Are homes unaffordable, or are people just too greedy?

With interest rates starting to rise again in Australia, and house prices failing to drop much during the GFC, many commentators(eg. Ross Gittins) are joining the chorus of young (and not-so-young) renters bemoaning the cost of houses now being "out of reach". I suspect this is a perennial complaint, as I know that my parents were shocked when they migrated to Australia in the early 60s and found that the equity from the sale of their UK house was barely enough for a deposit on a Sydney home. And I could barely qualify for a mortgage to buy a cheap house (in Blackett) a few years after I started working full-time as a uni graduate (and I was still living at home rent free...).

Anyhow, lets look at the current situation:

Average weekly full-time ordinary time weekly pay for a person in NSW (as at May '08) is $1,142.50. According the the St George bank online mortgage estimator, a single person on that weekly income (using the default settings of having average living expenses of $14,568 pa plus a 350/month car loan) would qualify to borrow up to $367,000 on a standard 30-year variable rate home loan. In my experience St George uses fairly typical repayment:income limits (typical of 'old school' banking). So a person on AVERAGE income in NSW could easily 'afford' to buy a house in one of the cheaper suburbs. For example, median (ie. half the houses sold for LESS than this amount) house prices for the 6 months to Sep '09 for some example suburbs are:
Blackett $226,000
Mt Druitt $277,000
St Marys $284,000
Colyton $300,000

I wouldn't choose to live in one of these suburbs, but they're OK (my sister lived in St Marys for a while and I owned a rental property in Blackett for about ten years).

Some commentators are even going so far as to state that houses are 'out of reach' for a couple where BOTH people work full-time! In that case, AVERAGE male full-time OTE weekly income is $1,213.00 and for a female full-time worker OTE weekly income is $1,026.90, giving a combine income of $2,239.90. According to St George, that couple could borrow up to $853,000 putting a whole swag of the most expensive Sydney suburbs within reach (if they had saved up a 20% deposit):
Epping $740,000
Birchgrove $910,000

It appears that only houses in the MOST expensive suburbs would actually be 'out of reach' for a couple with both earning AVERAGE income:
Bondi $1,200,000
Hunters Hill $1,495,000

I think a lot of the people that are complaining about housing affordability (and hoping that house prices will drop 30%-40% before they buy) are simply unwilling to make the life-style spending sacrifices (eg. no eating out, taking staycations for a couple of years) required to be able switch from being renters to being home owners. In five years time I expect both house prices and rents will be higher than now -- and the same people will still be waiting for house prices to drop to more 'affordable' levels.

What do you think?

Subscribe to Enough Wealth. Copyright 2006-2009

How much will going back to uni cost me?

While I'm waiting to find out if I'll even be offered a place in the JCU Master of Astronomy course for next year, I tried to work out how much I should budget for the course costs. The MoA consists of 6 subjects each worth 0.25 "EFTSL" (equivalent full-time study load). You can either do the course in 1.5 years full-time, or 3 years part-time (either way the course is delivered via the Internet as "Distant Education"). The course has "some" commonwealth-funded places available, but I couldn't find out how many funded places are available, or how many students were enrolled in the MoA in 2009. If I have to enrol as a fee-paying student it will cost $2,500 per subject, but I think there is a chance that I'll end up only having to pay the government-subsidised HECS-HELP rate of fees. The subjects for this course are offered by the JCU school of Engineering and Science, and for HECS purposes the subjects appear to be classified in the "engineering" band (2), which determines how much the government pays JCU (and the maximum fee the uni can charge the students). This is based on the course cost being quoted as $11,350 by JCU, which corresponds to the Band 2 maximum fee rate. I guess the MoA subjects have been classified by JCU as engineering rather than as science so JCU can get a higher payment per subject from the federal government. From my point of view it would be better if the subjects were deemed to be "science", as that is one of the current "national priority" categories where the commonwealth subsidy is higher (and hence the student fee is lower).

I'll be choosing to pay any HECS-HELP fees "up front" as my "repayment income" would be so high that the full amount would fall due with each tax return anyhow. By paying "up front" I'll get a 20% discount on the HECS-HELP fee amount, so the total cost for the MoA course (based on 2010 HECS-HELP fee rates) will be $9,080 (plus textbooks etc.), rather than the $15,000 as a fee-paying student. If I get a HECS placement the commonwealth government will pay $22,734 in subsidy to JCU (I'm not sure if the 20% "up front" HECS-HELP discount is also paid by the government to JCU). Overall, it looks like I'd end up paying around 26.6% of the "full cost" ($34,084) of the MoA course if I get offered a HECS-HELP place.

