Financial Plan for Realizing Australian Dream - Desklib

The report provides a financial plan to realize the Australian Dream by analyzing historical housing price data, income data, tax calculations, and investment options. The plan includes assumptions, potential risks, and risk management strategies. The plan can be achieved in 3 years with an 80% LTV loan. The potential risks include changes in assumptions and interrelated factors. The risks can be mitigated with proper planning and hedging.

Assignment
Master of Professional Accounting
Case Study
1.0 Investigate the historical housing price data for Sydney or Melbourne and make
an appropriate forecast of the housing price for the next 20 years. Clearly state the
assumptions you make in order to obtain the forecasts of housing price and justify
your assumptions by providing convincing arguments. Historical housing price
data are available on the ABS website.
The historical prices have been studied from ABS website and 2 data have been
considered for analysis. The data analysed includes:
 Residential Property Price Index ; Sydney for September 2003 to December 2017;
 Established House Price Index ; Sydney for March 2002 to December 2017;
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).
2.0 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..
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The historical prices have been studied from ABS website and have been considered for
analysis.
Two data have been considered for analysis;
 Quarterly Index ; Total hourly rates of pay excluding bonuses ; New South
Wales ; Private and Public ; All industries ;
 Wage Price Index Australia Trend (a) change in March 2017 Qtr. to March 2018
Qtr.
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).
3.0 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.
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.
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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%
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Sl. No. Loan Company Rate of Interest Loan to Value
(Insured)
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.
4.0 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?
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:
http://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/-
5.0 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
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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:
 80% LTV: By 3 year end.
 95% LTV: By 1 year beginning.
6.0 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?
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.
6.0 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.
The report has been described in the above points.
The house can be purchased by year end 3 on the basis of LTV 80%.
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The assumptions made are:
 Past data correctly forecasts the future;
 Present scenario remains constant over years;
 Sample data are true representative of population;
 Australian economy remains stable;
 No abnormal situation in future;
 Data are factually correct;
Potential risk assumed:
 The above analysis may not hold true in case of change of assumptions;
 All the assumptions are interrelated and a change in one can significantly impact
the other. For instance if the wage growth change than there will be a change in
interest amount and a change in house property tenure;
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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