Historical Housing Price Growth In Melbourne

Question:

Discuss about the Historical Housing Price Growth In the Melbourne.

Answer:

Detecting and justifying the historical housing price of Melbourne, which indicating the assumptions taken for future prices:

Adequate calculations are conducted to identify the overall historical housing price growth in Melbourne, which is needed for adequate analysis purpose. The housing prices of Melbourne has a relatively grown over the period of 2002 to 2017, which has helped in understanding the future prices of housing in the city. The average of Median Price of Established House Transfers (Unstratified) Melbourne is mainly used, as the overall inflating rates for the housing price in Melbourne (Abs.gov.au, 2018). This relatively helped in identifying the future 20-year price change in the housing property, which needs to be evaluated to understand the implications it will have on the client while purchasing the house. The data is mainly calculated from the ABS website, where adequate data are provided for evaluating and understanding the price action of the housing property (Baert, Heylen, & Isebaert, 2014).

Prices in Next 20 Years
Year	Quarter	Price (“000)
Year 0		$ 713,000
Year 1	Q1	$ 726,686
	Q2	$ 740,635
	Q3	$ 754,851
	Q4	$ 769,340
Year 2	Q1	$ 784,108
	Q2	$ 799,159
	Q3	$ 814,498
	Q4	$ 830,132
Year 3	Q1	$ 846,067
	Q2	$ 862,307
	Q3	$ 878,859
	Q4	$ 895,728
Year 4	Q1	$ 912,922
	Q2	$ 930,445
	Q3	$ 948,305
	Q4	$ 966,508
Year 5	Q1	$ 985,060
	Q2	$ 1,003,968
	Q3	$ 1,023,239
	Q4	$ 1,042,880
Year 6	Q1	$ 1,062,898
	Q2	$ 1,083,300
	Q3	$ 1,104,094
	Q4	$ 1,125,287
Year 7	Q1	$ 1,146,886
	Q2	$ 1,168,901
	Q3	$ 1,191,338
	Q4	$ 1,214,205
Year 8	Q1	$ 1,237,512
	Q2	$ 1,261,266
	Q3	$ 1,285,476
	Q4	$ 1,310,150
Year 9	Q1	$ 1,335,298
	Q2	$ 1,360,929
	Q3	$ 1,387,052
	Q4	$ 1,413,676
Year 10	Q1	$ 1,440,812
	Q2	$ 1,468,468
	Q3	$ 1,496,655
	Q4	$ 1,525,383
Year 11	Q1	$ 1,554,663
	Q2	$ 1,584,504
	Q3	$ 1,614,919
	Q4	$ 1,645,917
Year 12	Q1	$ 1,677,510
	Q2	$ 1,709,710
	Q3	$ 1,742,527
	Q4	$ 1,775,975
Year 13	Q1	$ 1,810,064
	Q2	$ 1,844,808
	Q3	$ 1,880,219
	Q4	$ 1,916,310
Year 14	Q1	$ 1,953,093
	Q2	$ 1,990,583
	Q3	$ 2,028,792
	Q4	$ 2,067,734
Year 15	Q1	$ 2,107,424
	Q2	$ 2,147,876
	Q3	$ 2,189,104
	Q4	$ 2,231,124
Year 16	Q1	$ 2,273,950
	Q2	$ 2,317,598
	Q3	$ 2,362,084
	Q4	$ 2,407,424
Year 17	Q1	$ 2,453,634
	Q2	$ 2,500,731
	Q3	$ 2,548,733
	Q4	$ 2,597,655
Year 18	Q1	$ 2,647,517
	Q2	$ 2,698,336
	Q3	$ 2,750,130
	Q4	$ 2,802,918
Year 19	Q1	$ 2,856,720
	Q2	$ 2,911,554
	Q3	$ 2,967,441
	Q4	$ 3,024,401
Year 20	Q1	$ 3,082,454
	Q2	$ 3,141,621
	Q3	$ 3,201,924
	Q4	$ 3,263,385

