Are million dollar suburbs destroying the 'average' Australian family?

Are million dollar suburbs destroying the 'average' Australian family?
Are million dollar suburbs destroying the 'average' Australian family?

GUEST OBSERVATION

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.

I t'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.

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

  1. Can you pay back the loan?
  2. Will you pay back the loan?
  3. 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.

Here's a sample of the ‘no go’ suburbs from the RP Data list:

 

Kevin Lee is the property investment expert and buyer's agent at Smart Property Adviser.

Tags: 
Demographics

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