Who is to blame for unaffordable housing?
NOTICE: Despite dramatic headlines and beehive reviews, for many, housing affordability has not deteriorated over the past year.
At the start of 2020, mortgage rates were around 5%. Today, they hover at 3%. At 5%, a $ 1 million loan will cost you $ 5,300 per month, for a total of $ 1.9 million over 30 years. At 3%, a loan of $ 1.2 million will cost only $ 5,100 per month for a total of $ 1.8 million over 30 years.
This is a crude analysis, but it serves its purpose: to eliminate the myth of diminished affordability. If you could afford a $ 1 million mortgage a year ago, you can afford a $ 1.2 million loan now. Home prices rose, at all costs, just under 20% last year.
However, this does not help the first time home buyer because as the price of the sticker increases, the required deposit also increases. In a functioning and rational market, this would not be a problem as banks and other lenders would simply assess the risk and provide loans with little or no deposit, allowing working families to own their homes.
* House price records beaten across the country
* First-time homebuyer’s ‘nightmare’: Wellington home prices hit record high as inventory hits record high
* First-time homebuyer’s barrier rises again, data shows
* Concerns about the frenzy of the real estate market
We do not benefit from a rational real estate market. Because we focused on the face price of a residential property, and not what a buyer will actually pay, our bureaucratic masters have decided that forcing banks to increase the loan-to-value ratio is a good idea.
This is not the case. What this destructive policy achieves is that only those with existing capital can stay in the real estate market.
“Borrowers with LVRs of over 80 percent (less than 20 percent on deposit) often exhaust their financial resources. They are more vulnerable to an economic or financial shock, such as a recession or a rise in interest rates.
The smug paternalism of our government class is astounding. They think they know better than you what economic risks you need to take. You, dear reader, are not as well equipped as a graduate in economics who probably never earned honest hard work in knowing when and how you should be allowed to buy a property.
The Reserve Bank has made housing expensive with its reckless monetary policy. It’s by design. Rising property prices make homeowners feel better, so they spend more. When this has perverse effects on people who are struggling to enter the real estate market, they introduce more regressive policies to try to dispel the effect their first one had.
The damage done to a generation will persist for decades. Owning a property is a permanent link with your community. It is the base that many seek before starting a family. This is what will keep your kids in this country rather than Brisbane’s sunnier economic climate.
I don’t know if she believes it or not, but it doesn’t matter because nothing is going to be done. There will be a cosmetic gesture such as a welcome bonus of a few dollars or other decorative touch-ups that will be as effective as their KiwiBuild program.
A 20 percent deposit is out of the financial reach of most people looking to buy their first home, and that’s what’s required starting in March. This despite the fact that many people could afford to pay off these mortgages if they had a lower deposit.
It will be great for children of rich and middle class parents as they will supplement their children’s savings to take them across the line. Those without such support, well, sorry. We are building an economically segregated economy that is built on class lines. Those from poor families are excluded from the real estate market, so children of middle class and wealthy families can buy their first property for a little less.
It’s perverse. It is wrong. It denies those who are on the verge of leaving poverty a viable path forward.
The lack of low-risk alternative investments compounds the problem. One of the predictable effects of setting interest rates below the level of inflation is that those with capital will seek return where they can find it. Residential housing still does.
CoreLogic, a consulting firm, revealed that investors were supplanting first-time homebuyers.
The advantage of residential property is that it generates income. Funds invested in a bank do not. Real estate is also a hedge against inflation.
Smart investors will watch the recklessness of the quantitative easing program and the specter of inflation looming over our economy. Going into debt to buy real estate is a smart game when you suspect that the currency is going to deteriorate.
So we have first-time homebuyers from poor families forced out of the market in order to keep prices low. At the same time, wealthy investors with liquidity are looking for investment opportunities. The effect is obvious and predictable.
This government considers itself the most progressive administration since Michael Joseph Savage. His photo is on the Prime Minister’s desk. It’s touching, but if their roles and policies had been reversed in time, her photo wouldn’t sit on hers.
* Damien Grant is a regular columnist for Stuff and owner of an Auckland based business. He writes from a libertarian perspective and is a member of the Taxpayers Union but not of a political party.
CORRECTION: The $ 1 million and $ 1.2 million loans require repayments of $ 5,300 and $ 5,100 respectively per month, not per week, as an earlier version of this column said.