MA514 : Business Finance : Evaluation of Above Graph Helps in Understa
2).Investigate the historical income data for Sydney or Melbourne and make an appropriate forecast of the income of your client for the next 10 years. Clearly state the assumptions you make in order to obtain the forecast and justify your assumptions by providing supportive arguments.
3). Calculate the nett income of your client, given that she is single and does not have dependent. You can use the ATO tax Calculator to determine the nett income. Make a realistic assumption on the monthly expense of your client and determine the capacity of monthly repayment of your client. Find out the most favourite current home loan rate, and determine the maximum amount your client can borrow at the best rate.
4). Usually, a bank will finance only up to 80% of the property value, i.e. the buyer needs to pay upfront 20% of the property value. Alternatively, if the upfront payment is less than 20% buyer needs to pay mortgage insurance. When purchasing a property you need also to consider the stamp duty that is associate with property purchase. You can determine the amount of stamp duty with online stamp duty calculator. What is the house price your client can afford now?
5). If the current financial situation of your client cannot afford a house, please work out a financial plan that will guide your client to realize her “Australian Dream”, where you need to consider how your client can invest her savings to achieve the target of upfront payment plus stamp duty. You need to provide a plan with 20% upfront payment and an alternative plan of 5% upfront payment plus mortgage insurance. Here you need to consider that the property price is changing following your answer in task 1 and hence the saving target is changing with time, and the income of your client is also changing with time following your answer in task 2. Use an excel table to show how the target will be achieved and when the house purchase can take place.
6). Since current interest rate is at its historically low. In the coming years, the mortgage rate may increase to 7% and stay at the level for several years before it goes down again. Assuming that the mortgage rate will increase to 7% in the third year after purchasing the house, what is the impact of the increased interest rate on your financial plan? Show the impact on the excel table of your financial plan. Can your client withstand this increase in interest rate? How would you advise your client to manage this risk?
7). Based on your analysis above, write a report with financial plan to your client detailing what are the assumptions underlying this financial plan, when the “Austrian Dream” can come true, and what are the potential risks entailed by the assumptions and how the risk is managed in the financial plan.
Answer:
With the help of above figure relevant future property price of Sydney housing could be identified, which might help in drafting the overall financial plan. This would eventually help in detecting the level of savings, which is needed by the client for supporting its Austrian dream. The future prices is mainly calculated with the help of averages, where the three year average price of the property is used to detect the level of price changes incurred in the property price. This detection of the price change would directly have an impact on the future prices, which is essential in understanding the level of savings and property value, which could be detected in future (Baur & Heaney, 2017).
2).
|
Year |
Weekly Income |
Yearly Income |
Three Year Average |
Price change |
|
1994–95 |
$ 642 |
$ 33,384 |
|
|
|
1995–96 |
$ 626 |
$ 32,552 |
|
|
|
1996–97 |
$ 648 |
$ 33,696 |
33,211 |
|
|
1997–98 |
$ 664 |
$ 34,528 |
33,592 |
1.15% |
|
1999–2000 |
$ 692 |
$ 35,984 |
34,736 |
3.41% |
|
2000–01 td> |
$ 709 |
$ 36,868 |
35,793 |
3.04% |
|
2002–03 |
$ 726 |
$ 37,752 |
36,868 |
3.00% |
|
2003–04(a) |
$ 806 |
$ 41,912 |
38,844 |
5.36% |
|
2005–06(a) |
$ 870 |
$ 45,240 |
41,635 |
7.18% |
|
2007–08(a) |
$ 994 |
$ 51,688 |
46,280 |
11.16% |
|
2009–10(a) |
$ 981 |
$ 51,012 |
49,313 |
6.55% |
|
2011–12(a) |
$ 1,015 |
$ 52,780 |
51,827 |
5.10% |
|
2013–14(a) |
$ 1,046 |
$ 54,392 |
52,728 |
1.74% |
|
2015–16(a) |
$ 1,070 |
$ 55,640 |
54,271 |
2.93% |
|
|
|
|
Average |
4.60% |
The evaluation of above graph helps in understanding the level of income growth which will incur by the client in 20 years’ time. The income growth calculation is mainly valued with the help of average valuation, which is obtained by the salaried persons in Sydney. Therefore, the calculation is mainly conducted with the help of previous 20 years of income that is generated by salaried person in Sydney, which could help in understanding the level of income. The income of client is anticipated to increase from $80,000 to 196,720 in 20 years’ time, which will be helpful in drafting the financial plan. This financial plan would eventually help in understanding the level of income and savings that needs to be conducted by the client for supporting her Australian dream (Chia, Li & Zheng, 2017).
