Hi
Following on from my post yesterday about " What to expect from the Australian property market" a few readers have asked why I would be interested in monitoring affordability and mortgage stress?
This is a cautionary tale for first home buyers and suburbs that have experienced recent growth on the back of first home buyer and buyer activity.
Well I was a Buyers Agent in Perth in 2006-2007 and purchased property for investors and home owners. I purchased about 50 properties in 12 months and conducted a high level of research.
I observed the Perth Western Australia boom and in particular one area called Kwinana which predominantly had 3 bed, 1 bath B & T houses on 728sqm single residential lots. Property prices went up very fast. For example in one period of 6 months these basic houses went up by $7k to $8K per month. With no add value like renovation. It was pure demand and suburb location growth. see the Town of Kwinana http://www.kwinana.wa.gov.au/ to check out the location.
I had associates buy property in Kwinana and a suburb called Medina. The price surge was indeed unsustainable, it peaked then prices went bust. See the case study below which I wrote in August 2009. Prices have fallen and interest rates are now heading up.
Negative equity case study - first home owner purchase of house in Medina in Kwinana south of Perth
Initial purchase of 3 bed, 1 bath house on 728sqm lot for $275,000 e.g. Medina in Kwinana in Western Australia in Jan 2007 (peak of cycle) – see the Medina Median House Price Chart & hover your cursor over the 2007 date. http://reiwa.com.au/res/res-suburb-...SC51916&geogroup_id=1722&geogroup_parent_id=3
Check out the median price in 2005. It was $155,000 and then peaked at $275,000 in 2007. A $120,000 increase over 24 months. Off the base of $155,000 and increase of $120,000 that is a 77% increase over 2 years. Hello does that look sustainable?
For price growth rates and suburb profile see Real Estate Institute of WA (REIWA) Medina Median House Price Chart . Medina price growth over last 1 year is – 16.4% and comparable to the Perth Metro Region price growth over last year is – 6.5%. This is against the backdrop of record low interest rates. http://reiwa.com.au/res/res-suburb-...SC51916&geogroup_id=1722&geogroup_parent_id=3
In Feb 2010 Medina price growth over last 1 year is – 11.5% and comparable to the Perth Metro Region price growth over last year is 3.0%.
Loan to value ratio was 90% . The loan was $247,500 in Jan 2007.
In 2009 the price has dropped to $ 230,000 (18% drop from $275,000 ) see the Medina Median House Price Chart & hover your cursor over the 2009 date which indicates a median price of $230,000. http://reiwa.com.au/res/res-suburb-...SC51916&geogroup_id=1722&geogroup_parent_id=3
The home owner is now in a negative equity scenario of $17,500
(NB be aware that in July 2009 interest rates are on the rise and unemployment is on the rise. There is a risk that suburb mortgage stress will increase resulting in premature sales and forced sales. Beyond this risk property prices may remain flat or drop further.)
Option one for the home owner with negative equity
Option two for the home owner with negative equity
Risks for home owners with negative equity
Results in
Any buyer could easily review the 2006 ABS census data for Medina and quickly understand that housing loan affordability was low in Medina and the Kwinana area. That average family incomes could only sustain the purchase of property at just below $300,000.
Any higher than that property was highly unaffordable until wages increased enough and other wealth factors came into play.
see here ABC Census 2006 Medina Community Profile
http://www.censusdata.abs.gov.au/AB...ype=Community Profiles&&producttype=Community
And review
B26 Gross Family Income by Family Composition
B28 Gross Household Income by Household Composition
B22 Housing Loan Repayment by Dwelling Structure
or any other factor
It made sense that the market was going to peak just below $300,000 and it did peak at that level.
So the poor first home buyers and buyers who bought in at the peak of the market are locked in now. For how long?? who knows. So their personal financial circumstances might change like in the scenarios above.
Should the investing community care?
Not my problem?
Or is it in the best interest of the Government and the investing community to protect buyers from bank fire sales as property values can decline quickly.
Who wants their investment property market value stripped away by forced low price sales?
What do you think?
Following on from my post yesterday about " What to expect from the Australian property market" a few readers have asked why I would be interested in monitoring affordability and mortgage stress?
This is a cautionary tale for first home buyers and suburbs that have experienced recent growth on the back of first home buyer and buyer activity.
Well I was a Buyers Agent in Perth in 2006-2007 and purchased property for investors and home owners. I purchased about 50 properties in 12 months and conducted a high level of research.
I observed the Perth Western Australia boom and in particular one area called Kwinana which predominantly had 3 bed, 1 bath B & T houses on 728sqm single residential lots. Property prices went up very fast. For example in one period of 6 months these basic houses went up by $7k to $8K per month. With no add value like renovation. It was pure demand and suburb location growth. see the Town of Kwinana http://www.kwinana.wa.gov.au/ to check out the location.
I had associates buy property in Kwinana and a suburb called Medina. The price surge was indeed unsustainable, it peaked then prices went bust. See the case study below which I wrote in August 2009. Prices have fallen and interest rates are now heading up.
