Mortgage Money is ‘Dead Money’

Jonathan Hoult is a ‘young Australian’ according to the Sydney Morning Herald. The 43-year-old software developer from Sydney was interviewed by the SMH this week. Perhaps he was the youngest person they could find.

The topic of conversation, housing and house prices.

Mr. Hoult said,

It’s not that I’m in a terrible financial position, I’m just not really interested in buying,

I think the amount of debt people are taking on, I think it’s unsustainable. From a personal point of view I would rather rent, at current prices.

People just seem a bit deluded, and I include my parents in that. They have grown up in this world where they’ve seen it happening: house prices going up, wages growth and increased productivity. They can’t see it. They can’t see what’s happening now. From a personal point of view I would rather rent, at current prices.

The only thing is the security of renting, and with my kids at this age [one aged 9 and twins aged 6], I may bite the bullet.’

Mr. Hoult is bang on. People are deluded. There’s nothing wrong with renting. In fact it’s the future of the Aussie housing market. The sooner people accept its OK to rent, the better off the country will be.

However Mr. Hoult does also say, ‘I may bite the bullet.’

Oh dear. He just fell right back into the trap.

At 43 he can’t afford a home, but hey, sounds like he might just ‘bite the bullet’ and take on a truckload of debt instead.

That’s exactly the problem in the housing market. Security isn’t about the home you’re in. Security is about the ability to consistently put food on the table and live an enjoyable life. Not about being mortgaged up to the eyeballs, in mortgage and financial (and then often emotional) stress.

Owning’ a house in Australia doesn’t guarantee security. In fact, that might be the most damaging thing you could do for your family.

The 90s saw incredible rates — but things were still affordable

When I was a kid, my Mum and Dad bought houses for us to live in as a family. That was security back then. It’s what you did. But back then, it was affordable.

Back then in the 90s property was within reach for your average wage earners. Anyone; teachers, bakers, bankers, doctors, bus drivers, whoever…a house was something that anyone could buy.

One thing homeowners of the 90s did have to contend with was incredibly high interest rates. Back in the mid-90s the RBA cash rate was well over 15%, retail rates higher again.

But the median house price in Melbourne was $129,000. At the time in Victoria the average weekly earnings for a couple worked out to around just over $68,000 per year. After tax that was about $52,836.

In other words, the average price of a house was around 2.4 times the after-tax earnings of a couple.

That means in order to get a 10% deposit a couple would have to save 24.4% of their after-tax income in a single year.

Also stamp duty at the time would have been about $3,940 – 3% of the purchase price. That means that in total to buy a house a couple would have to find 31.8% of annual income to get a place.

Now let’s say with a 10% deposit that means s $116,100 mortgage. With eye watering 20% rates the repayments would be $23,280. That’s around 44% of income.

The definition of mortgage stress is over 30% of after tax income. No wonder the country fell into a deep recession.

However, property was still relatively affordable through the 80s and 90s. This helped to mould the ‘Great Australian Dream’ of owning your own property.

It’s now an entrenched part of Australian culture. Generally speaking, the cultural view is that unless you’ve bought your own place you haven’t achieved anything in life.

Poor economy = affordable mortgages. Great economy = housing crisis. Which would you prefer?

What’s the same scenario like today?

The median house price in Melbourne is $725,000. And the combined income of a median couple is $161,824. After tax that’s $122,900.

In other words, the average price of a house is now 5.9 times average after tax earnings of a couple.

Now in order to get a 10% deposit today ($72,500) a couple would have to save an impossible 59% of their after tax income.

Furthermore, stamp duty would be $38,570, just over 5% of the purchase price. So with $111,250 you might have a chance of getting your own place in Melbourne today. That’s an astounding 90.5% of the annual after-tax income of a couple.

No wonder young people are up in arms. Who can manage to achieve that?

Still, even if you find a way or leverage of the bank of mum and dad, you still need $43,728 to cover the repayments. That’s based on a 5.35% standard variable rate loan. The good news there is that based on a couple’s after tax income that’s just 35.5% of income.

Erm, did I say good thing? Technically that’s mortgage stress. From day one, if you buy a house you’re in mortgage stress.

Let’s also not forget one of the assumptions here…rates staying low.

However if rates stay low the country continues to struggle. This means longer-term unemployment, reduction in full time employment, possible lower average wages. In other words a far more difficult economy to stay employed in.

Ideally as a homeowner you want a thriving economy. A country that is growing, increasing productivity and lowering unemployment helps keep people in jobs — paying the mortgage.

But it also means higher rates.

You’ve failed in life

This all leads to one compelling point. If interest rates in Australia ever rise it might be a sign the economy is growing again. But conversely, it’s going to create a housing crisis.

However most people don’t think about what things might be like in five, seven, 10 years’ time.

Social and cultural pressure dictates that, if you’re over 30 and don’t own a house, you’ve failed in life. That puts pressure on to get in now before it’s too late.

Aussie culture preaches about two damaging ideals. One is that ‘rent money is dead money’. The other is that ‘property always goes up in value’.

What a load of garbage.

Rent money keeps a roof over your head in a place you want to live. There’s nothing ‘dead’ about it. At least as a renter you won’t fall into financial ruin when interest rates rise.

No, instead you’ll be there to clean up and laugh at those whose properties are worth 40% less than they were yesterday.

In fact I think in Australia right now, ‘mortgage money is dead man walking money’.

The Aussie housing market is on the edge of ruin. It is overpriced and unaffordable. People are stretching just to get on the ‘fictional property ladder’ as my colleague Callum Newman refers to it as.

People assume the value of their home will offset their incredible mortgages. That is until it doesn’t. The day of reckoning is coming. For a buyer there’s nothing better than an urgent seller. A seller where the mortgage is too hard to pay, or in arrears.

Australia might be battling now. But it won’t last forever. The horizon has promise. No matter how hard it might be to see. When it comes — and it will — then rates will rise. That will see properties flood the market. And then we’ll see if it’s true that property always goes up…


Sam Volkering,
Editor, Money Morning

Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

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