Based on the $2,500 "full fee" rate per subject, it would appear that JCU makes a "profit" of at least $19,000 for every HECS-HELP place (ie. the $22,734 amount of government HECS contribution to JCU plus the student's HECS fee payments, minus the $15,000 of notional "full fee" payments). I assume that the $2,500 per subject charged to domestic fee-paying students is more than the actual cost of delivery for each subject. With the course being delivery via the Internet, the incremental cost to JCU for each student must be fairly low (just the cost of some admin overheads, plus marking of the exam and assignment work).

Doing the MoA will consume 1.5 of my remaining HECS-HELP SLE (Student Learning Entitlement). Fortunately the uni study I had done prior to 2005 didn't affect my initial standard entitlement to 7 years worth of full-time study assistance. To date my SLE balance has only been reduced by 0.625 for the subjects I attempted for the GradDipEd course I dropped last year, so I currently have 6.375 SLE remaining. In additional, it appears that if you're over 27 years old there will be an extra 0.25 SLE added each years from 2012 onwards, aimed at encouraging "lifelong study".

Aside from HECS fees, the MoA will probably cost me another $1,000 or so for textbooks, and a small amount for miscellaneous items. There may also be unexpected costs for software (eg. Hearne's "Origin" app for data analysis and graphing would be nice, but it's not worth the $1,000 cost) and there will probably also be some additional expenses associated with the literature review and research subjects.

Subscribe to Enough Wealth. Copyright 2006-2009

Net Worth Update: October 2009

October saw little overall change in my net worth, with the strength in the Sydney property market being offset by a sharp correction in the stock market in the last week, which produced negative results for my geared stock portfolio and retirement savings (SMSF). By 31 October my net worth had increased slightly to $790,140 (up $1,452).

My retirement account (SMSF) lost -$12,215 (-3.80%) to $309,237, erasing all of last month's gains. The drop in the stock market was exacerbated by our small geared stock investment (8 ASX200 index CFDs, code: IQ). There was around $2,000 of employer superannuation contributions banked during October, so the result is worse than it appears. I expect the rest of the September quarter's employer contribution will be deposited sometime during November (around $4,000). During October I transferred $5,000 of our cash balance into our Vanguard "High Growth" index fund investment and also bought 1 additional IQ CFD. If the market consolidates around current levels I may buy the final 2 IQ CFDs to top up our holding to the planned holding of 10 IQ CFDs.

The estimated valuations for my half of our real estate assets (house and investment property) were up substantially this month, by $21,459 (+0.2.74%) to $805,393. The Sydney real estate market still appears to be in an up-trend at the moment, but the winding up of Federal boost to First Home Owners grant and continued monthly rises in official interest rates will probably limit price increases.

My stock portfolio lost -$7,122 to $40,014 net equity during October (due to the high gearing levels - stock portfolio value is currently around $500,000 with $460,000 of margin and portfolio loans outstanding). Hopefully this is just a normal "correction" of 10%-15%, rather than the confirmation of a double-dip bear market. The relative strength of the Australian economy and Asian trading partners suggests the Australian stock market should have lower correlation with the US stock market in the medium term.

I haven't had any spare cash flow to pay off some mortgage or margin loan debt this month, as I continued spending on "home improvement" projects ($580 for a 81cm HD digital TV and stand from Aldi, $280 for sandstone slabs and besser blocks for constructing a path and steps as part of our swimming pool area upgrade, and about $500 on a new bunk bed and mattress for DS1's bedroom). This month I plan on spending another $250 or so to enclose two existing pine bookcases with sliding doors, and about $400 to lay new turf in the play area I've enclosed next to our swimming pool. It may also be quite expensive (I guess around $500-$1,000) to get our pool ready for swimming - the filter valve assembly needs a new seal, there is a significant leak somewhere in the underground pool piping when the filter is running, and the salt chlorinator needs a major service to get it working again!

Once I find out if I'll be enrolling in the MoA course next year I'll revise our budget for 2010. Perhaps I'll even have time during the Christmas holiday period to get my financial data for this FY up to date in Quicken.

