What is wrong with this picture ?

If one visits Realestate.com.au today (2/1/09), it is interesting to observe that there are 152 properties asking for more than $2M each. I must admit, even though I am in the finance industry, a $2M house is well over my budget.

In my personal experience, $2M is seen as "pocket change" these days. The Mosman real estate agents remind me of this one famous quote from the super model Naomi Campbell.

I am sure there are many more successful and intelligent people out there than yours truly. But sometimes I wonder how much leverage would someone take on in order to enter the pearly heavenly gate of Mosman ?

A disclosure here....I am working on anecdotes here. I was told 2 stories about the property market in the Eastern Suburbs 2 months ago. Bankers (about my age...early to mid 30s) put down a deposit of $500000 to buy houses worth $3-4M. A couple (both law firm partners) put down a deposit of $500000 to buy a house worth $5M.

Imagine if you are the banker here. Your mortgage rate is say 6% and you have borrowed $2.5M. Your base salary is $300000. Your interest payment alone should be close to $150000 a year. We all know what is the top marginal tax rate is and we can work out that there is not a lot of the base salary left after paying the interest, let's alone repaying the capital. Thus, to afford a comfortable lifestyle, you, the banker, needs to count on healthy yearly bonuses in years to come.

To make it more interesting, let's assume you, the banker, have 2-3 kids. Or you wouldn't need a 4/5 bedroom house. It is no secret that it costs more than $20000 p.a. to send a kid to a reputable private school these days. Hmmm I hope you, the banker, are married to another hard charging banker/lawyer/business executive.

Now if we turn to the second example, we know that a junior law firm partner probably makes $4-500000 a year. A more senior partner easily makes over $1M a year. Needless to say, a household income of $2M can easily work down a $4.5M mortgage. But it gets more interesting if the household income is only $1M. Interest payment alone on a $4.5M mortgage adds up to $270000. Still a fairly comfortable situation but the quesiton is how long would it take to pay off the mortgage entirely ?

My point is margin for error is low in both scenarios. If I have to take out a 30-year mortgage, by definition, I will be working until I am 65. Doesn't strike me as especially fun. But I must be old fashion. Apparently, 30-year mortgage is the norm these days.....