What’s affordable?

The use of a Special Development Order (SDO) to circumvent the normal planning process for the Loughlands development has been justified by the Government on the grounds that affordable housing is a matter of national importance. However, the new properties will cost between $450,000 and $500,000. Is that really “affordable”?

Last week, the Government’s sustainable development blog said that one definition for affordable housing is “housing for which the purchase price (mortgage and other annual costs) is no more than 28 % of gross annual household income”. Do the Loughlands properties meet that criterion?

Let’s suppose that a buyer avails himself of the Bank of Bermuda’s 95% mortgage financing. For a $450,000 home, he’ll need to stump up $22,500. The mortgage rate on the remaining $427,500 would currently be 8.5%. If he opts for a 30 year term (the maximum permissible), that would be a monthly mortgage payment of $3,287, or $39,445 per year.

According to the 2000 Census (page 74), the median annual household income for Bermudians was $70,777. Assuming this has grown by about 3% per year, in today’s money that would be roughly $84,500.

Thus, the annual mortgage payment for the cheapest Loughlands property would represent about 46% of the annual income of the average Bermudian household purchasing it with a 95% mortgage. That’s way off 28%, and doesn't include other annual costs.

Suppose the buyer manages to get together a down-payment of 15%, or $67,500. The annual mortgage payment on the remaining $382,500 over 30 years at 8.25% would be $34,483 – that’s still 41% of the annual income of the average Bermudian household.

Thus, either the suggested definition of “affordable housing” is too low for Bermuda or the Loughlands development cannot be considered “affordable”. If it’s the latter, the Government’s justification for granting the SDO is bogus.

Comments

[Alex Jones on 14.09.06 at 08:59]

What happens when you fast forward that picture 10 years with the accompanying salary rises (inflation) while morgage payments stay fixed?

[Copper on 14.09.06 at 09:29]

I guess it depends on what definition the government wants to use for affordable. With the average house price around or just over a million dollars, $450,000, seems to be more afordable.

[The Right Reverend Uncle Elvis on 14.09.06 at 09:44]

Bingo. I make a decent wage. My wife makes a decent wage. We can't afford $3,300 a month for a mortgage.
I guess these Loughlands places are to teach us all how to be Bermudian. Buy a place at a $3,300 mortgage. Rent it out for $7,000.
Makes sense to me.

Buncha vultures.

[ken on 14.09.06 at 10:02]

I think these homes are supposed to be affordable, not low income, and in todays market, $450,000 or $500,000 for a 2 bedroom or 3 bedroom home is much more affordable. There are many people that can qualify for these amounts but perhaps cannot qualify for the $800K and up prices of other condos and homes. I understand there are over 500 names on the list, so it appears that these homes will be well received by those that are interested.

[Bill Cook on 14.09.06 at 10:03]

If one owns a property that they want to rent out and that property cost one million dollars, what would be a fair rent to charge ?

Bear in mind that there are costs such as land tax, maintenance and possibly a substantial mortgage to repay.

Not factoring in the possible damage and destruction of that unit by tenants.

Do the arithmetic and get back to me.

As repeated by myself and others, there will ALWAYS be those who can NEVER afford to buy a house and those who dont want to as it means tying up all their cash for over 20 yrs or so.

There is no other way to house many, except by government purpose built rental accomodation, for people who are not able to fit into our market place, which will have to be subsidised by all taxpayers.

If properly controlled and managed the cost could be reduced by waving certain building codes, as long as safety was ensured etc such as high rise etc.

There is NO other solution, as free enterprise will not build to rent or sell at a loss.

[onevote on 14.09.06 at 10:12]

Whenever I happen to look at this topic, housing costs seem to fall around the 40-50% range in Bermuda, whether through rent or mortgage. I think the SDU must have imported that 28% number from somewhere else.

The US National Association of Home Builders/Wells Fargo Housing Opportunity Index seems to use the figure 28%.

HUD (US) uses 30%.

A public scheme in Ireland seems to use 35% as its yardstick.

The UK's National Housing Federation uses 25% of net income as a measure for affordable rent.

The CMHC (Canada) uses 30% of household income as a maximum for housing costs.