Negative equity case study - first home owner purchase of house in Medina in Kwinana south of Perth
Initial purchase of 3 bed, 1 bath house on 728sqm lot for $275,000 e.g. Medina in Kwinana in Western Australia in Jan 2007 (peak of cycle) – see the Medina Median House Price Chart & hover your cursor over the 2007 date. http://reiwa.com.au/res/res-suburb-...SC51916&geogroup_id=1722&geogroup_parent_id=3
Check out the median price in 2005. It was $155,000 and then peaked at $275,000 in 2007. A $120,000 increase over 24 months. Off the base of $155,000 and increase of $120,000 that is a 77% increase over 2 years. Hello does that look sustainable?
For price growth rates and suburb profile see Real Estate Institute of WA (REIWA) Medina Median House Price Chart . Medina price growth over last 1 year is – 16.4% and comparable to the Perth Metro Region price growth over last year is – 6.5%. This is against the backdrop of record low interest rates. http://reiwa.com.au/res/res-suburb-...SC51916&geogroup_id=1722&geogroup_parent_id=3
In Feb 2010 Medina price growth over last 1 year is – 11.5% and comparable to the Perth Metro Region price growth over last year is 3.0%.
Loan to value ratio was 90% . The loan was $247,500 in Jan 2007.
In 2009 the price has dropped to $ 230,000 (18% drop from $275,000 ) see the Medina Median House Price Chart & hover your cursor over the 2009 date which indicates a median price of $230,000. http://reiwa.com.au/res/res-suburb-...SC51916&geogroup_id=1722&geogroup_parent_id=3
The home owner is now in a negative equity scenario of $17,500
(NB be aware that in July 2009 interest rates are on the rise and unemployment is on the rise. There is a risk that suburb mortgage stress will increase resulting in premature sales and forced sales. Beyond this risk property prices may remain flat or drop further.)
Option one for the home owner with negative equity
- Continue to pay mortgage and service loan(s) – lender wins
- Nil growth in equity – cannot borrow against the property or ? apply for unsecured loan.
- Home owner will/may reduce fixed and variable costs – not spending as much on a retail level – Gov loses
- Increased dependence on Gov welfare services – Gov and borrower lose
- Increased dependence on Gov education services – Gov and borrower lose
- Cannot move house – borrower loses
- Not selling property – Gov and borrower lose
- Not buying property – Gov and borrower lose
- Overall decreased spending in the general economy – Gov lose
- More disposable income spent on bank interest and bank fees. The lender has the borrower locked in and the lender has the advantage
Option two for the home owner with negative equity
- Sell the property at market worth $230,000 ? or below market worth – with a realistic understanding it is a flat or falling market. Lender wins the borrower loses.
- Sustain a loss with consideration of cost of sale eg 3% selling fee $8100, settlement costs etc
- If sold below market worth a personal loan may be required to cover shortfall – lender wins
- Equity loss for home owner – borrower risk
- First home owners grant value is lost – Gov and borrower lose
- Shared equity scheme value is lost – Gov and borrower lose
- Stamp duty on property purchase value is lost by the home owner – borrower loss
- Home owner then rent privately or apply for public housing – Gov and borrower lose
- Increased dependence on Gov public housing services – Gov and borrower lose
- Increased dependence on Gov welfare services – Gov and borrower lose
- Increased dependence on Gov education services – Gov and borrower lose
- Nil tax deductions for the home owner
- Borrower then must rebuild equity and deposit for next purchase
- Not buying property for 3 to 5 years – Gov and borrower lose
- Overall decreased spending in the general economy – Gov loss
- The borrower loses and the lender again wins
Risks for home owners with negative equity
- Unexpected unemployment
- Illness
- Injury
- Decreased hours (income) at work
- Second job income decreased or disappears
Results in
- Arrears, default, possession and fire sale.
- Equity loss or personal loan debt for shortfall
- Borrower rents privately, with homeswest, or stay with family or friends
- Displacement of family
- Remaining debt burden
- Credit rating loss
- Reliance on Gov services e.g. housing, health, education, legal and other
- Reliance on unemployment benefits
- Family instability and breakdown
Any buyer could easily review the 2006 ABS census data for Medina and quickly understand that housing loan affordability was low in Medina and the Kwinana area. That average family incomes could only sustain the purchase of property at just below $300,000.
Any higher than that property was highly unaffordable until wages increased enough and other wealth factors came into play.
see here ABC Census 2006 Medina Community Profile
http://www.censusdata.abs.gov.au/AB...ype=Community Profiles&&producttype=Community
And review
B26 Gross Family Income by Family Composition
B28 Gross Household Income by Household Composition
B22 Housing Loan Repayment by Dwelling Structure
or any other factor
It made sense that the market was going to peak just below $300,000 and it did peak at that level.
So the poor first home buyers and buyers who bought in at the peak of the market are locked in now. For how long?? who knows. So their personal financial circumstances might change like in the scenarios above.
Should the investing community care?
Not my problem?
Or is it in the best interest of the Government and the investing community to protect buyers from bank fire sales as property values can decline quickly.
Who wants their investment property market value stripped away by forced low price sales?
What do you think?