Housing Affordability has been a term used in the media a lot over the past few years as property prices particularly in Sydney and Melbourne and many areas around the country have risen significantly.
The context by the media is one written to create drama and stress at a macro level. Googling “Housing Affordability Sydney” generates 415,000 results. However, housing affordability is really a very individualistic scenario for each household.
Perhaps housing affordability should be reframed to ‘the cost of housing makes for a difficult choice for many people’. Although, expressing housing in such a way won’t sell many newspapers or capture many ‘eyeballs’ on a screen.
At a household level
Housing affordability at the simple household level comes down to one key ingredient. How much am I or are we (as a formed household) prepared to spend on accommodation be it owning our own home or renting.
And, with that individualistic figure known and budgeted for by each household, each household can then determine how much they can afford to spend if taking out a mortgage to buy their own home or how much they can afford to pay in rent.
Once that figure is known, it is human nature to want the best bang for your buck. The best home, in the best location, with the best amenities and lifestyle drawcards for that amount of spending.
A difficult choice
And, this is where the misconception and difficult choice that many people face that enables the media to create drama about housing affordability. What I hear in this instance is that people want to live in a home and location that is valued at X, however that their budget only affords them X minus Y therefore the condition of a housing affordability crisis exists.
A family that wishes to buy their own home at varying interest rates with these assumptions:
Household Budget: $4,000 a month for mortgage repayments
Deposit: $100,000 after budgeting for stamp duty and legal fees
Term: 25 year mortgage
|Repayment||Interest Rate||Max Borrowing||Plus Deposit||Total Value of Home Afforded|
Stretched to the max
Some households may be stretching themselves to pay the maximum they can currently afford at a 4% mortgage repayment. A troubling set of circumstances would be created for stretched individual households and an interesting set of circumstances created at a more macro level if mortgage interest rates increased to 5% in a couple of year’s time. The specific consequences may be the source of discussion and a future blog post on this site.
Maybe the media have it right
My wife and I looked at a multi-million dollar home on Sydney’s Northern Beaches like the image above recently. It is in the right location, with all the amenities and lifestyle factors we want but we can’t quite afford it. Maybe the media is right, maybe there is a housing affordability problem after all…
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