Subscribe to Enough Wealth. Copyright 2006-2009

Blog Income Review

I don't expect to get rich from blogging (or even earn a similar amount of income per hour spent blogging compared to my day job) but it does provide a (very) small stream of income and has practically no monetary cost (if one ignores pre-existing overhead costs such as my PC and broadband connection). I no longer do any paid posts - it's not that I'm against sponsored posts (if they are flagged as such) - but simply that there aren't any opportunities coming through from PayPerPost, Blogsvertise etc. that aren't totally crass and/or for something I don't want to be promoting on my blog. My blog income this year is mostly from the handful of text link sponsor ads in my sidebar (LinkWorth) and from the banner ad clickthroughs (Google AdSense). The text link ads are relatively lucrative (around $0.50 per day per text link ad) compared to Google Adsense income (around $0.50 per day), but I have to wait for advertisers to request a text link ad to increase this revenue stream (and advertisers can "pull the plug" at any time). Whereas Google AdSense revenue could be boosted through my actions, as it depends on blog traffic volumes (ie. what I post, how often, and how I promote this blog) and on click-through rates (ad relevance/post content and blog audience composition I suppose), but my natural level of daily page impressions is fairly static. Some attempts to boost traffic (eg. Traffic Swarm) are counter-productive (as they are considered 'spam' links and can lead to page rank penalties from Google etc.), and others just increase traffic without producing any long-term increase in readership or clicks on ads (eg. StumbleUpon), as seen last October.

Overall I receive about $2-$3 per day income from this blog, which corresponds to an 'alternate stream of income' equivalent to about 1% of my wage income. If I could increase this by an order of magnitude (either boost quality blog traffic ten-fold, or establish ten similar blogs that are low maintenance/post frequency) the extra 10% income stream would become significant, especially if it was all directed into additional savings and investments ;)

Then again, I may be too busy doing a MoA next year to worry about setting up new blogs!

Subscribe to Enough Wealth. Copyright 2006-2009

Return to study next year?

I haven't been enrolled in any part-time postgraduate courses this year. Last year I'd been enrolled simultaneously in both a BEd degree and MIT degree (by distance education). The combination of full-time work, a young family (2 and 8 year old boys) with attention-demanding health issues (severe eczema), and going on holiday overseas for 6 weeks during the semester led to my dropping out of the BEd subjects I'd enrolled in and getting excluded for not making satisfactory progress.

I had been on an approved leave of absence from the MIT course, but then received a notice of exclusion just before Christmas for not meeting the progress requirements! I initially ignored the notice as they'd sent me the same last year by mistake. However, when I tried to complete enrolling in subjects for this year I found out that it wasn't a mistake. By then I had missed the deadline for appealing against the exclusion (I thought being on approved leave was a pretty good reason for not progressing), and would first have had to apply for special permission to make a "late appeal". In the end I decided that it wasn't worth the effort to even seek leave to appeal against exclusion, as I didn't fancy my chances of passing all the subjects I'd have to have completed this year to meet progress conditions.

I also didn't bother completing the assessment items for the Diploma of Financial Planning I'd enrolled in the previous year. I might still complete the items if I get bored during the Christmas holidays, but the career prospects in financial planning have dimmed a lot with the GFC and with the Australian regulator looking closely at commission-based remuneration in the planning industry. I really don't think enough people value financial planning enough to pay significant up-front fee-for-service.

Anyhow, I recently found out about an Internet-based MoA (Master of Astronomy) course run by James Cook University in Townsville. I've applied for admission, as I've always been keen on Astronomy as a hobby (I bought a 10" Meade SC telescope about 20 years ago) and have a suitable undergraduate degree and a Grad Dip in Industrial Math and Computing. I won't find out if I've been offered a place until the New Year, but I've already ordered a copy of the text for the first two subjects from Amazon.com (it cost around A$120 delivered from Amazon, compared to about A$150 for the same book from a local Sydney university book store!).

The MoA course *should* take three years to complete part-time, and cost about A$15,000. If all goes well I'd then like to progress to the DoA or PhD course (although I'll be in my mid-50s by the time I finish a doctorate). This study will be purely for fun, as I intend to stay in my current non-academic job until I retire, athough it would be cool to publish a few research papers "on the side". Sometimes I miss my old job as a research scientist.

