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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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