There was a great post by Michael Matustik last week, which I shared on LinkedIn, As a result I’ve received numerous phone calls and messages inspiring me to delve a bit further into the topic and what the ‘lavish lifestyle’ might cost you in borrowing capacity.
Let’s first start with some of Matustik’s insights.
He says, “So the buyer inquiry is up but real life is stopping most buys – and that’s HEM or the House Expenditure Measure. It’s a benchmark banks use to estimate a loan applicant’s annual expenses — a figure that becomes part of the calculation that determines borrowing capacity.”
Matusik reports that up to 80% of loans are assessed using HEM. He explains that the estimate of the household expenditure is based on the State in which the borrower lives, the number of dependent children and their lifestyle across four categories of student, basic, moderate and lavish – and believes that many are in the lavish category.
Taking a Basic living expense of $32,000, he compares household gross income of $80,000 up to $500,000 in terms of Basic borrowing limit, Lavish living expenses and Lavish borrowing limit. Take the $100,000 gross income household, for example, and the Basic borrowing limit is $484,315. Jump that household to Lavish and the borrowing limit is #327,000 with living expenses at $58,320.
Matusik suggests his comparison shows this is what is stopping many from buying an investment property, buying their first home, or selling and buying a more appropriate dwelling.
According to website payscale.com, the average annual income in Bundaberg is $51,729.
This helps explain where the majority buyers are in Bundaberg when you look at where the average gross income is for a household.
Considering Matusik’s comparisons, you can see how difficult it is for a first home buyer, especially if they are single, to purchase.
Even with interest rates so low, a buyer must pass the HEM test. The Lavish category is not very high at all; and, in reality, the word ‘lavish’ seems a bit of an exaggeration.
There are many cases where the deposit or funds from another sale add to the ability to buy a higher priced property. But for those who were not able to buy and ride the market on the way up in the early 2000’s, you have had to build your equity by improving the property or debt reduction.
It is tough to see how first home buyers or those looking to upgrade, from a unit to a family home for instance, can do so in a market such as Brisbane.
Technology and even different types of employment have provided more opportunities to work from home or a variety of locations away from a centralised business base, including a major CBD.
Bundaberg proves an attractive market in such cases.
From an investment purchase, we also have strong rental demand with a low-cost base showing strong rental returns of in some cases 7.5%.
The Bundaberg region is looking even better for those on a budget, or now in the ‘not so lavish lifestyle’ category.
- Michael Matusik’s Household Expenditure Measure table.
Scott Mackey, RE/MAX Precision – M. 0419 728 911