A week or so ago, Interest.co.nz published the latest home affordability information (you can read the full article here). It’s great to see there is finally some good news for first home buyers it has been a long time coming.
According to the article, in the lower quartile, (the cheaper end of the market), the selling price was $566,000, on a slightly lower mortgage rate of 6.89%. Another little bit of good news is the estimate for after-tax pay for a young couple both working fulltime, has crept up a little to $2,059 per week.
The article includes a very helpful home affordability table for either a 10% or 20% deposit. As I’m moving to the Tasman region in a couple of weeks, I’ve picked Nelson out of the list of home buying spots for the purpose of this exercise. You need to save $57,000 for a 10% deposit, which will take just under 3 years to achieve. Your mortgage will be $513,000 and your mortgage payment will be $875.00 per week, with after-tax income just under $2,000 your affordability as a % of your income is 44.7%. For our purposes anything over 40% is considered unaffordable. The homeownership dream isn’t looking quite so good.
I know I don’t usually quote statistics or numbers at you, but I just couldn’t help myself in light of another article that popped up on my radar.
Yes, Dave Ramsey, a name synonymous with financial wisdom, has found his real estate advice under the microscope - a recent buzz on social media questions the feasibility of his mortgage recommendations. "Can the average American realistically follow Dave Ramsey's mortgage advice?" one might wonder, echoing a sentiment prevalent on platforms like Reddit.
Ramsey advocates for purchasing homes outright (WHAT! If it takes 3 years to save a 10% deposit, most of us would be heading towards retirement before we were at the point where we could purchase our first home!) or, if that's not an option, opting for a conventional, fixed-rate mortgage over 15 years or less, ensuring the monthly payment is at most 25% of your take-home pay. This is considerably lower than the 40% we work on here in NZ. While sound in theory, applying Ramsey's advice in practice sparks debate.
Let's dive into the numbers: With US homes' median price around $402,045 in December 2023 ($164,00 below our cheaper houses) securing a home at this price point - with a 20% down payment - means a mortgage principal of $320,000. At a 6.66% interest rate, (not too far off our interest rates) monthly payments hover around $2,815. To keep costs within the advised 25% of take-home pay, one's monthly income before taxes should be at least $11,260. This figure starkly contrasts the median household income, pointing to a significant disparity.
If I look at the Nelson figures with a 20% deposit, the affordability comes down to 35.3%, still 10% away from Dave Ramsey's advice.
Critics argue this advice may seem disconnected from many Americans' economic realities, especially considering the median household income. The conversation brings to light the challenge of balancing Ramsey's guidelines with the diverse financial landscapes across the U.S.
I’d like to add our diverse financial landscape in here as well.
Ramsey's stance remains firm, emphasising the importance of adhering to financial principles, regardless of the market's state. "You don't get a pass on math," he asserts, highlighting the risks of becoming "house poor." His advice encourages a critical evaluation of one's financial ability to sustain homeownership in high-cost areas, underscoring the necessity of living within one's means.
I think this is the main point that Dave Ramsey is making; if you put yourself under additional pressure just to buy a house, is it really a good financial decision? That is what we all need to think about in our own economic environment.
I’m not saying Dave Ramsey is right or wrong, he has he own opinions and he is quite vocal in sharing them. We could also argue that we are a much smaller country with less options and choose about where we live in terms of being able to earn income. And I’m sure you will come up with many other points of difference.
What I do want you to think about is this; at what point does the pressure of having a mortgage and spending, in some cases, more than 50% of your income on your mortgage payments change your home ownership dream into a nightmare?
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"...at what point does the pressure of having a mortgage and spending, in some cases, more than 50% of your income on your mortgage payments change your home ownership dream into a nightmare?"
The point at which the forseeable negatives, realistic alternatives & opportunity costs outweigh the dream.
Forseeable benefits of ownership include avoiding unstable home environments (esp when kids involved) & homelessness in old age. Building your own equity/wealth instead of helping others to do it via dead rent.
I bought a (first) house in December. I was aiming for a mortgage no more than three times my salary, which I achieved, but it required moving to the sticks. Doing the math, by Ramsey's yardstick I'm at 31% rather than his maximum of 25%. It's not as comfortable as we'd like so I think there's logic in his 25% figure. It is hard to achieve though; maybe need to head to Westport or Invercargill if you really want to hit it. There is work in provincial towns, and classes have good student:teacher ratios.
These people are not able to hold on may have to sell. They took on too much debt. They believed that owning a home was better than renting and bought.
"She says she thought being a home-owner would benefit her family but it has done the opposite and they have a low quality of life with very little left over in the budget after the bills are paid.
"Both my partner and I work full-time but we can't save anymore. We have this asset sitting there but our quality of life is bad."
Stacey - who works as a property manager, is doing anything she can to generate more money including selling all their camping gear and cleaning houses on the weekends and after-hours.
"We're just an average hard-working family and we don't qualify for any help. Our new Prime Minister said he would work at helping the squeezed middle. We're a prime example of the squeezed middle that was promised help and none has come and we have no quality of life."
"We can't afford dentists, we can't afford holidays or any activities at all for that matter. We cannot eat out or buy takeaways. It's a pretty dire situation when you have a hard-working family struggling to get by," says Howden.
She and her partner are now considering selling and going back to renting or buying a cheaper house to bring their mortgage down."
https://www.newshub.co.nz/home/money/2024/02/cost-of-living-crisis-high…
All this is a consequence of her choice to buy an apartment and take on a high amount of debt relative to income.
https://youtu.be/Nomji5pmhEU?t=158
"I work, I sleep, I eat. That's about it." - that doesn't seem like someone who is happy. To me, it seems like misery.
No Pain-No Gain. What couples like this need to focus on it two things: 1) Average Auckland Household Income increased by $50,000 from 2016 to 2023. Likely to grow again in ext 7 years. 2) Within that time period there Principal will start declining. Every month that Principal repayment represents there Savings. Nothing could be worse for a family than the otherwise likely outcome of Rent doubling every 20 years or less, and entering retirement paying rent--then your life will be without possibilities.
If all buyers would act according to Ramsey, house prices would have never gotten so bad that people take a 30 year mortgage with repayments exceeding 50% of their take home pay.
But banks will tempt people to take more and more debt and pay it off for longer.
Also, if people don't buy the homes they live in, investors will buy them as it makes financially sense to them.
This creates the FOMO that drives people to bid up prices higher and higher.
Personally, we started in 2021 with repayments taking approximately 25% of take home pay (30yrs term) but this has since jumped to 40%.
Well, I guess shit happens but at least we're able to hold on to our home for longer than a lot of people out there, which is why these rules of thumb make sense.
You don't want to be one of the first at risk of going down. By the time you start feeling the heat, interest rates should be well on the way down.
Thank you for sharing your insights on the housing market and personal experiences. Your journey highlights the importance of being prudent and adaptable in managing homeownership expenses over time. Holding onto your home amid shifting financial landscapes is indeed commendable.
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