Defining “affordable”

There is a generally accepted rule of thumb that one should aim to spend no more than 30% of their income on housing.  This rule of thumb helps provide an idea of what “affordable” should actually mean.

Let’s start with the median personal income information from www.bermuda-online.org

In 2014 the median gross annual income for all job holders — in firms with ten or more employees — rose by 5 per cent to $63,897, up from the $60,668 for the year before. High median salaries included actuaries at $175,378, lawyers at $180,499 and auditors at $100,000.

The average salary in the banking and international business sector was estimated as US$ 89,896.

Ok, so $63,897 for the average worker and $89,896 for those in international business.

Let’s start with the average worker.  30% of $63,897, taken monthly equates to $1,597.43 per month.  Next, international business workers.  30% of $89,896 taken monthly is $2,247.40 per month.

This would be a great starting point for defining “affordable” because it means that this is what the average person, spending along the rule of thumb of 30% of their income, can reasonably afford.  These could then be doubled to consider what the affordability level is for a couple.

So let’s return to the “Affordable Urban Living” development and compare it’s affordability. Admittedly the post was rather strongly worded as this writer tends to get worked up over housing affordability because it is the root cause of most of the island’s festering problems, but we’ll digress from that.

Earlier this year the 7 Park Road project was reactivated with a starting price of $485,000 for a one bedroom apartment.  It is touted as “affordable” by the developer, yet labeled as “luxury” by the newspaper.  Is it affordable or luxury?  Well let’s crunch some numbers.

At a 0% interest rate, $485,000 taken over a 30 year term is roughly $1,347 a month to pay off.  This is of course before considering condo and maintenance fees.  Arguably, this could fall close to the rule of thumb calculations for the average Bermudian income and certainly falls within the mark for an international business worker.  Unfortunately, a no interest loan is fantasy.

So let’s try again, this time with a 6.5% interest rate more indicative of Bermuda’s mortgage rates.  We’ll use HSBC’s mortgage calculator to figure out the details.

Aside from the rather horrid fact that you’d pay more in interest than you would in principal, even at a very long 30 year term you’d be looking at a monthly payment of $2,986.23, far beyond our rule of thumb affordability.

So, who can afford this?  Well someone would need to earn $119,449.20 a year for this number to fall within the 30% rule of thumb, and again, that’s before considering maintenance fees.

So, does this development measure up as affordable or luxury?  Perhaps affordable if you’re employed as a Lawyer or an Actuary.  Sadly not so if you’re anywhere close to average income levels, even as an international business worker.

So what could be considered affordable? For the average worker, at $1,597.43 per month, likely a $200,000 place would be affordable with a 30 year, 6.5% mortgage of $1,350, leaving $247 spare for maintenance fees.  For the average international business worker, at $2,247.40 per month, a $300,000 place would be affordable with a 30 year, 6.5% mortgage of $2025.62 with $221.78 to spare for maintenance fees.

This is the fundamental problem so few seem to understand.  When one laments the lack of housing supply, people point to the many options available, usually far above the affordability rule of thumb. Bermuda housing is simply not affordable because supply has long outstripped demand and there is too much of a focus on luxury.  In order for Bermuda to fix many of its issues there needs to be a concerted policy driven effort to reduce the cost of housing.  Following New York’s initiative of embracing micro-apartments may be one way to help improve housing stock and affordability.

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