By Amanda Morrall (email)
Regular readers of my blog will know that I've come down with a bug; the property bug.
I wrote about it last Friday and was besieged with all manner of advice about whether to stay the hell out of Auckland's over-priced housing market,or suck it up and go forth with caution. Some good value for other prospective first time home buyers in that comment thread.
I'm still sitting on the fence although there were many persuasive arguments pro and cons, so thank you all.
Affordability is the underscoring issue for first time home buyers. I was therefore interested to read this piece published in the Globe and Mail on the "reality test for would-be buyers.'' Worth your time to read if you're in this boat.
The writer, personal finance editor Rob Carrick, makes a very good point on the issue of affordability which is the dangerous and yawning gap between what banks suggests you can afford and what you can actually afford. Given that some banks here are lending at a loan valuation ratio of 95%, there is good reason to be cautious about long-term costs.
You might think that banks, given it's their money (well actually a good chunk of it is money they're holding for you and I so we don't have to put it under our mattresses) would err on the most conservative side to protect their interests.
As Mr. Carrick adroitly points out, the banks will cover their butts sufficiently, naturally, but that risk calculation is not necessarily in your best interests.
Professionals working in the clean-up aisles for those who get in over their head caution borrowers against using the bank's lending criteria to determine affordability.
A fellow quoted in the story suggests that as a measure of affordability, your mortgage payments, rates and insurance should be no more than 30% of your take home pay. Using your gross salary won't give you a meaningful gauge of your actual ability to meet your financial responsibilities.
The argument for using this more conservative estimate is that you'll have a lot more wiggle room if you have a financial emergency, if interest rates go up, or if your circumstances should change. All of these are distinct possibility.
In our home loan affordability calculators and calculations at interest.co.nz we use a benchmark of 40% of take home pay. We also use aggregated averages as a way to price in insurance and rates etc into our home loan affordability report, so it might not necessarily fit your specific circumstances.
I thought I'd provide a few links today for would be home buyers as they pick through the minefield of considerations.
As a starting point, I'll direct to you that story I referenced above.
1) Reality test for would be home buyers
2) Our where can I buy mortgage calculator
I love this one but please note: it doesn't factor in rates or insurance and works off a 40% assumption.
3) First time home buyers report
Chock full of good information to consider; charts, and a region by region affordability guide (updated monthly.)
This is another one to bookmark if you are shopping around. You can plug in the address of the prospective home to buy and find out the rates, the rateable value and land value. I did some snooping yesterday and was surprised to see that my current rental home is worth $130,000 for the building and four times that for the land. The price you pay for living near a beach. This link above is Auckland centric too but you can find the same by going to the local council in whatever region you are eyeing and do some similar cyber snooping.
5) House and contents insurance
The Christchurch earthquake has been a game changer for the house insurance market. It was a harsh lesson for many about reading the fine print closely and more importantly understanding it. The link above will take you to Consumer New Zealand's 2011 house and contents insurance report.
It's a fairly comprehensive report on traps to avoid, rates comparison and policies. It also has some useful tips on ways to save as well as general advice. It's written in print that you can actually see and language you can actually understand.
To read other Take Fives by Amanda Morrall click here. You can also follow Amanda on Twitter@amandamorrall
32 Comments
Q 2. Have you enough equity to overcome 12 months of unemployment or sickness or enough time to sell up? Then add in the possibility of a 10% market drop- what is your equity then?
I believe 25-30% equity is necessary to be comfortable.
So if you do want to spend $600k do you have $200k to cover the deposit and other establishment costs?
For the other $400k mortgage you should not really go for 4x your gross income.
The interesting bit is that if everybody was that conservative, prices would be 20% lower to start with.
I can't believe people still think paying interest on a loan created from NOTHING is a good deal!
How about this? Pay NO interest on a loan that got created by a finger pressing a digit on a bank keyboard!
It's a total farce. And people wonder why we have 'inflation', why your dollar gets worth less and less by the minute, why everyone who takes on ponzi scheme credit ends up living week to week until they almost retire and then BAMM!, you find you can't even afford your rates on your wee pension.
So, perhaps Justice and powerdownkiwi would be kind enough to advise the “suckers” (say, a family with one or two kids, parents earning an average pay) on how to get into their own home without getting a loan and without paying the interest on it. I am sure the “suckers” will be waiting in anticipation…
A13 - I seen to recall a mindset :). There it goes - an expecation that because something is desirable, it must be able to happen indefinitely.
First - the assumption re 'average pay'.I've already posted this here tonight - you obviously haven't bothered to read it:
http://www.chrismartenson.com/blog/trouble-money/73469
So 'average pay' might have been a 'given' in your short existence on the planet, but there was never any guarantee that money (negative pigs - or didn't you read that either) could be cashed in for real stuff.
