KeithJ, I'm not convinced that the build-up in equity is going to help a second time buyer. Sure, they get a nice deposit, but there's a correspondingly larger jump to their next house.
For example:
- Year 0: Bought house for $200K, next house is worth $300K.
- Year 10 @ ~4%: Owned house is worth $300K (with $100K equity), next house is now $450K.
- Year 10 @ ~7%: Owned house is worth $400K (with $200K equity), next house is now $600K.
- Year 10 @ ~-4%: Owned house is worth $130K (with $70K negative equity), next house is now $200K.
Remember to add in the principle they are paying down... the average Australian home loan is paid off in 7 yrs. And remember that their wages have increased @ 4.5%pa, and their discretionary income has approx doubled.
Here's a picture of a spreadsheet (using your assumptions), showing what happens in reality. Assume wages grow at 4%, houses increase at 7.2%, and they pay down principle over 25 yrs at 7.5% average IR. Also assume they put down 20% deposit on a house worth 5x their salary, ie borrow 4x their $50K salary.
Column G shows the most expensive house they could afford to buy, based on the same constant borrowing 4x salary and putting down a deposit of their existing equity. In Yr 1 it's still 4x salary, plus $50K deposit, after a year of paying principle & price appreciation, their house is worth $268K, their wages are up $2K, so they could afford a slightly more expensive house at $278K, only $10K in real terms better than their current house.
Fast forward 10 yrs..... and after house price appreciation, & paying down principle their house is worth $500K, they have a equity of $342K, and their wages have increased to $74K... so using the same borrow 4x salary, and put down equity as a deposit as a deposit formula, they can afford to buy a $638K house. Their existing house is worth $500K, they can afford to buy a house 27% 'better' at $638K. This 'better' house would have cost them $317K ($250K x 127%) back when they started, so was well out of their price range.
But the most interesting column is Column I. This $638K house costs a whopping 8.6x their salary. They can easily afford to buy because we're still using the borrow 4x salary formula.
All these assumptions are the most conservative... 4% wage increase, paying off mortgage over 25 yrs (& not 7), only borrowing 4x salary (not 5 or more)., never promoted, so no wage increase above inflation.
In terms of a house as being a place to live, and not an investment (and, yes, I might be missing the point of this board), the negative equity scenario is the best outcome if the owner is looking to upgrade.
Sure it's a great theory.... however.... it would need some exceptional circumstances for that scenario to happen. I can think of lots of great theories that would be personally advantageous, unfortunately they bear no resemblance to reality.
Absolute prices are important. I estimate if they get to the 10 - 12x income to price mark, then the repayment on the average house would cost the entire of an average salary.
Absolute wages are important too, as are absolute deposits/equity. Try using average debt instead of using average price.
My grannys pension is $15K(?), her house price/income ratio is 100x..... Demographia would have a field day
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Which begs the question, who's going to buy all these really expensive properties in 20 or 30 years time?
As the spreadsheet above shows, it'll be really average people on really average incomes, who have invested (by default) in property and saved sensibly by paid down principle.
And your grandmother made a very astute purchase.
There was nothing astute about it. It was the cheapest crappiest house in Sydney at the time - it was all they could afford. I guess back then all the 'nice' houses closer in cost 10x their salary
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