Sunday 5 July 2009

Let me throw a slew of numbers at you

I enjoy reading the Dr Housing Bubble blog listed on my sidebar over on the right. I love the way the author slices and dices statistics to show just why he thinks housing markets in the US like California are doomed to be stuffed for years. Read a few articles to see what I mean.

I thought I'd have a crack at analysing housing in Five Wog.

How much to buy a $750,000 home in this suburb? That will get you a small, rundown 3 bedroom place in a rough part of this neighbourhood.

The banks these days are going 80/20 - 80% loan to 20% deposit, which means a deposit of $150,000. Gone are the days of the 100%+ mortgage. I hope.

That leaves us with a $600,000 mortgage over 25 years.

One of those online repayment calculators gives us a figure of $3771 repayment per month.

I've heard around the traps that banks want to cap repayments at 31% of pre-tax income, so how much do you need to earn to afford a mortgage of $3771 per month?

You need $12,164 per month, or $3041 per week.

Accoridng to the ABS 2006 Census, there are 3,073 households in Five Dock.

Of those, 302 earned over $3,000 per week. This was before the financial crisis, remember. At present, it is only those lucky 302 who could afford to bid on a $750,000 property, assuming the minimum $150,000 deposit. And assuming that they met all the usual documentation provisions.

A further 322 earned between $2,500 and $2,999. In the days of easy money, banks would have let these people have enough money to bid for a $750,000 house, even though someone on $2600 a week would be tipping 36% of their pre-tax income into their mortgage - even more if their deposit sucked.

A further 237 earned $2,000 to $2,499. Imagine earning $2200 per week and having to fund a $3771 mortgage, especially with kids. You'd be facing repayments of 43% of pre-tax income.

Some people in this last group of course were given mortgages of that size, and larger. I'm reliably told that there are quite a lot of people in this area who have not made a repayment in 6 to 9 months on their $800,000 mortgage. The banks are looking the other way, trying not to spark a panic by foreclosing on them and flooding the market with properties that just have to be sold. I'd assume that everyone in this group, if they have a mortgage like this, is fucked. They are financial zombies, waiting for the banks to turn off the life support.

Those in group 2 are probably not in great shape either. The bonuses that they depended on are gone, as is any hope of a good pay rise in the near future. Once Rudd gets over his panic and decides to pay back debt, it is this group that will cop it in the neck in terms of tax increases, which will further squeeze their available cash. Then there is unemployment - from what I have seen, companies have ruthlessly culled managers and executives in this pay band. The cafes are filled with morose looking middle aged men who have recieved a nice payout, but have not worked for 6 months, and have little hope of finding work in the next 6. Financial armageddon is just around the corner for them.

Those in group 3 should be sitting pretty - those earning over $3,000 per week; except that they are not sitting on an affordable $600,000 mortgage. If you are earning that much, why put up with living in a pokey dog box in the scungy end of Five Wog? These people are sitting on million dollare mortgages, which means a repayment of $6,285 per month. Ouch. You need an income of $5,000 per week to keep your repayments down to a manageable 31% of pre-tax income with a mortgage like that.

Now for the fun part.

2 years ago, you'd go to an auction for a $750,000 house and there would be bidders there from groups 1, 2 and 3. You had a pool of 861 households in this suburb who could afford to bid - 28% of all households in this area. You are talking a wall of money.

Now you'd be lucky to get 302 eligible households - 9.8% of households. What happens at auctions when 2/3 of the previous bidders are left out of the market?

Of course I am being silly by only limiting my search to households in this suburb, but I had to simplify things, or I'd be here all night.

The other fun thing is that I'd assume that most of these households are 1.5 or 2 income households. The mean taxable income for this area is $57,900.

What happens when the 0.5 of a job disappears, or one of those 2 jobs vanishes?

Me, I'm waiting for the banks to give up and start foreclosing in earnest. That's when things will get interesting.


Emily said...

Well, my dreams have been shattered. I thought things were supposed to be better over there than they are here. From what you say, it sounds worse...maybe not, I doubt we'll be able to get out of our shed and buy the desired family sized home any time soon.

You've cheered me up no end!

I'm off to read the 'My Life's Worse Than Yours' blog to cheer me up.

Emily said...

Crap, the author of 'My Life's Worse That Yours' blog has closed down due to intense competition from me.

Margo's Maid said...

This post has all the portents of being something to point back to when it all goes pear shaped...