ANALYSIS: Recent figures show that the cost of living has increased in the past 12 months by 5.2% - the highest 12-month increase since 2008. For anyone looking to buy property, they can add inflation to the list of hurdles they are facing.
But how much of a hurdle is inflation to getting a mortgage?
I wonder how many people who are not living paycheck to paycheck have noticed this increased cost over the past 12 months. Take petrol for example. Did you notice the price go from $2.50 per litre to $2.70? I didn’t hear any comments. Of course, $3 per litre is a milestone that is easily recognisable but not many people took note prior to that.
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The same with food. How many middle-class earners would notice apples getting 20c per kg more expensive? They might if it jumped up all in one go but odds are the price went up slowly or maybe fluctuated depending on the season.
So overall, would a home-buying family, who spends about $1500 per month, notice a 5% cost increase? Would they notice an additional $75 per month, with that cost being spread over all their utilities, food, petrol, discretionary spending etc? It seems unlikely except for those on the breadline, particularly, again, if that $75 increase happened slowly over the year. Just a few dollars increase every month, gone unnoticed. But just because it's gone un-noticed doesn't mean it hasn't had an effect. The increases all add up
So, assuming that all else stays the same, what would an additional $75 per month (or $900 per annum) in expenses reduce your mortgage affordability by? As it turns out, it’s almost exactly $10,000 of additional borrowing. In other words, someone with an approval for $800,000 last year could now, all else being equal, now only purchase $790,000.
Rupert Gough: "There are many things to be frustrated about with the housing market at the moment." Photo / Fiona Goodall
But as we know, all else is not equal. In fact, it’s far from equal. Loan to Value ratios have been fully implemented. Debt to Income ratios are partially implemented. Interest rates are up from 2.1% to 3.5% fixed for one year. And the CCCFA is stopping a large chunk of high-quality buyers from getting finance for ridiculous reasons. But most of all, someone who was looking at a house worth $800,000 last year is now looking at around $1m for the same house.
There are many things to be frustrated about with the housing market at the moment and inflation has just made an already high barrier to entry that little bit higher.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
