The attached spreadsheet attempts to show why average house price growth outstrips average wage growth and CPI.
Assumptions -
Alongside the 40 year history of Mr Green, is shown a potential first home buyer (Mr Gray). He's a new FBH is attempting to enter the market for a PPOR - all of which are owned by people like Mr Green. Each new FHB has 4% more starting wage than the previous years FHB, and the average house price grows by 7.2%pa.
The Output
Shows the reason house prices grow at more than wage growth or CPI is that every home owner has had growth (just like an IP investor). He's also paid off principle every month rather than rent.
The result is that after a few years, paying down principle and the natural growth in his PPOR means he can afford to put down a larger deposit when he upgrades. This means their LVR is relatively low and also that they can service the relatively smaller loan.
Conclusions
Feel free to change the assumptions in the blue cells.
And duplicate the bottom line 10 times to see the full 40 yr term - my spreadsheet was 100.5Kb & wouldn't upload, so I deleted the last 10 lines.
Assumptions -
- An average guy (Mr Green) on an average wage buys a house he can afford at 5 times his annual salary - so $50Kpa allows him to buy a $250K house.
- He puts down a 20% cash deposit
- His house grows in value at 7.2%pa every year
- His wages grows at 6% pa - I assumed that it grows in line with average wages at 4%, and also added 2% because of his promotions.
- He upgrades his house after 10 years and 20 years
- He doesn't pay off any extra even though he can afford to
- He has a 30 yr P&I loan for the 1st 2 houses and a 20yr P&I for the 3rd house
- He puts the whole of the profit from the house he sells down as a deposit for the next house
- There's no transaction costs
- It's human nature to want a bigger & more expensive house
Alongside the 40 year history of Mr Green, is shown a potential first home buyer (Mr Gray). He's a new FBH is attempting to enter the market for a PPOR - all of which are owned by people like Mr Green. Each new FHB has 4% more starting wage than the previous years FHB, and the average house price grows by 7.2%pa.
The Output
Shows the reason house prices grow at more than wage growth or CPI is that every home owner has had growth (just like an IP investor). He's also paid off principle every month rather than rent.
The result is that after a few years, paying down principle and the natural growth in his PPOR means he can afford to put down a larger deposit when he upgrades. This means their LVR is relatively low and also that they can service the relatively smaller loan.
Conclusions
- it's not investors pushing up house prices - it's existing OOs who have big deposits from the sale of their previous PPOR
- for most FHB the best option is to save a deposit on a below average priced PPOR, pay down the principle quickly and upgrade when possbile.
Feel free to change the assumptions in the blue cells.
And duplicate the bottom line 10 times to see the full 40 yr term - my spreadsheet was 100.5Kb & wouldn't upload, so I deleted the last 10 lines.
