Finance advice

Mortgages ‘not expensive relative to rent’, finds bank

By Annie Kane
Mortgages ‘not expensive relative to rent’, finds bank

Rental payments are taking up a greater proportion of household income, while mortgage payments remain in line with the historical average, which could boost housing demand, a global bank has said.

Deutsche Bank’s Australian Housing Update has found that Australians are now paying 13.5 per cent of their household income on rent, up from the historical average of 12.8 per cent.

However, the bank also found that mortgage repayments (as a percentage of household income) remain in line with the historical average of around 17 per cent, which the bank argues “implies a continued move toward home ownership”.

Moreover, despite claims that many are facing “mortgage stress”, the bank argues that housing affordability has actually improved, even in the face of rising house prices. It states that this is largely due to interest costs.

The report reads: “Australian annualised median house prices to September 2016 have increased +0.6 per cent qoq [quarter-on-quarter] and +4 per cent yoy [year-on-year] on a weighted average basis, compared to an average qoq price growth of 1.5 per cent per quarter since QD12 [December quarter 2012].

“We note that annualised median house prices have increased in all major state capital cities (except in PerthPerth, TAS Perth, WA, -3.6 per cent yoy) on a yoy basis in September 2016 (highest of 6.3 per cent yoy and 4.4 per cent yoy in Sydney and Melbourne respectively in QS16)…

“Home loan affordability (which is the ratio of median family income to average loan repayments; an increasing value reflects improving affordability of housing loans) increased +7.3 per cent yoy in QS16 [the September quarter 2016], and is in line compared with the historical average.

“Home loan affordability [as calculated by the REIA] has improved in all the states on a yoy-basis in QS16 (+7 per cent yoy in NSW and +10 per cent yoy in VIC)…

“We believe interest cost as a percentage of median household income is the key driver for affordability.”

Analysis run down

The bank’s analysis took the current house price and standard variable mortgage rate to calculate the weekly interest cost on a state basis. It then took average weekly income on a state basis to calculate the percentage of household income used to repay mortgage interest.

It found that in Sydney, the average weekly mortgage interest payment/average weekly income increased from a recent low of 50 per cent in the July quarter of 2013 to 63.6 per cent in QS16.

The bank argues that while this is “higher than the historical average of 57 per cent” — indicating it is “increasingly becoming difficult to afford to pay mortgage interests” — Sydney’s home loan affordability (as calculated by Deutsche Bank by looking at average weekly mortgage interest payment/average weekly income) improved. The bank found that the proportion dropped from 67.5 per cent in the March quarter of 2016 to 65.6 per cent in July and then 63.6 per cent in the September quarter.

Median rents to September 2016 increased by 2 per cent year-on-year (yoy) in Sydney to $470 per week, while median house prices rose by the same amount.

Likewise, in Melbourne, while the average weekly mortgage interest payment/average weekly income was higher than the historical average of 43.7 per cent (at 45.8 per cent) in the September quarter, the affordability improved to 45.8 per cent (down from 48.7 per cent in March).

Median house rents in Melbourne increased by 4.2 per cent in QS16 at $375 a week, while house prices increased by 2.9 per cent (yoy).

In Brisbane, the average weekly mortgage interest payment/average weekly income declined to 31.3 per cent in QS16 – down from the peak of 48.2 per cent in December 2010 and below the historical average of 35.6 per cent. Rents here increased by 1.3 per cent yoy but house prices rose by 4 per cent over the equivalent period

Perth also saw average weekly mortgage interest payment/average weekly income decrease, from 33.6 per cent in the September quarter 2014 to 27.3 per cent in QS16. This reflected a decline from the recent peak of 45.8 per cent in 2010 and was below the historical average of 33.5 per cent. Overall, Perth saw house prices drop by 3.9 per cent (to $512,000) and rents fell 9.5 per cent (to $380 a week).

“We note that mortgage payments as a percentage of income are in line with the historical average of 17 per cent, while rent payments remain above the historical average of 12.8 per cent,” the researchers said.

“We believe this implies a continued move towards home ownership.”

Cash rate could drop to 1.25 per cent

The bank went on to predict that it expects the Reserve Bank of Australia will reduce the cash rate later this year.

Deutsche Bank’s report stated: “We retain the view which we have held since the May 2016 RBA board meeting that the bank will reduce the cash rate as we expect inflation to eventually undershoot the RBA’s current published forecasts.

“We expect a 1.25 per cent cash rate by mid-2017.”

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With the softening market impacting property values in many parts of Australia, Sally Wood, Opteon state director for NSW, ACT and Qld joins us to discuss the importance of valuations in the current property market

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Joining host Phil Tarrant, Sally will draw on her 25 years of experience in valuation and discuss the processes involved in arriving at a value for a particular property. She will also share how that process differs between commercial and residential properties and the difficulties which regional property valuations can present.

Sally will unpack the importance and cost of regular valuations on your properties, discuss whether presentation and owner input can sway a valuation and share what you should look for when seeking a reputable property valuer.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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A softening market can be a difficult time for a property investor with finance approval tightening and property capital growth slowing, and while many real estate agents are also feeling the squeeze McGrath Brighton Le Sands' Bill Tsounias claims it is simply the market returning to normal.

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In this episode of the Smart Property Investment Show, Bill joins host Phil Tarrant to share his thoughts on the current Sydney property market, and to share the shifts that he has seen in house and unit sale prices following their worst quarter in the past decade.

Bill will unpack why properties are spending longer on market, share what he believes property investors are doing wrong when trying to sell their properties and share the secrets to getting the best out of a real estate agent and an auction in the current softening market.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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Gavin Kemp and his now-fiancé bought their first property together after only six months of dating. They weren’t even living together at the time. Now, two years on, the pair have bought five properties, sold two and have a solid plan in place for their ongoing property journey. 

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In this episode of the Smart Property Investment Show, Gavin joins host Phil Tarrant to discuss how he chose the locations where he decided to invest and how, due to the initial lack of education (something that he now values highly), he lost money on his first two investments.

Gavin will share his thoughts on the current property market, reveal the people who he has leaned on throughout his property journey and discuss why his strategy employs a zero procrastination rule.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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Launceston
Raceview

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A joint property portfolio before they were even living together

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