3).
|
Particulars |
Monthly |
Yearly |
|
Salary |
$ 6,666.67 |
$ 80,000.00 |
|
Expenses on Amenities |
$ 1,320.00 |
$ 15,840.00 |
|
Expenses on rent |
$ 680.00 |
$ 8,160.00 |
|
Total expense |
$ 2,000.00 |
$ 24,000.00 |
|
Tax |
|
$17,547.00 |
|
Savings |
$ 3,204.42 |
$ 38,453.00 |
|
Particulars |
Value |
|
Max LVR |
80% |
|
Property Value |
$ 442,265.00 |
|
Loan From Bank |
$ 353,812.00 |
|
Deposit to bank |
$ 88,453.00 |
The calculation relevantly helps in understanding the level of monthly savings and maxim amount of bank loan, which could be obtained by the client in the current situation. The calculation relevantly indicates that the client is savings up to $3,204.42 in monthly basis, while the amount $38,453 is saved on yearly basis. The derivation of the overall savings is conducted by deducting all the relevant expense and tax that is being paid by the client on yearly basis (Cho, Li & Uren, 2017). This would eventually help in understanding the level mortgage payment that could be accumulated by the client and the minimum amount of property, which could be bought with a LVR of 80%.
4).
|
Particulars (Without Insurance premium) |
Value |
|
Max LVR |
80% |
|
Property Value |
$ 440,877.00 |
|
Loan From Bank |
$ 352,701.60 |
|
Deposit to bank |
$ 88,175.40 |
|
Stamp Duty |
$ 277.60 |
|
Max LVR |
99% |
|
Property Value |
$ 985,000.00 |
|
Loan From Bank |
$ 974,120.00 |
|
Deposit to bank |
$ 10,880.00 |
|
Stamp Duty |
$ 39,815.00 |
|
Insurance Premium |
$ 37,758.00 |
The calculation conducted on the above tables relevantly helps in drafting an adequate financial plan for the client, where mortgage loan is with and without the insurance pre. Under the insurance premium method, individuals can accumulate high end LVR mortgages, which could reduce the overall deposit amount. Therefore, from the evaluation it could be identified that without the insurance premium the client could only purchase property of $440,877, while using the insurance premium the property value increases to $985,000. The evaluation of the calculation relevantly indicates that without the insurance premium the overall LVR is at the level of 80%, while it increases to a max of 99% if insurance premium is included in the loan process (Easthope, Stone & Cheshire, 2017).
5).
|
Year |
Property price |
Savings Target |
20% upfront |
Stamp duty |
Difference |
|
0 |
$ 977,500 |
$ 88,453 |
$ 195,500 |
$ 41,868 |
$ (148,915) |
|
1 |
$ 1,031,880 |
$ 128,830 |
$ 206,376 |
$ 41,674 |
$ (119,220) |
|
2 |
$ 1,089,286 |
$ 171,231 |
$ 217,857 |
$ 43,993 |
$ (90,619) |
|
3 |
$ 1,149,885 |
$ 215,557 |
$ 229,977 |
$ 46,440 |
$ (60,860) |
|
4 |
$ 1,213,855 |
$ 261,936 |
$ 242,771 |
$ 49,024 |
$ (29,858) |
|
5 |
$ 1,281,385 |
$ 310,475 |
$ 256,277 |
$ 51,751 |
$ 2,448 |
|
6 |
$ 1,352,671 |
$ 361,288 |
$ 270,534 |