[ABP on 14.09.06 at 10:18]

Well nowadays that is what "affordable" housing is. I'm trying to rebuild my house which entails closely to a million dollar loan from the bank. With the 8.25% interest rate it brings my mortgage to over $8000 a month over a 30 year period. For the average Bermudian, as myself, how am I supposed to come up with that amount to live comfortably on my own island? Just to think still that government is offering these homes for about half of what my mortgage works out to be. So as it stands the option government is giving is better than trying to build your dream house on your own. The question is will the situation ever get better or do I just live with the gut feeling that I'm being driven out of my homeland.

[Bill Cook on 14.09.06 at 11:02]

ABP,

Yes you could be driven out of Bermuda.

It is realistic in the sense that is has been happening, is happening and will continue to happen, with many seniors and retired folk who simply cannot afford to remain here retired, unless they have Bermudian relatives who will give them a home.

Thousands have left over the last 20 yrs and those lucky enough to own a home sold it, or rent it and live in other places.

[Jamaican Q on 14.09.06 at 11:07]

What amazes me is that Bermuda (and other BOTs) show off about how prosperous their economy is...at the expense of their citizens....and yet I recall reading where senior citzens were contemplating relocating to the US or Canada as it was too expensive to live in the land of their birth? And you are all satisfied with that?

[silencedogood on 14.09.06 at 11:39]

$450K for a home in Bermuda is, like it or not, a steal in this market. It’s comparable to the price you would pay in any major metropolitan area in the US or UK and our salaries are comparable or higher but without taxes. Anyone eligible should scrape together whatever is necessary and buy one. They won’t be sorry.

[Pompous G Windbag III jnr. on 14.09.06 at 11:42]

Before we all dive down the back of the sofa for loose coppers does anyone know the current rental yield for for these properties or their peers?

[SmokingGun on 14.09.06 at 12:00]

The opportunity to purchase a property at $450 - 500,000 is a start. There are definitely some people who will be helped in this case. However I think the way the government is going about it with Loughland's is completely wrong for a host of reasons. First and foremost the number of units is more than twice the size of what it should be. Secondly they should be having a variety of values that allow low income to participate as well as higher income individuals or families. Third, I would want to make damn sure that the only people who live in them are the actual owners, no rental scams. And finally, where's the competition on mortgage rates?

[silencedogood on 14.09.06 at 12:18]

That's the rub there SG. I should clarify that I think it should be limited to first time buyers. If there is a surplus left over after a period of time then open it up to investment property buyers. As with most things the devil is in the details and any government can frig up a good idea.

[ken on 14.09.06 at 12:39]

Silencedogood,

I believe it is limited to first time homeowners.

[Bill Cook on 14.09.06 at 12:41]

Jamaican Q

Unlike our southern neighbours we do not live in tin shacks here and set a certain standard minimum.

It is a problem however as the cost of living has in a short period risen dramatically and will take some adjusting to.

That said we fare better than any other islanders that I have visited.

[Tiger Bay on 14.09.06 at 12:59]

In most jurisdictions, SDO's are only granted after 1) all documentation associated with the project is made public, 2) public meetings are held with a well defined objection period, and 3) the authority publishes its detailed reasons for granting the order.

[Guilden M. Gilbert, Jr. on 14.09.06 at 13:18]

Smokes,

You are right on target about owner/occupier. I believe that those who purchase these units must occupy them. There should be an ordinance that these units cannot be used for speculation. There should be a pre-agreed sale price and this price should be based on where property values have gone. For example, if over a 10 year period the overall property market has appreciated by 30% then the sale price (in simple terms) will be the original price plus the 30% plus the value of any improvements made over that period.

[H Reardon on 14.09.06 at 13:24]

"If one owns a property that they want to rent out and that property cost one million dollars, what would be a fair rent to charge ?"

Posted by Bill Cook on 14.09.06 at 10:03

Whatever the market will bear. It is fair to let economics decide it.

Is it immoral to earn a profit on your property? What if you have many people wanting to rent it--how do you decide without letting the one willing to spend the most get it? Would it be immoral of you to make a big profit on it if a lot of people wanted to rent it, or should you arbitrarily lower the rent to only make what you consider a "fair" profit? How then do you decide who gets it, as you have, by definition, underpriced your rent? How do you explain to the families that don't get it--particularly if they were willing to spend more? What if the family you said no to was black, and the family you gave it to at an underpriced rent is white--did you do something racist?