Evaluating the historical income data of Melbourne, while justifying the assumptions for the income data:

Time	Income	Yearly Income	Income Growth
1994–95	$ 1,340	$ 69,680
1995–96	$ 1,297	$ 67,444	-3.2090%
1996–97	$ 1,342	$ 69,784	3.4695%
1997–98	$ 1,400	$ 72,800	4.3219%
1999–2000	$ 1,534	$ 79,768	9.5714%
2000–01	$ 1,475	$ 76,700	-3.8462%
2002–03	$ 1,525	$ 79,300	3.3898%
2003–04(a)	$ 1,582	$ 82,264	3.7377%
2005–06(a)	$ 1,681	$ 87,412	6.2579%
2007–08(a)	$ 1,967	$ 102,284	17.0137%
2009–10(a)	$ 1,870	$ 97,240	-4.9314%
2011–12(a)	$ 1,914	$ 99,528	2.3529%
2013–14(a)	$ 2,016	$ 104,832	5.3292%
2015–16(a)	$ 2,055	$ 106,860	1.9345%
Average income Growth rate			3.4917%
Inflation rate			1.9200%
Growth rate in income			3.5587%

The above table a relatively represents the overall historical growth in income which is calculated from 1994 to 2016. This overall historical data has eventually helped in protecting the increment in income that will allow the client to obtain the Austrian dream. The average growth rate in income has been calculated for the past years while adequate incrementation is used by implementing the inflation rate on the average growth rate. This relatively has been understanding the level of growth in income that will incur in the next 10 years. This determination of the income is relatively viable approach which would eventually help in understanding the level of mortgage exposure the client could have in future. Moreover, it will also help in understanding when the client would be able to purchase the Austrian Dreamhouse. Growth rate of 3.5587% is used on the yearly income of the client to understand its growth over the period of 10 years which is effectively depicted in the following table (Genworth.com.au, 2018).

Time	Future 10 years growth rate
Year 0	$ 80,000
Year 1	$ 82,847
Year 2	$ 85,740
Year 3	$ 88,734
Year 4	$ 91,832
Year 5	$ 95,038
Year 6	$ 98,357
Year 7	$ 101,791
Year 8	$ 105,345
Year 9	$ 109,024
Year 10	$ 112,831

Detecting the net income by using ATO calculator, while detecting the home loan rate and maximum amount that the cline could borrow:

Particulars	Monthly	Yearly
Annual Salary	$ 6,667	$ 80,000
Expenses
Amenities (Food and Transport)	$ 1,850	$ 22,200
Rent	$ 1,250	$ 15,000
Living Expense	$ 3,100	$ 37,200
Tax		$ 17,547
Savings	$ 2,104	$ 25,253

Particulars	Values
Home Loan rate	4.50%
Time	30
Max LVR	80%
Property Price	$ 374,851
Maximum Amount borrowed	$ 299,598
Initial deposit to the bank	$ 75,253

The above tables relatively represent the overall Savings and maximum borrowed money which will be allowed to the client. the client will eventually save around $2,104 on monthly basis which could be used for the mortgage payments. However, the calculations of loan requirements are relatively indicating that a property value of $374,857 would only be allowed to the client due to the low initial deposit to the bank. Hence, a small property can be bought by the client with the value of $374,857 and about this payment of $2,104 (McCollum & Upton, 2016).

Calculating the stamp duty situated with property purchase, while detecting the house price client can afford:

Without Mortgage Premium
Particulars	Values
Property	$ 370,000.00
Total Stamp Duty value	$ 1,076.00
Total cost	$ 371,076.00
Bank loan	$ 74,000.00
Savings	$ 75,253.00

With Mortgage Premium
Particulars	Values
Property	$ 600,000.00
Total Stamp Duty value	$ 1,614.00
Current savings	$ 75,253.00
Initial payment	$ 50,000.00
Insurance premium	$ 20,790.00
Total Bank deposit	$ 70,790.00
Savings	$ 4,463.00

The above two tables relatively indicate the overall Property value that will be obtained by the client when mortgage premium is not used and when mortgage premium is used. From the valuation the property value of only $ 370,000 can be obtained by the client, as the overall savings is at the levels of $ 75,253 (Living, 2018). Moreover, the total LVR is at the levels of 80%, which has allowed the client to effectively accumulate the property with the value of $ 370,000. However, the property value with the mortgage premium is at the levels of $ 600,000, where the client pays adequate insurance premium to obtain the loan for the property. Total LVR of 92% is mainly provided by the bank for the property with the mortgage premium.