$ 54,630 |
$ 36,124 |
|
7 |
$ 1,427,922 |
$ 414,494 |
$ 285,584 |
$ 57,669 |
$ 71,241 |
|
8 |
$ 1,507,361 |
$ 470,217 |
$ 301,472 |
$ 60,877 |
$ 107,868 |
|
9 |
$ 1,591,218 |
$ 528,588 |
$ 318,244 |
$ 64,264 |
$ 146,080 |
|
10 |
$ 1,679,741 |
$ 589,744 |
$ 335,948 |
$ 67,839 |
$ 185,957 |
|
11 |
$ 1,773,188 |
$ 653,830 |
$ 354,638 |
$ 71,613 |
$ 227,579 |
|
12 |
$ 1,871,834 |
$ 720,995 |
$ 374,367 |
$ 75,597 |
$ 271,031 |
|
13 |
$ 1,975,968 |
$ 791,398 |
$ 395,194 |
$ 79,803 |
$ 316,402 |
|
14 |
$ 2,085,895 |
$ 865,205 |
$ 417,179 |
$ 84,242 |
$ 363,783 |
|
15 |
$ 2,201,938 |
$ 942,589 |
$ 440,388 |
$ 88,929 |
$ 413,272 |
|
16 |
$ 2,324,436 |
$ 1,023,733 |
$ 464,887 |
$ 93,876 |
$ 464,969 |
|
17 |
$ 2,453,749 |
$ 1,108,827 |
$ 490,750 |
$ 99,099 |
$ 518,979 |
|
18 |
$ 2,590,256 |
$ 1,198,073 |
$ 518,051 |
$ 104,612 |
$ 575,410 |
|
19 |
$ 2,734,357 |
$ 1,291,679 |
$ 546,871 |
$ 110,432 |
$ 634,376 |
|
20 |
$ 2,886,475 |
$ 1,389,865 |
$ 577,295 |
$ 116,575 |
$ 695,995 |
|
Year |
Property price |
Savings Target |
5% upfront |
Insurance premium |
Stamp duty |
Amount |
|
0 |
$ 977,500 |
$ 88,453 |
$ 48,875 |
$ 37,532 |
$ 41,868 |
$ (39,822) |
|
1 |
$ 1,031,880 |
$ 128,830 |
$ 51,594 |
$ 39,620 |
$ 41,674 |
$ (4,058) |
|
2 |
$ 1,089,286 |
$ 171,231 |
$ 54,464 |
$ 41,824 |
$ 43,993 |
$ 30,950 |
|
3 |
$ 1,149,885 |
$ 215,557 |
$ 57,494 |
$ 44,151 |
$ 46,440 |
$ 67,472 |
|
4 |
$ 1,213,855 |
$ 261,936 |
$ 60,693 |
$ 46,607 |
$ 49,024 |
$ 105,613 |
|
5 |
$ 1,281,385 |
$ 310,475 |
$ 64,069 |
$ 49,200 |
$ 51,751 |
$ 145,455 |
|
6 |
$ 1,352,671 |
$ 361,288 |
$ 67,634 |
$ 51,937 |
$ 54,630 |
$ 187,088 |
|
7 |
$ 1,427,922 |
$ 414,494 |
$ 71,396 |
$ 54,826 |
$ 57,669 |
$ 230,603 |
|
8 |
$ 1,507,361 |
$ 470,217 |
$ 75,368 |
$ 57,876 |
$ 60,877 |
$ 276,095 |
|
9 |
$ 1,591,218 |
$ 528,588 |
$ 79,561 |
$ 61,096 |
$ 64,264 |
$ 323,667 |
|
10 |
$ 1,679,741 |
$ 589,744 |
$ 83,987 |
$ 64,495 |
$ 67,839 |
$ 373,423 |
The above calculation relevantly indicates two type of loan process, which could be used by the client, where 20% and 8% upfront payment needs to be conducted. From the valuation it could be identified that with the upfront payment of 20% the client could buy the house within 5th year, while using the 5% upfront payment reduction in property purchase time could be seen to the level of year 2. In addition, from the valuation it could be detected that the upfront payment of 20% calculation does not include any kind of insurance premium. On the other hand, the calculation of 5% upfront payment mainly has an expense of insurance, which needs to be conducted for minimising any kind of risk involved in investment. This has allowed the client to purchase the property quickly without waiting to accumulate the required savings for supporting her purchase of house (Gurran, & Bramley, 2017).