That being said, if you bought a $1 million house, assumed that it increased in value 5% a year, morgaged 95% at 8.5%, and had monthly tax and maintenance costs of $1,000, you would earn a 15% return on your money by renting it out for $7,000 a month. Your mortgage payment would be $7,300 and maintenance costs of $1,000 put your net cost each month of $1,300. You would sell your house for $4.3 million in 30 years to claim your profit.

[silencedogood on 14.09.06 at 13:36]

I thought so--thanks Ken.

[Guilden M. Gilbert, Jr. on 14.09.06 at 13:44]

Bill,

"Unlike our southern neighbours we do not live in tin shacks here and set a certain standard minimum."

I happen to live in one of Bermuda's southern neighbours and I don't live in a tin shack, nor does anyone else that I know. Is there poverty? Do some people live in what could be classified as shacks? The answer to both is yes, just as there are people in Bermuda who are living in cars or where there are multiple families living in one small house. Why do you feel the need to attempt to degrade people who may have less money than you? Does it make you feel superior to do that? Does having money make you a better person?

[SmokingGun on 14.09.06 at 14:11]

"You would sell your house for $4.3 million in 30 years to claim your profit." - H Reardon

You could sell the house in 12 years and make a $1 million profit. That's the beuaty of having someone else pay off your mortgage.

BTW - is it immoral to rent to the highest bidder? In a market like Bermuda it might well be. As much as I might desire to allow the market to be able to sort itself out based upon supply and demand it just doesn't work that way here. We have oligopolies and monopplies that is a form of protectionism so why not take the high road and leave a little on the table for others to get by on.

[Pompous G Windbag III jnr. on 14.09.06 at 14:19]

You could sell the house in 12 years and make a $1 million profit. That's the beuaty of having someone else pay off your mortgage....

Posted by SmokingGun on 14.09.06 at 14:11

that is assuming that house price growth can return to a real 5-10% level (rather than nominal level). The four most expensive words in history are "this time it's different" as anyone who has speculated in HK, NYC or Tokyo over the last 15 years can tell you. Bermuda's peculiar demographic is no put option against negative equity.

[SmokingGun on 14.09.06 at 14:44]

PGWIIIjnr. - yes - if all the stars stay aligned and the wind don't blow too strong on any given day.

[J Galt on 14.09.06 at 15:52]

"Does having money make you a better person?

No being productive makes you a better person

[Ali on 14.09.06 at 16:22]

My understanding of Loughlands is that it is for non home owning buyers who cannot sub let the property or flip it, they must sell back to BHC at a pre arranged price. If these guidelines are adhered to so that it benefits first time buyers all well and good, the prices are fair in this market. However, the way that the project has been pushed through by Col Birch in his usual self righteous,' get out of my way I'm in charge here' manner is unacceptable and should be challenged. Grant Gibbons' point that just because the Government has taken 7 years to get moving with housing is no excuse to ride roughshod over existing planning regulations is a very good one. Lack of planning is not an excuse for an SDO.

[loki on 14.09.06 at 16:51]

"My understanding of Loughlands is that it is for non home owning buyers who cannot sub let the property or flip it, they must sell back to BHC at a pre arranged price."

Well, I hope they do a better job of vetting the alleged 'first-time homebuyers' than they did for the Southside Development. I personally knew of two families selected to be owners for that project who had previously owned property on the island, but who lied on their application forms.

[The Right Reverend Uncle Elvis on 14.09.06 at 17:08]

Better than what?

[loki on 14.09.06 at 17:12]

"Better than what?"

WTF? Better than the job they did vetting the Southside scheme.

No go in peace, young Padawan.

[SmokingGun on 14.09.06 at 17:12]

The cynic in me says the only vetting they are going to be doing is making sure the "new" owners are all dyed in the wool PLP.

I still cannot believe these guys are going to bank-roll a $50 million + over-crowded tenement park slap dab in the middle of an already overcrowded area that has half the island passing through each and every day. All without sharing an ounce of information to show justification. Just to bail out a guy who bit off more than he could chew.