I suggest to the young folk we have through here - all starting out in life, (most of whom understand limits and sustainability - it's why they visit) that they link up with a compatible older couple. The city way of 'earning money to buy real stuff' will be compromised, and local/personal food and other work will be the way of an energy-deficient future. The oldies are running out of grunt, but have the property. The youngies have the grunt, but are landless. It's not rocket science, the demographics support it, it helps solve the pension problem, is a win-win, and we (partner and I) are effectively doing it already.
silly comment.
If you read the article - you still didn't, did you? - then you'd have realised that the current 'valuations' are unsustainable, and by a good margin (more than BH was suggesting, and for a more concrete reason).
I suggest a method which doesn't include the income they - on average - can't possible get.
As I said before, your problem is that you start from a mindset, one which unfortunately doesn't fit on a finite planet. Time's up for that attitude, but there are different ways. The one I suggest gives them more of their lives not stuck on the treadmill - what's that worth?
Why is it that folk like you refuse to learn, if the learning is going to threaten your currently-held belief/hope? Mortgaged, are we?
Steven - chuckle.
I used to be more tolerant - 30 years ago, when the debate should have been had. Folk like him are the thing that has had me most amazed since then. Perhaps a useful study could be done in Oncology, questioning those who are leaving after their first inkling of bad news.
One suspects there are a minority who have pragmatically said 'well, shit happens, what are my options, what are the chances of outcomes from those options - and when do we start?
I suspect the majority come out going 'I want a second opinion'. There's a further sub-set, of course - those who were too afraid to approach the place in the first instance. Our creed-believing mate might be one of that lot.
:)
Who said that's stupid? You did it when the going was (a) good, and (b) possible. I'm saying that window is now closed. If someone like Amanda takes on a several-hundred-thou mortgage now, I'm saying - and I reckon I can prove - that on average, such mortgages can't/won't be repaid. Even at zero interest. The global-resource underwrite is too short. (that link puts it well)
You don't reconcile your 'retirement' with your 'income', so I can't address that meaningfully. What is your 'income'? How long will it last (read that Martenson piece, look closely at the graphs) ?. Will you be able to retrieve it? Will it buy anything?
There are two basic scenarios, neither of them growth-forever. One is that we have deflation, a lowering of all asset values, and a working-out of debt. That presupposes it happens before energy depletion hits - the Foss view. If energy depletion hits (my view) then there is too much money seeking too few real resources, some of which are essential. I see inflation re the bidding for the essentials, but a rapid drop in the 'values' of discretionalt items - toys etc.
If you read my posts, I am suggesting that the generation which had the easy ride - yours and mine - gives something to the next, which won't. In my own case, we let a young couple use our garden, no money involved, and for more than 50% of the time, we host young folk who want to learn about sustainability, again for no money. We teach what we know, and attempt to pass on our skills - it's our inter-generational pay-back.
I can't help that they're born on a depleted, polluted, over-populated planet, but I can recognise that I was as to blame as anyone, and can attempt to make amends.
Beats denial. :).
There are stages of the process of getting thorugh this, so on occasion, no I have lost sleep.....but Ive mostly got past that.
Morally I find oit very hard. I think back at building and driving powerful cars that did 12~20mpg....had a lot of fun wasted a lot of petrol....what I look at now is my children will be lucky to ever own a car, public transport, bikes & horses seem more probable........I didnt know about Peak Oil etc but such errors still weighs on my thoughts....
regards
Ivan - that's a foolish statement. 42% of the world's electricity is coal-fired, and that's increasing. 85% coal-fired in Australia.
http://www.worldcoal.org/resources/ecoal/ecoal-current-issue/costs-of-coal-fired-electricity/
en.wikipedia.org/wiki/Coal_in_Australia
So - dreams aside, and dealing with current reality, an electric car is largely a coal-car. You need to do your homework, before knocking someone who has.....
There are folk who hype yet-to-be- proven energy sources, and for that matter, yet-to-be-proven carbon-capture systems. As a general rule, if you google them, and get artists impressions rather than photographsof real plants, they don't exist. Just anticipating your next comment.....
:)
but you have no debt which is excellent....so you would seem to have been very sensible with the opportunity given you....and grabbed it with both hands it seems, congrats.
Its not that 20~30 years ago buying made no sense, it did...the problem is buying now at double fair value....ppl getting 95% mortgages are carrying a huge risk of huge losses IMHO.
Your choice is like my one and its complex. Do I sell and rent and use the capital interest to pay the rent? what about the risks of bank default and being left destitite? as the open doors resolution policy leaves my deposits stolen....or do I stay owning my house and accept that I lose paper value Ive never seen, but have a low cost of living in the future?
I have chosen the latter as I think its the most resilient...though im not quite mortgage free....
Happy renting, well home ownership is something that is only dominant for the last 40~60 years or so and given that period of stability it made enough sense to do that. Looking forwards there is no stability I can see....but there are/will be opportunities.
