Affordable Housing; What does that mean?

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Darwin's Goverment House May 2010
Where’s the affordable housing in Darwin?

Last week I attended the “Housing 2030 Conference” held at the Darwin Convention Centre.  Although the official catch-phrase was “a balanced market” the real buzz-words on the ground were “affordable housing.”  And, the big question, “How do you get there?”  How do you get to affordable housing because it seemed everyone was in general agreement, “We’re a long way from it!”

Definition Please!

Before you can attack a problem, you have to know exactly what it is.  That’s where definitions come in handy.  So, the first task is to define “affordable housing.”  What is it?  What does it mean?

About 10:40 in the morning on 9 Nov 2011, I heard the definition.  The speaker, Robin Zakharov, shared her understanding of affordable housing.  Apparently a case for affordable housing can be made when 30% or less of household income is used for housing.  When you push above the 30% mark, you start getting into household financial stress.

So, there you have it.  One definition of affordable housing.  There were no objections to this assertion and therefore it appears to be a reasonable working model.  I would agree, the definition has to include a stop limit percentage of household income and 30% seems like a good number to me.

Now, with this definition, we can get a starting point and see how much work we have to do to get to the goal of affordable housing.

Instead of using household income as a starting point, I’d like to approach this from another angle.  Let’s look at rents and house prices in Darwin and then work backwards to determine the appropriate household income mark.  Then we can look at this “ideal” household income and see if it makes sense in the real world.  In other words, does this calculated household income – based on current market rents and house prices – seem in line with actual incomes?

My data source is the Darwin Market Monitor Newsletter, Sep 2011.

Let’s begin.

Affordable Rent?

First, we’ll look at rent.

The  median rent for a 2 bedroom unit in Darwin is $450 per week.  A 3 bedroom house will set you back $550 per week.

Now, let’s calculate the required household income to make these rents, “affordable.”

If my math skills don’t fail me, we just need to divide the rents by .3 (30%) to get the answers.  So, let’s do it.

Household income required to make rent “affordable” …

Unit: $450 / .3 = $1,500 per week; $78,000 per year; $6,500 per month

House:  $550 /.3 = $1,833 per week; $95,333 per year; $7,944 per month

I’ll let you be the judge.  How many households would have enough income to call the median rental, “affordable?”

Affordable Mortgage?

Now, let’s look at purchasing a house.  Is purchasing a more “affordable” option to paying those seemingly high rent prices?

What’s the median house price in Darwin?

According to my source (see above link), the median unit price is $399,204; the median house price comes in at $614,063.

In order to run the mortgage numbers we need to make some assumptions.  Do these sound reasonable?

1)  Interest rate of 6.5%

2)  Down payment / deposit:  20%

3)  Buyer pays all other purchase costs with cash.  The only outstanding debt is 80% of the purchase price.

3)  Interest only loan

Now, you may question these assumptions.

For instance, finding a 6.5% interest rate may be a challenge.  But, the trend seems to be downward so let’s go with this lower rate for our calculations.  Just keep in mind if the rates go up, so do the mortgage payments!

Also, a 20% down payment may not be in the cards for most people.  Even folks that use an existing line of credit for the deposit are still borrowing the money.  Therefore, the calculated interest should be based on the total loan amount, not just the 80% number I’m going to calculate below.

For the buyer to put down a 20% deposit and pay all other buying costs is a stretch.  I would imagine most folks would have to borrow to bridge the gap.  But, for this discussion, let’s assume our buyers can do it.  But, this will give us numbers the fall on the low side of the scale.  Most people will borrow these funds and therefore pay much higher repayment costs than what I’ll calculate below.

Most people should be able to choose an interest only loan.  And, this will substantially reduce the monthly payments.

So, all these assumptions will put our calculations on the lower side.  Keep this in mind when we get to the final numbers.

Ok, let’s run the numbers again using our “rose coloured” assumptions.

Mortgage Repayments:

Unit:  $399,204 – $79,840 (20% deposit) = $319,363

$319,363 X .065 (6.5% interest rate) = $20,758 / year = $1,729 / month = 399 / week

House:  $614,063 – $122,812 (20% deposit) = $491,250

$491,250 X  .065 (6.5% interest rate) = $31,931 / year = $2,661 / month = $614 / week.

Household income required:

Household income required to make the median unit or house purchase “affordable” …

Unit:  $399 / .3 (30%) = $1,330 / week = $69,160 / year = $5,763 / month

House:  $614 / .3 (30%) = $2,046 / week = $106,426 / year = $8,868 / month

Remember, these are very “idealistic” numbers.  We’re assuming the buyers put down 20% of the purchase cost and pay for all buying costs.  And, the loans are interest only.  So, these numbers are the bottom floor.  For most people, the numbers will be higher.

Do you see any affordable housing here?

Our numbers suggest the most affordable Darwin accommodation choice is to buy a 2 bedroom unit.  Of course to get this option you need to have a handy $80 grand in cash to pull the deal off.  How many people do you know that have a lazy $80k sitting under their pillow?

So, for those without the $80k in cash, the next best option is to rent a 2 bedroom unit.  But, if it’s to be affordable, then you need a household income of at least $6,500 a month!  Let’s say you’re single and you work in the hospitality industry making about $20 per hour, what’s your best option?

Does the word “roommate” mean anything to you?  Or, better yet – “roommates!”

Or  does the phrase “marry someone  with a good income” mean anything to you?

You get the idea.  The days of one job income per household are numbered.  Especially in Darwin where rents and house  prices are – shall I bravely assert – very high!

Back to you …

So, I’ll leave it to you – the reader – to determine if this seems like affordable housing.  Do you feel most people can afford these kind of rental and purchasing repayments?

What ideas do you have for making housing more affordable in the Northern Territory?

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