Our so called leaders are extremely ignorant. We need change and we need it now.

[ken on 14.09.06 at 18:24]

SmokingGun,

And who cares about the 96 families that will be getting homes?

[ken on 14.09.06 at 18:31]

SmokingGun,
Also where would you suggest they build these units? Nearly everywhere in bermuda is overcrowded at this time. There are not endless options for constructing these units.
I agree with Col Burch that if these units earmarked for somewhere in Hamilton or Pembroke east or somewhere less "prestigious" than Paget, there would be no bickering over SDOs and pushing through the plans.
The criticisms are simply because this is a plan with benefits and PLP opposers refuse to see any good at all in anything that is suggested. Whether they built the condos in paget, warwick, southampton or sandys there would be the same traffic issues as they would all have to come down and pass through paget in the morning. Also, wherever they built them there would be school issues over where to send the kids. I find nothing wrong with the development, and really do believe that we are the worst sufferers of the NIMBY syndrome. We can criticize every option identified, but refuse to give any sort of credit when a solution is selected.

[loki on 14.09.06 at 18:37]

Ken,

You seriously think that it's appropriate for Government to approve this scheme - sight unseen - via an SDO, without giving anyone, least of all the local residents, an opportunity to see plans, suggest changes and have their views put before having it rubber-stamped?

[Phil on 14.09.06 at 18:41]

Ken

How about Southside? Plenty of space there.

[ken on 14.09.06 at 18:42]

Loki,

I think it would be better PR wise and for transparency sake for them to show the plan etc and all the specifics of it, but what I really believe is that whether they showed it or not the opposers would remain opposed simply to oppose.

[Bill Cook on 14.09.06 at 18:43]

Guilden,
What I meant was that our government does not allow tin shacks to be built in Bermuda.
That we have homeless people is a fact, that we have relatively few is also a fact of course.
I have been to just about every Island south of us in my 25 cruises and my numerous trips competing in sports etc.
I feel I have a good handle on the quality of life in most of these islands.
It is my opinion we do better than any of them ,but that is MY OPINION and may not be others.
Having money and more money than most, does not neccessarily make me either a better or worse person than those who have less than them, it makes me wealthier which I appreciate, only because of the greater opportunities it permits me, that being one reason I decided to become wealthy in the first place.
I do not feel the need to degrade people and that is why I do not do so.
If other domains allow tin shacks, so be it, we here in Bermuda do not and it does not in my opinion demean anyone to tell the truth.
If you, or others with your viewpoint, feel living in a tin shack is demeaning, then it would be more productive addressing that problem, rather than accusing me of something I am not guilty of.

[ken on 14.09.06 at 18:44]

Limey,
I agree, that Southside is a good location, and I also do believe that the HarbourView (formerly Harbourside) development will be there, as well as the more recently announced development being built with Trinity Construction.

[loki on 14.09.06 at 18:46]

For the life of me, I cannot understand why Loughlands has been deemed an appropriate site for this. I don't give two hoots about the fact that it's in Paget, I'd like to know why it's preferable to Southside, Parsons Road, Dockyard (how many years have the old prison officers' quarters stood derelict by the side of the road. Oh, of course. How stupid of me - we'll never find out, because it was all rubber-stamped via an SDO without any information being made public. The traffic alone will be a nightmare.

[SmokingGun on 14.09.06 at 18:47]

ken - with all due respect this is a bonafide knee-jerk reaction to a problem that has been shaping up for years. Are there not going to be a multitude of condos being built in that area already? Are there not a host of other areas that would seriously benefit from having apartments or condos built for families above and beyond the 96 they want to shoe-horn into this one already over-crowded area?

How about going to an area in the back of Hamilton or on the north shore where there are some run down houses in poor neighborhoods and buying up lots of land/houses and rebuilding them in better formats with great infrastructure. Create an environment that creates safety and improved life-styles and allows people to save money because they won't have to buy cars just to get to work. This can re-invigorate neighborhoods that need it and at the same time help reduce cost of living expenses.

I'd rather see a common sense approach that puts 200 apartments on the market spread out in 3-4 locations rather than jamming 96 into that space. 40 max is what should be there and some should go at higher rates to off-set some lower ones. Trouble is the developer wants to make sure he nets a windfall from it. Fine if you want to do it alone but not if the Government's bank-rolling it at the expense of the rest of the island.