6).
|
|
Property value |
$ 1,089,286 |
| |
|
|
Loan amount |
$ 1,034,822 |
| |
|
Year |
Interest rate |
Mortgage Payment |
Saved |
Savings |
|
3 |
3.42% |
$35,391 |
$ 84,023 |
$ 48,632 |
|
4 |
3.42% |
$35,391 |
$ 103,962 |
$68,571 |
|
5 |
3.42% |
$35,391 |
$ 126,270 |
$90,880 |
|
6 |
7.00% |
$72,438 |
$ 151,067 |
$78,630 |
The above valuation mainly helps in understanding the level of mortgage payment that needs to be conducted by the client after purchasing the property. In addition, the negative impact on the rising interest payment on the mortgage payment condition of the client is also evaluated. From the valuation, the financial capability of the client is mainly detected, which could help in understanding her level of supporting the interest increment from 3.42% to 7% in 4th year of loan. The client could effectively support the rising interest rate, as her savings and income are adequate for supporting the mortgage payments (Hulse & Yates, 2017).
7).
The financial plan mainly indicates a positive attribute of the client, which could help in supporting her Australian dream. However, from the valuation it could be detected that any kind of adverse action in her income would directly have a negative impact on her capability to support the Sydney house. Any kind of problems related to the change in government policy would also have negative impact on savings capability of the client, which would directly impact her mortgage payment capability. Regardless of the drawback the overall financial plan would be effective for the client in allowing her to achieve the Australian dream.
Reference:
Abs.gov.au. (2018). Ato.gov.au. Retrieved 29 May 2018, from https://www.ato.gov.au/calculators-and-tools/simple-tax-calculator/
Baur, D. G., & Heaney, R. (2017). Bubbles in the Australian housing market. Pacific-Basin Finance Journal, 44, 113-126.
Chia, W. M., Li, M., & Zheng, H. (2017). Behavioral heterogeneity in the Australian housing market. Applied Economics, 49(9), 872-885.
Cho, Y., Li, S. M., & Uren, L. (2017). Negative Gearing and Welfare: A Quantitative Study for the Australian Housing Market.
Easthope, H., Stone, W., & Cheshire, L. (2017). The decline of ‘advantageous disadvantage’in gateway suburbs in Australia: The challenge of private housing market settlement for newly arrived migrants. Urban Studies, 0042098017700791.
Gurran, N., & Bramley, G. (2017). Relationships Between Planning and the Housing Market. In Urban Planning and the Housing Market (pp. 85-120). Palgrave Macmillan, London.
Hulse, K., & Yates, J. (2017). A private rental sector paradox: unpacking the effects of urban restructuring on housing market dynamics. Housing studies, 32(3), 253-270.
Leal, H., Parsons, S., White, G., & Zurawski, A. (2017). Housing Market Turnover. RBA Bulletin, March, 21-30.
Lee, C. L. (2017). An examination of the risk-return relation in the Australian housing market. International Journal of Housing Markets and Analysis, 10(3), 431-449.
Lee, M. T., Lee, C. L., Lee, M. L., & Liao, C. Y. (2017). Price linkages between Australian housing and stock markets: Wealth effect, credit effect or capital switching?. International Journal of Housing Markets and Analysis, 10(2), 305-323.
Liu, S., & Gurran, N. (2017). Chinese investment in Australian housing: push and pull factors and implications for understanding international housing demand. International Journal of Housing Policy, 17(4), 489-511.
Stampduty.calculatorsaustralia.com.au. (2014). Stamp Duty Calculator. Retrieved 29 May 2018, from https://stampduty.calculatorsaustralia.com.au/
Wang, J., Koblyakova, A., Tiwari, P., & Croucher, J. S. (2018). Is the Australian housing market in a bubble?. International Journal of Housing Markets and Analysis.
Warren-Myers, G., & Heywood, C. (2018). A New Demand-Supply Model to Enable Sustainability in New Australian Housing. Sustainability, 10(2), 376.
Wong, S. Y., Susilawati, C., Miller, W., & Mardiasmo, D. (2018). Improving information gathering and distribution on sustainability features in the Australian residential property market. Journal of Cleaner Production, 184, 342-352.
Wood, G. A., & Ong, R. (2017). The Australian housing system: a quiet revolution?. Australian Economic Review, 50(2), 197-204.
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