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Housing affordability can be a confusing topic. Even the experts don’t always agree on how it should be measured, so often we’re left to guess whether or not a particular marketplace is affordable. As a result, individuals interested in property investing are often left confused as they try to weed through all of this conflicting advice to get to the bottom line…can I afford to buy an investment property or not?
Consider just two methods commonly used to determine affordability:
The 30/40 Rule (Cost to Income)
One of the most widely used criteria for establishing affordability, the 30/40 rule is the ratio of housing expense to earning capacity. It refers to those individuals who are in the bottom 40 per cent of earners whose housing costs should not exceed 30% of their household income. Should the figure exceed 30%, housing is deemed to be unaffordable.
RPData’s Tim Lawless points out some problems that can occur with this method:
“The RBA point out some of the differences in methods for calculating housing affordability, particularly around the house price to income ratio and why results can be significantly and fundamentally different depending on what data and figures are being used.
For example, on the housing side of the equation, using an ‘average’ (mean) price rather than a ‘median’ will result in a higher estimate of housing prices; so too will focussing on just capital cities rather than all of Australia. Another factor is whether the analysis is based solely on ‘house’ prices rather than ‘dwelling’ prices, which include attached and semi-attached homes.
On the income side of the equation, it really depends on where the income data is being sourced from, with the typical options being either survey, such as the Census, or from the national accounts data, both of which are sourced from the Australian Bureau of Statistics. Survey data typically only includes cash income such as salaries and wages, while the national accounts income data includes additional income sources such as superannuation payments.”
Despite its complexity, this method is growing in popularity, as it is superior in many ways to the income-based method, however both methods have their particular strengths and weaknesses. Residual income is defined as the money you have left after paying your actual housing costs.
Unlike the income method, which uses the same figures across the board, the residual method accounts for different income groups, ages, types of households and level of housing consumption. Combining this data with the “after housing poverty line”, experts can then determine housing affordability.
Why You Can Afford To Buy
Sam Saggers, Director of Positive Real Estate, told Commonwealth Bank’s Jean-Paul Pelosi why he believes that it’s still possible to buy an investment property in Australia.
“Non-property owners dwell on an Australia that, they argue, delivers high house prices, deterring them from buying at all. The truth is, property has always been well balanced compared to incomes in Australia and today it’s still a land of opportunity. It just takes some knowledge to shut out other notions.”
To start with, a well-crafted budget will go a long way towards securing the financial future you’re after. Says Sam, “A budget is about making small adjustments that can change lifestyles. Smart budgeters look well in advance and plan for surprises. They save and create buffers that are instrumental to their success.”
So what’s needed to achieve our goals through real estate investing? A well crafted plan, which relies upon due diligence rather than media hype.
As savvy property investors, we really don’t need to wait for experts to determine whether or not we can afford to buy an investment property. We have the knowledge we need to find those investment properties, which will deliver the results we’re after.
Should I Care About Housing Affordability?
As a property investor, you’ll obviously want to be aware of market drivers which can indicate your ability to gain from a particular property investment purchase, however keep in mind that housing affordability reports are not the “holy grail” of data.
For example, Capital City figures are often used to determine housing affordability – a sure way to skew the data as there are many affordable areas just outside of these major metropolises – and even some suburbs within the CBD…you just need to know where to look and what to look for.
If you’re curious about where you can find your next affordable investment property, come along to our next Property Investor Night.
They’re complementary so the only price you’ll pay is a bit of your time. At our fun filled events, you’ll learn fantastic strategies designed to boost your financial independence such as ways to significantly reduce your tax obligation – potentially to zero – and how you can pay off your PPOR in as little as six short years!
We look forward to seeing you there!