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Tips to overcome affordability woes

John McGrath
2 November 2010

We often see stories in the media about falling affordability in the property market based on ‘affordability indexes’, which are complicated calculations based on a range of criteria including average house prices, household debt, household incomes and the cost of living.

To make things more complicated, each institution that reports an ‘affordability index’ uses different criteria to calculate it, so it’s quite confusing for the average person to understand them. And that’s why it’s worth taking these ‘affordability indexes’ with a grain of salt. Some would have you believe that property has become 30 per cent less affordable since 2009! 

Instead, I recommend calculating your own personal affordability index. Take a look at your salary, your debt levels, your cost of living and what you’d have to pay if you took out a mortgage for the type of property you really want. You’ll then need to talk to your mortgage broker or bank to work out what they are willing to lend you and what you can afford in terms of loan serviceability, such as repayments.

The next step is being honest with yourself about the costs of your long-term lifestyle. A mortgage is a 30-year thing so we’re talking about a permanent change in your disposable cash. So what do you want? Do you want to do some travelling in the near future? Do you have an expensive hobby that you don’t want to give up? If so, you definitely need to factor this in before deciding what sort of property you can afford.

Some people claim that Australian property is just totally unaffordable, full stop. Drill down into their complaint a bit and you’ll find that many of them are referring to property in their favourite suburb – which often means premium beachside areas close to the CBD!

Here’s a quick way to buy where you want for less. Pick a suburb that you’d love to buy in. Let’s say Manly, on Sydney’s Northern Beaches. Right now, RP Data says the median price of an apartment in Manly is $685,000. Now take a look next door and by that I mean take a look at the neighbouring suburb.

Just a 10-minute walk from Manly is Queenscliff, also a great beachside suburb where the median price of an apartment is $578,000. Here you can still have the Manly lifestyle, but you’ll save almost $100,000 if you buy in Queenscliff, and you’ll pay 16 per cent less in monthly loan repayments as a result.

Let’s look at another super desirable suburb – how about houses in Toorak in Melbourne. Australian Property Monitors says the median price of a Toorak house is $2.288 million. Right next door is Kooyong, also a highly desirable suburb, where the median price is $2.148 million. Toorak Road runs through both suburbs yet there is a $140,000 difference in the median house price – that’s a big saving for many buyers.

In terms of price growth, your property may grow in value a little faster if it carries a Manly or Toorak address. However, every suburb has a tipping point when it gets too expensive and people start looking next door for affordability – and that’s when you see strong long-term price growth in these neighbouring suburbs. There are many ‘next-door’ suburbs in Australia that are yet to undergo this supercharged growth. Buying in these suburbs today could be a very smart move!

Another way to buy the lifestyle you want for less is to consider what it is you really like about where you live now. Say it’s the trendy café society. Well, it’s time to discover other parts of your city where the same café society is on offer. It’s happening right now in Sydney with a major migration of Eastern Suburbanites to the trendy Inner West where the same café lifestyle is available for much less money.

For NSW readers, check out the Lifestyle Property Search on www.mcgrath.com.au and you’ll discover which suburbs in other areas of your city offer a similar lifestyle at a lower price. For readers in all states, you can conduct a similar search using the Radar tool on www.domain.com.au.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Related articles

A spring influx of homes for sale is good news for property buyers.

And McGrath’s advice on buying with friends and family.

And, how does our prestige property compare globally?

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