So I expect huge loses in house value, 75% seems possible, but after that has been realised then buying and being a PI/Landlord and renting out seems an interesting possibility.
regards
"Oncology" actually, there are studies on this. Ive certainly read enough articles talking about ppl not wanting to visit the doctor on the first signs of a possible issue, hence leaving it too late for the best possible outcome... It seems the "usual" time is to go finally just before xmas some time down the track from the first inkling.
"Creed" interesting point.....yet here they are fighting our logic with; retoric, lies, smears and attempts at bans rather than simply staying away......are they here hoping to hear from others of their ilk that all is OK and no need to fear? and get upset when they dont see just fellow lemmings? Or do they know its a ponzi but they then are hoping that to keep the it going by fooling others to participate? Olly for instance strikes me as a classic possibilty for the latter, some operator.....teflon comes to mind, have to sort of admire that.
In terms of Peak Oil and AGW for me its pretty clear to me that second, third, fourth etc opinions being sort seem to be the name of the game.....anything to put aside the moral imperitive of having to do something positive....or while they move out leaving just the suckers...for instance the only 3billion for the CDS swaps being triggered from Greece's default seems to suggest this is happening on a considerable scale.
regards
The oldies are running out of grunt, but have the property. The youngies have the grunt, but are landless. It's not rocket science, the demographics support it, it helps solve the pension problem, is a win-win, and we (partner and I) are effectively doing it already.
PDK. I can see the merit in your point ..but you would need to factor in Oldies still selling to the top bidder which in the developing demographic , particularly in the Auckland Metro area that bid would most likely be from offshore money.
While your suggestion has merit .I might suggest you deliver with a little more tact......suckers losers etc...does not make for a receptive audience.....I think alex13 found your tone a tad patronising...always difficult to swallow when your not in the position of advantage...and appears to reflect an "Im alright Jack" attitude wether intended or not.
Count - good thoughts. I don't give a tuppenny what A13 thinks of me; when folk stick to mantra without further investigation/debate, they relegate themselves.
And I make no apologies for seeing it earlier than some, or for being further down the track - there's always a bell-curve....
Yep, it's hard to swallow, but there are three times as many on the planet, as there were when my Dad was born. Without depletion, that makes someone born today 2/3 poorer, from a standing start. Add depletion (oil, etc) and it's worse. A shyte sandwich.
I wasn't advocating selling oldies-to-youngies, I meant a co-habitation baton-change. If you keep immigration emigrated, there will be enough houses to go round given the demographics. You raise a valid point, though - overseas ownership of anything is a potential trouble for future Kiwis. (Mind you, that Martenson graph suggests that the overseas 'investment', may also lack underwriting).
Cheers PDK....but I think it's tip of the iceberg stuff where Chinese Nationals investments are concerned......and I'm sure the fat man is thinking ...I wonder if we could interest them in a slice of the rebuild..?
The big three may yet become known in infamy as The Fastboys .
Count - yep, it's happening fast. Not surprising, the race amongst the folk who have worked out what is happening, is to tangible assets. When the dust settles - whether it's inflation, deflation, or implosion - real assets are the wealth to hold.
The turkeys will miss out, and even those of us who saw it coming, may be squeezed (I can't avoid paying rates for a Staduim, for instance).
In this moat-protected, relatively socially-cohesive country, there will come a time when we nationalise what we have lost, and it will happen when enough of us have little to lose.
What we need is a 'pollie who says it like it is - and Shearer certainly hasn't even found the ball, let alone dropped it.
"there will come a time" I think you are right....just look at Argentina as a "great" example of the future...which is interesting when you consider how many foreigners own NZ assets.......say farms and say expect to ship the food elsewhere/home in the future....
"moat" I think it might get to look a bit small...unlike the titanic lifeboats opening up the distance, we cant move but of course fuel scarcity might achieve the same thing....and when we look at the likes of Shearer and his cronies using force to stop the flood of migrants seems un-likely, interesting moral dilemma......
regards
You start from the faulty assumption they have to own their own home....they dont.
Then they have to be able to meet the payments and when housing is 50% over-valued its potty to buy...
Beyond that basic thing you only pay for anything you can get a return on.....
For instance I use Hire plus for tools I use rarely or cant afford but buy. Makita/dewalt/aeg for ones I will use frequently and for years....or I buy ozito say for something that will get light but long term use but is cheaper than hire plus. So a plate cutter for $135 for occasional use makes sense when the makita is $750.....but buy a makita power drill for $130 v a ozito for $75, I know the former will last me 15+ years the latter at most 5.
Do the sums......
regards
Many thanks crooked thumb. Did my stint in chch, four years. My friends still haven't forgiven me for leaving.
I was gutted to leave my Clifton hill outpost for the rent I was paying!
P.s. Yoga is a natural anti-aging remedy. Can't say enough good things about it.
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