Read Time: 5 minutes
It’s a phrase that is now branded around all nightly news reports and if we’re lucky, even the Sunday evening current affairs programs. It’s the buzz word of 2018. And rightly so, with property prices growing faster than the rate of household incomes over the last two decades, it was only a matter of time before we needed to each have ‘that’ chat around the dinner table, discussing why we need to tighten the purse strings.
It’s a really important key indicator for us when analysing areas and regions to be investing in. We want to ensure that households are absolutely comfortable paying off their mortgage each month. Because guess what, If they are red lining it, it won’t be too long before the banks knock on the door and take away their prized possession and sell it for a steal. And if that is consistent throughout a suburb/region, then ultimately, we’ll see the area median decrease significantly. Not great if you are an investor in that region and the value of your investment is declining.
The reality is, at the moment with interest rates at record lows, we are ok….for now. But ultimately, we all know there are interest rate rises to come. So, we need to future proof our investment.
There are two key methodologies we use, they are:
1. The ratio of dwellings to household income
This is a multiple of household income to asset value. We ensure we are purchasing in areas where this ratio sits comfortably under a multiple of 7.
2. The proportion of household income required to service an 80% LVR mortgage
This is a measure of the total household income that goes towards paying the mortgage. We don’t like to see anymore than 40% of the total household income going towards paying the mortgage. We will look for this to be sitting under 30% as an insurance policy for future interest rate rises and loss of jobs in the household.
CoreLogic recently released their Housing Affordability report. Above, we have highlighted our two key indicators and the capital cities that are exceeding our comfortable thresholds. Sydney and Melbourne - probably not a surprise to most. However, key to note there are markets within markets, so it doesn’t go to say that all of Sydney and Melbourne are tarnished with the unaffordable brush. There are also other factors at play, such as understanding the demographic and home ownership in an area too. The calculations might show Woollahra in Sydney’s Eastern Suburbs superseding the threshold. However, when you break it down further, the data might also tell you that a high proportion of homes are unencumbered! So, it’s obviously important to take the deep dive and explore all the possibilities when doing your research.
Milk Chocolate research, purchase and renovate residential and commercial property in Australia on behalf of Australians living abroad, looking for a home or investment property. To see how we can help you get in touch here.
Cheers
Richie
Source:
CoreLogic
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