Calculating and presenting a financial plan with upfront payment of 20% and upfront payment of 5% for the loan:

Year	Property price	Savings Target	20% upfront	Stamp duty	Difference
0	$ 713,000	$ 75,253	$ 142,600	$ 39,729	$ (107,076)
1	$ 726,686	$ 101,696	$ 145,337	$ 40,492	$ (84,133)
2	$ 740,635	$ 129,343	$ 148,127	$ 41,269	$ (60,053)
3	$ 754,851	$ 158,171	$ 150,970	$ 42,061	$ (34,860)
4	$ 769,340	$ 188,175	$ 153,868	$ 42,868	$ (8,562)
5	$ 784,108	$ 219,406	$ 156,822	$ 43,691	$ 18,893
6	$ 799,159	$ 251,920	$ 159,832	$ 44,530	$ 47,558
7	$ 814,498	$ 285,773	$ 162,900	$ 45,385	$ 77,489
8	$ 830,132	$ 321,026	$ 166,026	$ 46,256	$ 108,744
9	$ 846,067	$ 357,739	$ 169,213	$ 47,144	$ 141,382
10	$ 862,307	$ 395,978	$ 172,461	$ 48,049	$ 175,468
11	$ 878,859	$ 435,807	$ 175,772	$ 48,971	$ 211,064
12	$ 895,728	$ 477,297	$ 179,146	$ 49,911	$ 248,241
13	$ 912,922	$ 520,519	$ 182,584	$ 50,869	$ 287,066
14	$ 930,445	$ 565,548	$ 186,089	$ 51,845	$ 327,614
15	$ 948,305	$ 612,461	$ 189,661	$ 52,840	$ 369,960
16	$ 966,508	$ 661,339	$ 193,302	$ 53,855	$ 414,183

Year	Property price	Savings Target	5% upfront	Insurance premium	Stamp duty	Amount
0	$ 713,000	$ 75,253	$ 35,650	$ 30,588	$ 39,729	$ (30,713)
1	$ 726,686	$ 101,696	$ 36,334	$ 31,175	$ 40,492	$ (6,305)
2	$ 740,635	$ 129,343	$ 37,032	$ 31,773	$ 41,269	$ 19,269
3	$ 754,851	$ 158,171	$ 37,743	$ 32,383	$ 42,061	$ 45,985
4	$ 769,340	$ 188,175	$ 38,467	$ 33,005	$ 42,868	$ 73,835
5	$ 784,108	$ 219,406	$ 39,205	$ 33,638	$ 43,691	$ 102,871
6	$ 799,159	$ 251,920	$ 39,958	$ 34,284	$ 44,530	$ 133,148
7	$ 814,498	$ 285,773	$ 40,725	$ 34,942	$ 45,385	$ 164,722

The calculation of tables relatively indicates the duration where adequate investments on the property can be conducted with a 20% upfront payment by the client. equation loan can be accumulated during the fifth year where the difference between income and expenses as positive. On the other hand, the case scenario with 5% upfront payment relatively indicates the use of insurance premium which would allow the client to obtain the property by year 3. this would eventually help in improving the level of income that could be generated from operations (Bankrate.com, 2018).

