The Inflation Thread

[Bjauck]

Now I'm more inclined to buy something. I didn't think Shamubeel was right when he wasn't buying. In theory renting is cheaper but inflation will always change that over time. Rents go up house prices go up but your house price purchase is in todays dollars and even your mortgage gets easier to deal with as wages rise. That's the game and I suppose that is why deflation is apparently bad because everyone is playing the game, central banks are obliged to keep it going as to stop now would be disastrous. I wonder if there is an end to continuous growth. The planets ability to provide for more and more humans could be tested eventually but that could take more than my lifetime.

Deflation is definitely bad for people who leverage their deposit to be able to buy a house. Nobody wants to be stuck with negative equity especially if they suddenly can no longer afford the mortgage. Home owners, especially the highly leveraged ones, definitely hope that the government will keep them happy with policies that ensure asset price inflation.

The mortgage remains affordable provided you can lock in today's low interest rates for the term of the mortgage, or the first good few years at least? Those who have bought using large mortgages in recent years may be depending on that or depending on wages rising faster than any increase in interest rates. It is debatable whether NZ's unaffordable housing can continue at such unaffordable levels for much longer. Will the high levels of net immigration continue? Will low interest rates continue to be so low? What will happen when the next downturn arrives? etc.

I think the second sentence in Shamubeel's item is telling: "We bought a house last week. We bought because our rental will be sold and we want stability for our family. "
It made financial sense for his continuing to rent. However NZ renters have comparatively little security of tenure compared with many developed countries. "Our rental market is broken" says Samubeel. Luckily for Shamubeel he can afford to buy his own home to provide security for his family. Maybe he had sufficient assets to be able to afford a generous deposit and has a financial cushion to be able to weather any adjustment to house prices too.

Maybe he had to sell shareholdings in productive companies to be able to buy an expensive section of land with a house to provide himself with a home. Many others are increasingly unable to become first home buyers in NZ's unaffordable residential housing market, as falling home ownership rates attest. They are in effect locked into the rental market, with its insecurities, and unable to have the choice to access the advantages of home ownership.