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When it comes to property, every buyer is in a microcosm: they have to ensure that the price they pay and the size of their loan repayments stack up for them personally.

House prices in Sydney and Melbourne continue to be big news with rising prices creating a lot of discussion about a housing crisis.

In the March quarter, the Australian Bureau of Statistics reported a 1.6 per cent rise in property prices in Australia’s capitals, with Sydney almost doubling that trend at 3.1 per cent growth.

That’s mixed news for people who already own property, and a kick in the guts for those wanting to buy in Sydney. But it’s also a wake-up call for those who watch market numbers too closely.



As I’ve often pointed out, property markets and average prices are made up of hundreds of sales and auctions. They aggregate the cheapest with the most expensive to get their averages.

But for a couple buying their first home, they are not an average among hundreds of sales: they buy one home, at one price and pay one mortgage.

When it comes to property, every buyer is in a microcosm: they have to ensure that the price they pay and the size of their loan repayments stack up for them personally.

In a booming market, every buyer has to play to their strengths. What someone else is paying 14 suburbs away is immaterial.

In this market, you have to become really conversant with not only the real-estate market, but with lending formulas for home loans and also your own personal finances and budgets.

You need to measure personal affordability and your ability to pay off the loan, known as “loan serviceability”.

One of the oldest rules in the book is that an appropriately-priced property should be valued at around five times your annual income.

This assumes a 20 per cent deposit and it means that if you and your partner bring in $120,000, the sweet spot is a house price of $600,000.

In Sydney right now, this rule of thumb has become somewhat out-dated. Buyers are having to go to six and seven times their incomes to buy the house they want.

This means buyers can’t rely on rules of housing affordability alone, and they have to address loan serviceability.

The question of loan serviceability varies from lender to lender and often hinges on monthly household expenses such as food, clothing, entertainment and so on. Your lender will help you determine this, according to your personal situation.

You can use online calculators to see your borrowing power, and every property buyer should use one to self-assess their situation. However, lenders might calculate your loan serviceability differently and where one may approve you, another won’t.

This can confuse borrowers. In an environment of having to stretch your income to cover a larger loan, first-home buyers should make at least one visit to a mortgage broker. Information is power, and brokers have the information.

The real lesson is to understand the property market from your own personal circumstances.

When a property market booms, it’s painful to buy-in. But at the very least you can formulate your own affordability and loan serviceability parameters.

After all, it isn’t the “market” which repays the mortgage – it’s you.

Mark Bouris is executive chairman of wealth management company Yellow Brick Road. www.ybr.com.au.


Posted by Mark Bouris – The Age on 17th July, 2015