Calculating whether increment in interest payment can hamper interest payment capability of the lender:

Time		360
Property value		$754,851.00
Loan amount		$717,108.45
Year	Interest rate	Mortgage Payment	Saved	Savings
4	4.50%	$ 43,601.80	$ 45,984.83	$ 2,383.03
5	4.50%	$ 43,601.80	$ 50,151.00	$ 6,549.20
6	4.50%	$ 43,601.80	$ 55,925.64	$ 12,323.84
7	7.00%	$ 57,251.28	$ 63,372.26	$ 6,120.98

The above table indicates the overall mortgage payments that will be conducted by the client after the purchase of the property. However, the changes in interest rates from 4. 50% to 7% in year 4 will have low impact on the overall mortgage payments of the client. The above table indicates the overall Savings and income that is generated by the Client for the period of the initial investment (Stampduty.calculatorsaustralia.com.au, 2014). The initial investment on the property will be conducted on year 3, while increment in interest rates will result from year 7. Change in mortgage payments from $ 43,601.80 to 57,251.28 will not negatively affect the overall income of the client due to its continuous savings and rising income throughout the year.

Providing a relevant plan with detailed risk entailed by the assumption made for the financial plan:

The assumptions are mainly made for the client to achieve its Austrian dream, as the overall income of the client is adequate to support a mortgage for the new home. The calculations conducted in the financial planner relatively represents the changing income of the client over the period of time which would help in a comedy eating a new mortgage. However, from the evaluation it is understood that if the client loses their job then the overall aim of Achieving the Austrian dream will not be feasible. The focus of the financial plan is only on the income that is generated by the client over the period of time, which would help in supporting the mortgage payments (Feldstein, 2018).

Reference and Bibliography:

Abs.gov.au. (2018). Ato.gov.au. Retrieved 24 May 2018, from https://www.ato.gov.au/calculators-and-tools/simple-tax-calculator/

Baert, S., Heylen, F., & Isebaert, D. (2014). Does homeownership lead to longer unemployment spells? The role of mortgage payments. De Economist, 162(3), 263-286.

Bankrate.com. (2018). Bankrate. Retrieved 24 May 2018, from https://www.bankrate.com/calculators/mortgages/mortgage-payment-calculator.aspx

Campbell, J. Y., & Cocco, J. F. (2015). A model of mortgage default. The Journal of Finance, 70(4), 1495-1554.

Feldstein, M. (2018). The Global Impact of America's Housing Crisis. Project Syndicate.

Finder.com.au. (2013). finder.com.au. Retrieved 24 May 2018, from https://www.finder.com.au/home-loans/bank-of-melbourne

Fuster, A., & Willen, P. S. (2017). Payment size, negative equity, and mortgage default. American Economic Journal: Economic Policy, 9(4), 167-91.

Justiniano, A., Primiceri, G. E., & Tambalotti, A. (2016). A simple model of subprime borrowers and credit growth. American Economic Review, 106(5), 543-47.

Living, C. (2018). Cost of Living in Melbourne, Australia. May 2018 prices in Melbourne.. Expatistan, cost of living comparisons. Retrieved 24 May 2018, from https://www.expatistan.com/cost-of-living/melbourne

Genworth.com.au. (2018). Genworth.com.au. Retrieved 24 May 2018, from https://www.genworth.com.au/lenders/lmi-tools/lmi-premium-estimator/

McCollum, M. N., & Upton, G. (2016). Local labor market shocks and residential mortgage payments: Evidence from shale oil and gas booms.

Stampduty.calculatorsaustralia.com.au. (2014). Stamp Duty Calculator. Retrieved 24 May 2018, from https://stampduty.calculatorsaustralia.com.au/

Tradingeconomics.com. (2018). Tradingeconomics.com. Retrieved 24 May 2018, from https://tradingeconomics.com/australia/wages

Van Ooijen, R., & Van Rooij, M. (2014). Financial literacy, financial advice and mortgage risks. DNB Working Paper.

Weick, K. E., & Sutcliffe, K. M. (2015). Managing the unexpected: Sustained performance in a complex world. John Wiley & Sons.

Westpac.com.au. (2018). Westpac.com.au. Retrieved 24 May 2018, from https://www.westpac.com.au/personal-banking/home-loans/calculator/stamp-duty-calculator/

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