Does anyone else think I must be mad to enrol in another part-time uni course? DW thinks I should just sit back and relax and not bother with any more 'study'. Perhaps this is my version of a "mid-life crisis" ;)

Subscribe to Enough Wealth. Copyright 2006-2009

Timber! Fizz!

I haven't received any notification as yet from the Timbercorp liquidator KordaMentha regarding the sale of the Timber assets to Australian Bluegum Plantations on 30 Sep for approx. $345m. From the KordaMentha press release it appears that about $198m of the sale proceeds (due to settle on 2 Nov) will be available to the woodlot investors. As Timbercorp's forestry assets included 92,000 hectares of eucalyptus plantations, and each woodlot represented 1 hectare of forest, I estimate around $2,150 is available for distribution per woodlot. However, the earlier woodlots (such as mine) should receive a higher proportion of the sale proceeds as the standing timber was more mature (due for harvest in 2011), and the later woodlots had many more years of maintenance payments due before they would reach maturity. It will be interesting to see what distribution formula (and costs) are used to calculate the final payout figures. Earlier correspondence from KordaMentha had indicated that growers who hadn't paid the last annual maintenance and rent invoice would not be entitled to proceeds from sale of forestry assets, so that may boost the amount paid to the paid-up investors.

I've already written off my initial $11,500 investment in three Timbercorp woodlots, so any sale proceeds will be a pleasant surprise. The $200 contribution towards legal costs I paid to Clarendon Lawyers on 24/8 is probably money down the drain. And I think the annual timber insurance premium I recently paid was non-refundable.

As the initial investment and annual fees were tax deductible, I expect any pay-out will be taxable income. Due to the recent slashing of the amount that can be salary sacrificed into superannuation, my current marginal tax rate is probably the same, or higher, than when I made my investment into Timbercorp. So, no net income tax saving, and probably a negative ROI on the amount invested!

* * * * * *

I sold my main tranche of Coca-Cola Hellenic Bottling company shares several years ago, but somehow wound up with an odd lot of 60 shares (probably from a dividend reinvestment plan allocation). CHB has now been removed from the ASX, and I just sent in the paperwork to have my remaining CHB shares pooled and sold-off on the Athens stock exchange in November. The brokerage fee (0.55%) is good value, but unfortunately the market price could be depressed by CHB purchasing their own shares during the share sale period. Apparently CHB can buy up to 20% of the recent average daily volume each day, and although the maximum price is regulated (no more than highest normal market trades in CHB) there is no minimum stipulated. There is also a special recapitalisation dividend of around $3 per share that I might be paid (depending on timing of the share sale and the recapitalisation being finalised), although I expect the CHB share price would drop by a similar amount as soon as they trade ex-entitlement. I'll probably end up being sent a cheque for around A$1,200.

Subscribe to Enough Wealth. Copyright 2006-2009

Some good customer service from Westpac

The 0% balance transfer offer on my Westpac Ignite CC ended last month on the 13th, and my repayment of the full $22,000 balance due didn't appear on the CC statement until the 14th. As I'd left making the online BPay payment until the last minute, I wasn't surprised to see an interest charge on my next CC statement. However, the amount of interest was $32.08, which seemed a bit steep for only one, at most two, days of having a $22,000 balance accruing interest charges. The APR for cash advances on this account is 17.74%, which according to my calculation meant an interest bill of $21.38 should have be due. (The only way I can come up with something close to this figure is to divide the APR by the number of business days in a year, and apply that daily rate to the $22,000 balance for two business days).

As I wanted to make sure I now paid off the CC balance in full (so I didn't end up with another small balance on next month's statement for interest accrued on the $32.08 balance!) I phoned to enquire about how the interest amount had been calculated, and to find out the current balance due.

The call centre rep couldn't see how the amount had been calculated either (after checking that 0% had applied up to the 13th, and the balance had been paid in full on the 14th), so she told me she had reversed off the interest charge! Cool. Although their system is now showing $0 due she wasn't sure there wouldn't be a small interest charge calculated on the $32.08 balance from the 14th until the date of the reversal. I'll wait and see what appears on my next CC statement.

Subscribe to Enough Wealth. Copyright 2006-2009

Will the AUD be worth more than the USD?