Did I mention once before people don't go on vacation to sit in grid-lock? These idiotic decisions that do not look at the big picture are going to make things less affordable for everyone in the long run.

[Casual Observor on 14.09.06 at 20:07]

As one of those who I hope will benefit from the construction of those units, I must say that I am appalled by the NIMBY reaction from my fellow Bermudians... The perception seems to be that this is some low income project that will land questionable individuals in a particular neighbourhood.

I beg to differ.

I am a university educated, professional Bermudian in my mid-20's. LIkewise, my University educated husband is also a young Bemudian professional. I am in no sense a fan of the Colonel, but perhaps his most commendable statement to date was that the potential homeowners are not people from Mars... but rather are fellow Bermudians.

Now, I do not like the thought of further traffic congestion in that area, or living in potentially very close proximity to 95 other families any more than those who oppose the plan. However, the long and short of it is that if this is my one shot at owning a piece of property in the country where I was born and raised without having to sacrifice my first born or work three jobs to meet the mortgage payments, then by all means I am going to do so.

Somebody suggested the development of North Hamilton. I ask you this... would you be willing to be part of some government experiment to turn urban neighbourhoods into family friendly little cul de sacs? Probably not. And I do not blame you.

[The Right Reverend Uncle Elvis on 14.09.06 at 20:24]

Lokes, that wasn't for you. It was for the "better person" posts

[loki on 14.09.06 at 20:26]

"As one of those who I hope will benefit from the construction of those units, I must say that I am appalled by the NIMBY reaction from my fellow Bermudians... The perception seems to be that this is some low income project that will land questionable individuals in a particular neighbourhood."

With all due respect, that comment speaks more of your own prejudices concerning your fellow Bermudians than it does of those that you criticize. The fact that people who live in the neighbourhood currently (I do not) have objected to having this railroaded by Government, without being subject to due process, without having the courtesy of even being able to see plans, is not a case of NIMBY. All these poor people know is that 96 condomiums of undetermined size are being dumped into an already crowded neighbourhood, in a planning zone that would prohibit such development without an SDO. If government so readily rides roughshod over planning regulations here, who's to say that they won't continue to do so throughout the island for projects less altruistic in nature. And if you think that's unlikely, read Burch's arrogant, disdainful and ill-mannered comments for yourself and tell me that the 'fuck you' tone employed therein isn't more than a little worrying.

With so many other, more intelligent options for development, we're entitled to answers and we're entitled to expect our government to show the electorate some respect.

[Wickering Banker :-) ----: on 14.09.06 at 20:39]

If there are so many people the want to live at the Loughlands place, maybe Government should hold some sort of lottery.

Oh sorry, they already did that.

[Casual Observor on 14.09.06 at 20:44]

Loki,
Personally I would rather see the development of existing properties (ie, Club Med) and any other derelict sites. IMO these should be targeted and razed and/or redeveloped.

My main point is that people automatically equate 'affordable' with low-income 'project-like' neighbourhoods. I was just trying to point out that this is not necessarily the case.

I agree that this is not necessarily a good idea to cram 90 something units on the site - inevitably leading to further congestion and strain on infrastructure and resources. I agree wholeheartedly. However that will not deter me from adding my name to the list of prospective buyers.

I respect the opinions of those Paget residents and I think that Government does need to addresss those concerns. On the other hand, the reality is that we have a severe housing crisis and some seemingly draconian methods may need to be implemented to alleviate the current situation.

[loki on 14.09.06 at 20:58]

" agree that this is not necessarily a good idea to cram 90 something units on the site - inevitably leading to further congestion and strain on infrastructure and resources. I agree wholeheartedly. However that will not deter me from adding my name to the list of prospective buyers."

Absolutely, and if I we're in your position I'd be doing the same, regardless of whether a development on that site is appropriate. Unfortunately, what we have here is a developer who bought a piece of property that, realistically, he couldn't do much with, and a government all too ready to take advantage of railroad an inappropriate project in the name of expediency.

I'd love to hear why no attempt has been made to develop Parson's Road or Dockyard.

