Hmm all part of the cycle.
Delloite Access Economics have a great moving chart of periods of 'undervalued and overvalued' over time. According to them, over the last 15 year period there have both been periods where housing was undervalued and periods where they have been overvalued.
I believe they factored in a lot more than price to income and price to rent multiples in their models too.
Ps thanks for the link!
Hi Redom, could you please provide the link for this useful information. It would be really helpful if it provides chart for the state also. Thanks in advance.
So the sustainability of a long term commitment should be measured on the basis of whatever interest rates are right at this moment?
The price/rent & price/income ratios don't take the biggest expense into account, so the income/interest paid ratio is an improvement over those measures.So the sustainability of a long term commitment should be measured on the basis of whatever interest rates are right at this moment?
Just because something can be serviced with the same initial payments doesn't mean that it's equally as affordable.The price/rent & price/income ratios don't take the biggest expense into account, so the income/interest paid ratio is an improvement over those measures.
The 1st year of a house purchase is the hardest. After a bit of wage inflation the 2nd yr is a bit easier, and so on, until yr 25 when it's free.... OTOH renting, while a little cheaper in the early years, is far more expensive in yr 25.
The RBA who published the chart presumably feel it's relevant, and are likely to reference it when making IR decisions - so Yes it is sustainable.
Is it safe to conclude that you think ratios/charts that take into account only 2 of the 3 most significant variables are better than one that takes all 3 into account ?Just because something can be serviced with the same initial payments doesn't mean that it's equally as affordable.
Did you miss the bit about 'new normal' and low interest rates for the foreseeable future ?$300,000 borrowed @ 6%
Repayments of $2000 per month
23 years, 2 months to payoff loan
Total repayments = $555,903
$150,000 borrowed @ 12%
Repayments of $2000 per month
11 years, 7 months to payoff
Total repayments = $278,643
That's a completely different strawman. We both know that the vast majority of renters don't put the $$$ they save by renting into something that produces better returns than a PPOR.Depends on what the renter does with the savings in the initial years.
The point I was making is that the largest expense (ie interest) disappears. The RBA rarely publishes charts/ratios that include trivialities such as maintenance, rates & insurance - do you feel that is important ?Even owned outright a PPOR isn't "free" to maintain.
I agree entirely, and if they feel that the interest paid/income ratio is not sustainable they will act accordingly. It's important to look forward at likely scenarios, and not backwards. Just because we once had IRs of 20%, doesn't mean they WILL happen again in the short/medium term. And in the long term (25yrs) a PPOR is free housing for anyone who starts now.The RBA also has a job to maintain financial stability and will do what it takes to achieve that.....
Conspiracy theory much ?.....[RBA] publishing data and opinion that downplays risk.
The chart is correctly labeled as income/interest paid ratio ..... my post incorrectly called it interest paid/price.wouldnt a chart of House prices to interest paymetns also be ambiguous as it would depend on what the loans are, ie in an environment where everyone is doing 105% loans then the repayemtns would be higher then say when everyone is doing 80% loans
So replace example with 4.5% & 9%. The point is that lower rates/higher prices relative to income doesn't make it more affordable.Did you miss the bit about 'new normal' and low interest rates for the foreseeable future ? 10/15yr fixed rates of <7% ?
Not really. It's called jawboning and the RBA does it all the time (for various reasons). If you don't think they downplay financial risk, you are the one with the tinfoil hatConspiracy theory much ?
So are you saying higher rates/lower prices make it more affordable ?So replace example with 4.5% & 9%. The point is that lower rates/higher prices relative to income doesn't make it more affordable.
Irrelevant. The point is that the market thinks that IRs for the next 10-15 yrs will average around 7%.How many borrowers take out 10-15 year fixed rates?
I think I saw a stat the other day that puts 85% of borrowers on variable.
The market thinks that your scenario is unlikely - IRs will NOT be rising 'only a couple' of %', while incomes will continue to creep up, and people will get promotions & consequently their income will increase faster than the average.You talk about incomes creeping up making it easier to repay over time, but we have low income growth at present and rates only rising a couple of % could blow out the cost of a mortgage 30% or more.
Not as far as housing is concerned -all their recent rhetoric (for over a decade) has been emphasising how risky housing is.It's called jawboning and the RBA does it all the time (for various reasons). If you don't think they downplay financial risk, you are the one with the tinfoil hat
Clearly. Serviceability ≠ affordability.So are you saying higher rates/lower prices make it more affordable ?
It's not a very relevant measure for overvalued/undervalued prices, it makes more sense to measure against income &/or rent.Are you saying that the RBS Income/interest paid chart is not worthy of consideration ?
It's not a very relevant measure for overvalued/undervalued prices, it makes more sense to measure against income &/or rent.
If you think that it's a relevant measure, then I'd be interested in your take on when housing has been overvalued using that measure [e.g. when it goes above 12% (once in the last 20 years), when it goes above 10% (half the last decade)]? Or is it just that Australian property has never been overvalued?
Clearly. Serviceability ≠ affordability.
Pointing at higher prices/lower rates and saying housing is affordable because the debt can be serviced is a farce when the total repaid & risk are both substantially higher (with the house price to income ratio having doubled).
An environment with higher interest rates would also indicate higher levels of inflation, which reduces the debt burden faster.
I have a problem measuring affordability using a snapshot in time or making assumptions such as rates will always stay low, incomes will increase at the rate they have in the past, etc.I think if your measuring current 'affordability' of house prices, serviceability is a key factor.
When looking at affordability over time, current serviceability doesn't mean much as the interest rate will have a very large bearing on the serviceability.
Unfortunately this isn't all that well priced in - its what the RBA are worried about and keep harping on about fearing people overextend themselves by relying on todays interest rate.