Not so long ago the AUD had gone from around 50c US to close to parity with the USD on the back of the commodity boom turning into a commodity bubble. The GFC pricked that bubble and last year the AUD had dropped back into it's traditional 70c-80c US range. Now the AUD is back over 90c US and many pundits are predicting the Aussie dollar will soon reach parity with the USD. This time around I think there is a good chance the AUD will soon be worth more than the USD and it could probably stay that way indefinitely. The USD is under pressure due to the US Federal deficit reaching massive levels (around US$4,500 per capita in the past year, and likely to accrue to over US$25,000 per capita over the coming decade), which could well lead to an inflation problem in the US once the economic recovery gets underway. On the other side of the equation, commodity prices are likely to remain high as the global economy recovers and demand again starts to pick up while supply constraints are still evident for many commodities (Oil isn't the only commodity likely to see production peak in the next decade or two).

I've had a couple of attempts of making some money from these expected long term trends, but going long with AUDUSD forex and the Crude Oil price trading CFDs on my City Index and CMC Markets accounts didn't work out due to short term fluctuations and trend reversals exceeding my expectations. Although I had opened an oil position at around USD51 and bought the AUD around 68c US earlier this year, both positions were closed out when temporary dips saw my margins evaporate. My trade execution and risk management still needs improving.

Subscribe to Enough Wealth. Copyright 2006-2008

Apparently Praying doesn't Boost Investment Returns

I'm guessing that while lots of investors might have resorted to prayer as they watched the value of their life savings plummet during the GFC, it wouldn't have had any material effect (apart from any purely psychological benefits). This story provides some evidence to that effect. The Glebe Administration Board (apparently an Anglican Church body) posted a $160 million loss for the year to December 2008, or a -60% annual return!. Its highly geared share portfolio crashed amid the global share market downturn. Unfortunately they won't be benefiting from the recent strong rally in the equity markets, as the board reduced its bank debts from $140 million to just $14 million between December 2007 and December 2008 as part of an attempt to reduce its gearing and "protect" its assets from further falls. Not very inspired decision making, although if they had attempted to ride out the downturn any longer they would have probably been completely wiped out by the time the market bottomed out in March.

Subscribe to Enough Wealth. Copyright 2006-2009

We'll all be rich

Not that I place much reliance on the various market predictions that are constantly being released by all and sundry, but a new report "Housing Outlook for 2010 to 2012" released by QBE Lenders' Mortgage Insurance is predicting a 21% rise in Sydney house prices by 2012. If our two properties saw a price rise of 21% my net worth would get a $170,000 boost over the next couple of years! For many home owners such an increase would not increase their disposable wealth, as they have to live somewhere, so any profit made when selling their current home would be offset by the higher cost of the new house they move to. The exception to this is where people make a "sea change" (or "tree change") and sell their city house to move to a country town on the coast, or inland, where prices tend to not appreciate in real terms.

In any event, many other property 'analysts' have questioned the forecasts. For example, Louis Christopher, the managing director of SQM Research, has said that "Given the level of housing debt we have in this country, and overall private debt to GDP which is at quite a considerable high, it's actually near a record high at this time, it means that... borrowers are very susceptible to interest rate rises, probably more so than at any time in the last 30 years,".

"This time round with the cycle, it probably won't take interest rates to get to 9 per cent to stall the market, or to make the market fall, it'll probably take something less. And that's one thing I question the BIS numbers on is what happens if we see interest rates at that time [in two or three years] at say 8 per cent or 9 per cent, what would that do to their forecasts?".

Mr Christopher believes that over the long-term, house prices can only sustainably rise at a similar pace to incomes, otherwise the economy becomes vulnerable to debt-fuelled asset bubbles. Well, who doesn't? The question is how long do you have to wait for "long term" trends to overcome short-term deviations? Moomin has plotted real house prices vs. income, which shows a sustained trend for house prices in Australia to rise in real terms compared to incomes since the 1960s. But a lot of that real increase is due to houses evolving from a fibro, one level, three bedroom cottage into the current "McMansion" houses with multiple bathrooms, a "home theatre" and much higher floor areas. Also, real incomes have increased over the past decades in Australia, so a larger percentage of disposable income can be devoted to servicing housing costs. So, although there must be a limit to how fast real house prices can grow compared to real incomes, it's not clear that the ratio of real house price (or more accurately real housing cost eg. interest payments) to real income can't change significantly over time.

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