[vitruvius on 14.09.06 at 21:10]

I would challenge the new Minister of Immigration, brother Burgess, to insist of the Colonel that a significant number of Bermudians are employed to construct these units.

This is to ensure the Government's dealings with the private sector demonstate they can influence "best practice" hiring policies in the construction industry.

To do otherwise would illustrate (again?) blatant hypocrisy of this administration

[HomeOwner on 14.09.06 at 21:10]

"If one owns a property that they want to rent out and that property cost one million dollars, what would be a fair rent to charge ?

Bear in mind that there are costs such as land tax, maintenance and possibly a substantial mortgage to repay.

Not factoring in the possible damage and destruction of that unit by tenants.

Do the arithmetic and get back to me." - Bill Cook

I'm in precisely the position that you describe, and I would have to rent my house for a minimum of $9k per month to break even vs the costs of ownership including mortgage interest, condo fees, land tax and insurance, interior maintenance.

Comparable properties are being rented for about $10k per month, but after agency fees have been paid and vacant periods are taken into account, this would not cover the cost of ownership.

[Guilden M. Gilbert, Jr. on 14.09.06 at 21:19]

Bill,

Clearly you do not understand the situation. It is not that the Government allows or approves tin shacks. The fact is many cannot afford to build homes. They put these up illegally. For the record construction costs in the Bahamas are not too far behind that of Bermuda.

The Government here has been removing these shacks and they have a very sound low cost home programme, where persons who wouldotherwise not be able to afford it can purchase a Government built home for less than $100K. The homes are solidly according to building code, which by the way is more strict than Bermuda because every corner poured, reinforced concrete and at every 12 ft. a poured reinforced concrete column is built, which all ties into the belt.

So instead of people in Bermuda building illegal shacks, they must sleep in cars and live in small confines with other families.

As far as construction costs in Bermuda there is a building method (using reinforced concrete) that if used could significantly lower the cost of construction and the buildings are built to withstand in excess of 220 mph sustained winds, concrete block is rated at about 180 mph. Using this method has saved nearly 50% of construction costs here in the Bahamas and the same or similar savings could be achieved in Bermuda.

[Andrew on 14.09.06 at 22:09]

OneVote wrote:

"Whenever I happen to look at this topic, housing costs seem to fall around the 40-50% range in Bermuda, whether through rent or mortgage. I think the SDU must have imported that 28% number from somewhere else"

All of your references to the suggested values of 28% to 35% (US, Canada, and UK) make the $500K price tag seem unreasonable. You missed a key point that affects those numbers. Those guidelines were all for countries with a heavy income tax burden. In Canada, I paid over 40% of my gross salary as income tax. For me, the CMHC guideline of 30% of household income would equate to about 50% of my net income.

With a median household income of 84K, 50% works out to $3500 per month. $3500/month will get you one of those new homes with a little cash to spare.

I think if you compared figures relative to net incomes, you would get a much different result. The government's 28% figure shows that they haven't really analyzed the data themselves, they just imported the number from elsewhere.

[Andrew on 14.09.06 at 22:11]

...but don't worry - being an imported figure, the 28% value will be replaced with the correct Bermudian value when its six-year term limit is reached.

[Bill Cook on 14.09.06 at 23:04]

Guilden,
Whether or not your opinion of my understanding or lack thereof,it falls into the category of winning an argument, which I may add may interest you much more than it interests me, as I am primarily more interested in finding solutions to problems.

This is not a competetion between Bermuda and the Bahamas, which collectively represents but a relatively small percentage of the total area discussed, who live in deplorable conditions that cannot be in any realistic way be compared to either.

I and I am sure others, appreciate your advice on reducing building costs and most of all those unfortunates living in conditions that we more fortunate do not have to.

We both know where these people are located and you may consider directing your valuable advice in that direction.

If you currently are involved in any endeavour in assisting in those areas, I feel sure there are many on this blog who would like myself consider aiding and contributing.

Bermuda on the other hand has money to spare, unlike the management brains to get the most from that money I feel.

If we ever get to the stage where we get acceptable mileage from our money, then in my opinion we will have much fewer people living in such conditions.

I have I may point out made suggestions in that direction many times.