1. The historical prices have been studied from ABS website and 2 data have been considered for analysis. The data analysed includes:
The data for the past years have been compared quarter on quarter and change is calculated by using formula (Index in Q1Y1- Index in Q0 Y1)/ Index in Q0 Y1
On the basis of the data has been obtained. Further a simple average has been carried out to obtain a realistic figure for the purpose of analysis. The resultant growth obtained in price of residential property is 5.6% and established house price was 7%.Further, the data for residential property index has been considered as it is alignment with the research objective of analysing the purchase of property for accommodation under Great Australian Dream.
Accordingly, the rate of growth for forecasting is 5.6%
For the purpose of analysing, the value of property has been inked from the link https://finance.nine.com.au/2018/02/01/08/30/sydney-median-home-price-rises-as-growth-slows
The value considered is 7,36,900 Million AUD. Median has been considered to remove impact of outliers.
On the basis of the above data, an analysis has been carried out forecasting the price for 20 years in the excel enclosed (Excel Answer 1)
2. The historical prices have been studied from ABS website and have been considered for analysis.
Two data have been considered for analysis;
The data for the past years have been compared quarter on quarter and change is calculated by using formula (Index in Q1Y1- Index in Q0 Y1)/ Index in Q0 Y1
On the basis of the data has been obtained. Further a simple average has been carried out to obtain a realistic figure for the purpose of analysis. The resultant growth obtained in wage index is 3.0% while in other data obtained is 2.1%
The rate of growth for forecasting is 3% as the past growth is an important critical element in predicting future and a simple average of data over a larger length of time encompasses all crest and trough and negates impact of abnormal situation.
Initial wage has been taken at AUD 80,000 as provided in the case.
On the basis of the above data, an analysis has been carried out forecasting the wage for 20 years in the excel enclosed (Excel Answer 2).
3. The slab of individual taxation has been obtained from: https://www.ato.gov.au/Rates/Individual-income-tax-rates/
The tax system in Australia is progressive. Further, a Medicare levy of 2% is levied on tax.
On the basis of data in Question 2 and tax slab at ATO website tax has been computed in Excel Answer 3. Further, the recent tax slab has been considered for the purpose of analysis as the average of past data shall not be of any use in the current scenario. Further, taxes are forward looking activity. Accordingly, net income is computed from gross income by deducting taxes.
Monthly Expenses
The monthly expenses have been considered from the link: https://sydney.edu.au/study/finances-fees-costs/living-costs.html
The monthly living expense for a single individual is AUD1,690 and includes food expense, accommodation, utilities and entertainment. Therefore, yearly expense sets out to be AUD 20,280.
Further, inflation factor has been taken into consideration as reflected in Consumer price Index for March Qtr. 2017 to March Qtr. 2018 i.e 1.9% round off to 2%. The data for the current period has been considered as inflation is a forward looking activity and no sudden catastrophe or abnormal surge is expected in future years. Accordingly, a year data has been considered for analysis.
On the basis of above, data has been plotted for further 20 years. Refer Excel Answer 3
Monthly Capacity of Repayment
The monthly capacity for repayment has been determined by deduction from gross income taxes and expenses. The resulting factor gives us savings or capacity for repayment which is further divided by 12 to give monthly capacity.
Assumption: Monthly expenses remain consistent over the year.
Most Favourable Home loan Rate and maximum Amount that can be borrowed
The loan rate has been scrutinized from the link: https://www.finder.com.au/cheapest-home-loans
On the basis of analysing the above link, the following home loans have been considered favourable:
|
Sl. No. |
Loan Company |
Rate of Interest |
Loan to Value (Insured) |
|
1 |
SCU Basic Variable Rate Home Loan |
3.81% |
95% |
|
2 |
Community First Accelerator |
3.99% |
95% |
|
3 |
Mortgage House Advantage Variable Home Loan |
4.12% |
95% |
|
4 |
Bank of Melbourne |
3.65% |
95% |
On the basis of the above, the most favourable loan is from Bank of Melbourne with highest LTV and lowest interest rate. The maximum amount that can be borrowed is 95% of property value.
4. Since the individual at present has a saving of 50,000 AUD and the salary/ wages shall accrue at year end, the house value that can be afforded has been detailed here-in-below:
|
Sl No. |
LTV |
Value of Property Affordable |
|
1 |
20% |
2,50,000 |
|
2 |
5%* |
10,00,000 |
Assuming Insurance amount is deducted from loan amount.
The value of stamp duty has been determined through the following link: https://www.moneybuddy.com.au/home-loans/guide-stamp-duty.html
Accordingly, the value of stamp duty has been determined on the value of property determined in question 1 is AUD 7, 65,550/-
5. The subject is risk averse and invests in flexible mutual funds where return is 10% (Conservative). The rate has been considered from the following link: https://www.investsmart.com.au/managed-funds/top-funds
On the basis of analysis in Excel Answer 5, the house can be purchased:
6. The analysis has been carried out on 80% LTV loan repayable over 30 years and initial interest rate has been considered at 3.65%.
In the first instance the equated yearly instalment was 37,857 AUD which increased substantially to AUD 55,070, thereby creating a significant risk for the client.
The first option that client opt for is fixed rate interest whereby irrespective of market change rate of interest remains constant.
The client can also opt for contingent insurance against interest rate.
Swap Agreements are also a viable option for the purpose of hedging.
I would advise client to opt for interest rate hedging whereby the client pays fixed and receive flexible interest rate and can thus be a payer of fixed rate which shall not impact the loan.
7. The report has been described in the above points.
The house can be purchased by year end 3 on the basis of LTV 80%.
The assumptions made are:
Potential risk assumed:
The above risk shall be mitigated with proper planning and hedging. Client can opt for insurance against property too in order to safeguard against risk.
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