Not unusually, several people called me, and others stopped me and spoke to me about that end-of-the-year article about Bermuda house prices and wages [30 Dec 05]. The gist of the comments was that the situation was ‘scary’ because it meant that so many people would be shut out of owning a house. Two interesting points arose. One came from within my mind. The other came from a caller.
First, the caller’s point. He referred to someone with whom he’d spoken and said that this person was a hardworking tradesman. He said that this tradesman had told him that he was working steadily and was handling all the work that came his way. He didn’t need more work.
After paying for his weekly expenses, he said that he was able to ‘bank’ $1,000 a week. Every week. I thought about that and I reckoned that if it was true, this tradesman was actually saving $50,000 a year – or over $4,000 a month. I put that in the context of buying a Bermuda house.
At $4,000 a month, he could carry a 30 year mortgage of about $440,000. Assuming he was paying market rent for wherever he was living [say $1,800 a month] he could add his current rent to his mortgage capability. That meant that he would be able to carry another $200,000 of a 30 year mortgage. So, altogether he could afford a mortgage of around $640,000.
Not bad, huh?
So if he saves up for four years and puts $200,000 down and takes up a mortgage of $640,000 he can buy a house for $840,000.
If he can find one at that price. No house? That’s OK. Get a condo instead. Condos are being advertised for as low as $685,000. At that price, our tradesman only needs one year’s savings and then he can carry a 30 year $640,000 mortgage.
So as difficult as it seems, house-buying is possible. Not much choice though, and you’d need a very high personal income like our tradesman who, if his story is true – must be taking home something in the region of $96,000 a year – which means that he has to be grossing around $110,000 a year. Now that income seems very high, and according to all the Census Reports on incomes in Bermuda, it’s not an annual income that is common or frequent for individual Bermudians.
So back to the question – is house-buying a practical proposition for a married couple taking home a net $97,000 from an annual household income of $115,000? It’s the same this week as it was last year. NO! It is not.
That makes Bermuda the land of the ‘wealthy poor’.
The other thought that I had? Why buy a house anyhow? Why not rent all your life and invest the money that you’d pay out in a mortgage?
Sound idea. It would work actually very well in an economy where rising house prices did not rocket past rising wages.
That’s not what happened in Bermuda.
In Bermuda, from 1972 to 2005, dollar wages went up 833%. That means that the starting out $14,000 household income I’d spoken of last time would only have the spending power of about $115,000 now – before taxes and contributions.
But what happened to house prices? You would still actually need to work more than twice as long to get to build up to a ‘house price’. House prices, if they’d stayed level with wages, would now be around $500,000 for a small cottage or condo. But house prices are almost twice that. – with only the odd condo appearing for $685,000 – and cottages at $960,000 and up and up…
What about rents? Rents for long-term Bermudian households seem to have stayed more level with wages. A two bedroom unit that would have rented for $200 a month in 1972 is still available at a rent between $1,600 and $2,500 a month now. Hard-to-find I know, but actually still there for good tenants.
So should people give up on trying to buy a house and just rent instead – and spend the difference on expensive clothes and shoes and cars and trips?
In many cases, in Bermuda, is that what’s actually happening now?