for anything else with the risk that if either of us ended up not working then we'd be screwed.

Instead, we're going to continue renting in Auckland in a decent sized property in a nice neighbourhood while looking to see how we can make our way back to Christchurch where we could get the house and land we want for around $400k-$500k, which would be well within our reach and would have us in a mortgage where it wouldn't be the end of the world if one of us ended up out of work for a period.

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Handle9

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#2406892 25-Jan-2020 22:01

alasta:

It has always fascinated me how so many people are anxious about their ability to come up with a deposit, but comparatively unconcerned about servicing the mortgage debt.

This implies that there are a lot of people who have a decent income but very limited capital. I would have thought that scenario would only apply to people who have recently recovered from a significant setback - e.g. a marriage breakup or significant health issue.

Why would you assume that. Most people aren't great with money.

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