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They don't look at affordability, they look at serviceability. That's why they use serviceability calculators.Banks do not look at affordability using a snap shot in time
Might want to redo the math on that.add in a buffer of around 2%, an increase of around 20% on what most people are paying.
They don't look at affordability, they look at serviceability. That's why they use serviceability calculators.
Serviceability ≠ affordability.
Might want to redo the math on that.
They don't look at affordability, they look at serviceability. That's why they use serviceability calculators.
Serviceability ≠ affordability.
Might want to redo the math on that.
Yes, the bank calculations add in a 40% buffer not 20% and who knows other than yourself what the economy may be doing by the time interest rates are up 2%.
Does that leave the calcs. as
Serviceability= affordability + 40%
I'll stick with walking the walk you can stick with talking the talk
I think that explains a lot of your issues. The markets v. strong view is that the new normal is low rates - that is a safe assumption. You can absolutely guarantee it when you fix for 15 yrs at 7%. Why aren't you also making that assumption ?I have a problem ..... making assumptions such as rates will always stay low, incomes will increase at the rate they have in the past, etc.
If you can mitigate the rate risk, then would you agree that there is little difference between definitions 1 and 2 ?Here are two definitions of 'afford':
1. Afford: To have the financial means for; bear the cost of.
2. Afford: To manage or bear without disadvantage or risk to oneself.
Some think that the first defines affordability, if the household has the means to purchase a house (/service the loan) with everything as it stands today, then they can afford it. I lean toward the second definition which is a more holistic view, which is important when looking at a decision that will affect the buyer for many years. In my opinion a household taking on an amount of debt that couldn't be afforded should rates normalize is not able to afford it (as it's a real risk). Which is why I said above:
Serviceability ≠ affordability.
Because that's not what a majority of people in Australia do (fix rates long term).I think that explains a lot of your issues. The markets v. strong view is that the new normal is low rates - that is a safe assumption. You can absolutely guarantee it when you fix for 15 yrs at 7%. Why aren't you also making that assumption ?
When I talk about lack of affordability, I am talking in a general sense/on a national scale, it can differ between states and the actions of the majority sway my judgement. But yes on a case by case basis if a household takes appropriate measures to protect themselves then the property they buy may be affordable... as I wrote last year:If you can mitigate the rate risk, then would you agree that there is little difference between definitions 1 and 2 ?
Out of interest, when would you consider housing affordable ?
http://www.bullionbaron.com/2013/08/whats-next-for-adelaide-property-prices.htmlI would never discourage others who want the stability of ownership and are prepared to treat housing as a consumable (rather than an investment) from buying. If you have a healthy deposit (preferably one that will help you avoid LMI), fixed interest rate (or able to service higher interest rates), protect yourself (income protection, cash buffer, etc) and expect to stay in the property you purchase for the long term (until mortgage paid off), then it shouldn't matter what prices do (rise, fall or stagnate).
I don't have a one track mind.
Some cities are more overvalued/undervalued than others.
Have owned property, will buy again.
Correct.I know bugger all about property economics. I do see a trend though, reading through these forums and other sources it looks like the naysayers always predict a big downturn every time the property market has positive news and an upswing. this 'big downturn' never comes though. Sure maybe one day there might be a 15% drop in the market but if you buy well this shouldn't affect you too much, and in the mean time while certain people are waiting for this downturn to happen there are plenty of people getting rich through property investing.
Also true.Also i have never brought into the commonly used phrase of housing being unaffordable. i know we are talking about property being overvalued not unaffordable, but its another topic that the naysayers are always going on about. Sure if you have a couple of kids and your household income is 80k then your not going to be able to buy a million dollar inner city home...but thats a given. there are affordable housing options for everybody on any income if they want it.
cheers
blair
I think that explains a lot of your issues. The markets v. strong view is that the new normal is low rates - that is a safe assumption. You can absolutely guarantee it when you fix for 15 yrs at 7%. Why aren't you also making that assumption ?
As you consider rates to be unpredictable, then surely you will always consider housing to be to high risk ? Regardless of the fact that you are offered v. long term fixed IRs are at historic lows.Because that's not what a majority of people in Australia do (fix rates long term).
How accurate has "the market" been when looking out 2-3 years at interest rates? From my anecdotal observations, not very. If you have a measure that shows the markets medium - long term view on interest rates has been consistently accurate I would be interested to see what it is, sounds like guaranteed profit
If you can mitigate the rate risk, then would you agree that there is little difference between definitions 1 and 2 ?
Out of interest, when would you consider housing affordable ?
When I asked when would you consider housing affordable ?, I was hoping for an answer like when IRs are at X% & price/income ratios are Y & ...., not a non-answer like 'on a case by case basis... with appropriate measures..... actions of others'. Are you waiting until price/income ratios get back to 3x ?When I talk about lack of affordability, I am talking in a general sense/on a national scale, it can differ between states and the actions of the majority sway my judgement. But yes on a case by case basis if a household takes appropriate measures to protect themselves then the property they buy may be affordable...
So are you saying there's no market proof that low rates forever is a "safe assumption" as you previously implied?As you consider rates to be unpredictable, then surely you will always consider housing to be to high risk ? Regardless of the fact that you are offered v. long term fixed IRs are at historic lows.
I think you are too closely mixing "affordability" with "overvalued/undervalued" discussion, as Redom noted there's a difference.When I asked when would you consider housing affordable ?, I was hoping for an answer like when IRs are at X% & price/income ratios are Y & ...., not a non-answer like 'on a case by case basis... with appropriate measures..... actions of others'. Are you waiting until price/income ratios get back to 3x ?
Every house that sells qualifies for your 1st affordability definition. And these days lenders ensure the vast majority of those also qualify for your 2nd definition.
I don't understand your Q. 'forever' isn't a time frame I'm interested in - 15 yrs is a far more interesting time frame & we have a guarantee of that.So are you saying there's no market proof that low rates forever is a "safe assumption" as you previously implied?
I think you're basing valuation on an overly backward looking measure, and not a more recent past & forward looking basis... see below.I think you are too closely mixing "affordability" with "overvalued/undervalued" discussion, as Redom noted there's a difference.
The last 10 yrs of your chart shows that price/income ratio ranges from 4.0 to 4.5 for >90% of the time.... for all of this time we have had a low rate environment. The 10 yrs prior to that the P/I is around 3.0... for that period we were not in a low rate environment. We've established the market is expecting a low rate environment for the next 15 yrs. So as a buyer the odds would favour the P/I ratio to remain in the 4-4.5 band rather than revert to the 3.0 ratio. If one were to wait another 15 yrs until there is a possibility of a structural change a PPOR buyer would probably have wasted over half their working life. And in that 25 years prices are likely to have quadrupled. Of course, there are a few who will stick to their principles & theories that a P/I ratio of 3.0-3.5 is the 'right' ratio, but that reversion is likely to come about only after more price rises.It's too difficult to answer your question on price to income (as there have been various measures published and not every city is on the same cycle)... I think this chart shows that cyclical lows have developed around 3.5-4 on a national level, but I do think there is a risk of it heading below 3.5 in a more significant correction if Australia were to be hit by a shock/recession, etc.
I don't think a return to 3.0 is likely (as a long term average), though it could head that low in a severe correction.So as a buyer the odds would favour the P/I ratio to remain in the 4-4.5 band rather than revert to the 3.0 ratio.