Interest Rate Increase Sucks

But consider the longer term position.

Statistics can often be quite confusing, and whilst we will take some liberties with the following examples, the picture that evolves is still quite reflective of the net effect to property owners over a longer term.

We can’t offer any help with rising interest rates, increasing petrol prices, general inflation and a stagnate property market, but we can make suggestions for how you could put money back into your pocket.

And when you turn us all upside down and shake the money out – isn’t that what we all want.

So firstly we will deal with some of the basic statistics we are going to use in this comparative analysis.

1. Average Australian Mortgage = $220,000
2. 0.25% increase in interest rates = $36 month extra repayments
3. Annual increase in repayments = $432 per year
4. Average property price Australia = $ 400,000
5. Average life cycle of property ownership = 7 years
6. Average household income = $60,000

Now the following data has been rounded to make the presentation of the analysis easy, but sources of this data include, Australian Bureau of Statistics, Australian Property Monitors, Real Estate institute of Australia and various other publications and sources.

We start with the approximate median property price within Australia of $400,000 (it is slightly less – December 2005 weighted average all capital cities $394,531). This is what the average sale price will be for a property throughout Australia.

Now statistics suggest property owners sell their property roughly every 7 years. In 2004/2005 there was around 500,000 dwelling sales. This doesn’t include sale of land, which is roughly 70,000 parcels per year sold.

Traditionally these sales would have occurred by the property owner employing a real estate agent.

The costs associated with selling a property are approximately 2.5% of sale price for the agent’s commission and 0.5% of sale price for advertising costs charged by the agent. On a $400,000 property sale this means you would incur costs of $10,000 for commission, $2000 for advertising for a cost of $12,000. Now you must add GST because the government wants their bit and the total cost to you for selling is $13,200. Approximately 3.3% of the sale price.

That’s $13,200 out of your pocket after tax. If you are selling your principal place of residence, you are not liable for any tax on any capital gains you may have achieved. This means any gains are tax free.

So how much would you have to earn in a taxed environment to give you $13,200 in your hand.

Based on the average household income of 60,000 – you would be in the 25,000 to 75,000 tax bracket which incurs income tax at the rate of 30 cents in the dollar. So the exercise becomes how much extra do I need to earn to put $13,200 in my pocket based on 30% tax rate.

The answer is $17,286 required to generate $13,200 after tax.

Now consider the cycle of 7 years for property. If you were paying the extra interest rate of 0.25% over that period the extra cost to you of $432 a year for 7 years would equate to an extra $3024 you would pay due to the latest interest rate rise.

Now we cannot control this cost. But if you were to sell your own property without a real estate agent you could save $13,200 ($17,286 if you had to work to pay for it)

You would be over $10,000 ahead. Which means interest rates could climb another 0.75% over the 7 years and you would still be in front simply by deciding to sell your property yourself.

So whilst we have no answers for Australian fiscal policy, rising inflation and other common ailments to your weekly pay packet we do know that if you choose to sell your property yourself you will be well ahead over the longer term.

It saves you thousands.



Michael Eroz
Property Analyst
Zeroagents.com.au
E: Michael@zeroagents.com.au

http://www.zeroagents.com.au