Falling down Castle Hill: Diagnosing a suburb living way beyond its means

GUEST OBSERVATION

So two weeks ago I babbled on about how Sydney property prices will go down in value and how many property buyers live in a fantasy world where they don’t think it will or has ever decreased.

So I thought I would go into one Sydney suburb, diagnose the stats and show you that it can be a reality for this suburb.

There was no science in choosing Castle Hill as the suburb of choice. I didn’t troll through pages and pages of data to choose this particular suburb though.

Looking at the latest CoreLogic RP Data stats as at September 2014, Castle Hill has a median house price of a whopping $982,000.

Yep that’s right, its going to cost you just shy of a $1 million to buy in Castle Hill. In fact, it will probably cost you more. Even a three bedroom unit sold over weekend for $920,000. Yes, a unit.

According to CoreLogic RP Data it has grown in value 19% in the last year and 49% over the last five years. So in English, in 2009 you could buy in Castle Hill for $650,000.

With an average ‘days on market’ of 29 days, it is showing that the market is still red hot. So I would assume that we will see the magic million mark passed by Christmas, if not already.

Yields have failed to keep up, like many Sydney suburbs. They do their best work in a quiet market where no new houses are being built and the supply dries up. That said, the median rent is $650 per week.

So forget investing there, with a yield at 3.4% you can achieve this in a bank account without the risk. It’s one of those suburbs where it is cheaper to rent than to purchase! And the volume of sales, 576, shows significant numbers that can be relied upon. Be wary of sale figures in a low sales volume environment.

Now we need to add some income and other fun facts into the mixing bowl from the 2011 Census. Of all the working families, 41% had one major breadwinner whilst the other partner either worked part time or not at all. The suburb averages three people per dwelling and they own two cars.

The median family income is $2,059 per week – that’s a tidy $107,068 per annum.

But hang-on, that’s the whole household income and that’s gross before tax. So take home in hand is $1,487 per week, well for 41% of families it is.

Now lets go back and look at the house figures again and put the income and other stats in.

Let’s stick with the median house price at $982,000. If you were to purchase with a 20% deposit you would require around a $230,000 deposit and have a loan for $785,600. With an interest rate of 4.8% the principle and interest payments it equals $951 per week over 30 years.

That’s a whopping 63.9% of your net income per week going towards your mortgage. Does that sound like it makes financial sense? Better hope interest rates do not ever go up, or that you have a child, or both. That’s a recipe for bankruptcy.

But hang on, wasn’t the average people per household three? Oh, so they do want to have a family and a house in Castle Hill. Uh oh.

Now I have gone and checked with the banks that they would even lend you the money, and I can confidently tell you that even the banks are not that crazy. So if that’s the case, then how are people affording to buy these properties if the banks wont give them a loan that size?

Well, there are possibly several answers here:

• They have larger than 20% deposits
• They could be investors from other suburbs, so their incomes are different
• The lower incomes earners may have owned property for a while when prices were lower
• The higher income earners are buying the properties today

As the median income is the middle income achieved in the area, this means there are certainly income earners on a higher income than $107,000. It is more than likely these people, who are on incomes of $135,000 or higher, who are purchasing properties at this level. Doing some numbers here on servicing and income categories, it is those families in the top third percentile that could only realistically afford properties at this level. 

But hey, let’s go crazy and pretend interest rates will go up (we all know that never happens) and let’s say they go up to 8% – that same scenario above with the higher income earner at $135,000 can no longer afford to get that loan.

Can they afford to make the loan repayments though?

$785,600 principle and interest at 8% equals $1,329, which equates to 73% of their income, which leaves them $485 per week for:

• Food to feed a family of three
• Fuel for two cars
• Rego
• Council & Water rates
• Alcohol and possibly cigarettes
• Bills
• School fees

So it could potentially be done, but you would be living on bread and water and in reality this family would go bankrupt.

Remember my tip: Always do your sums on 9%.

And the figures are telling me that this is going to be a common story for Castle Hill in the coming years.

The numbers are leaning towards a suburb that is living well beyond its means and I would say that there a little of the “keeping up with the Joneses” going on here too and that’s a recipe for one mighty price correction.

TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based wHeregroup.

Picture of a Castle Hill house courtesy of Wikimedia Commons.