first home buyer advice

[kiora]

As the mortgage is paid down the borrowing power of the mortgage can be used to buy shares as well

[SBQ]

As the mortgage is paid down the borrowing power of the mortgage can be used to buy shares as well

You've got to be kidding. No bank is going to lend on the equity of the house AT comparable mortgage rates. Sure at 10 or 15% but not at 4% that we see for home mortgages. Even greater consideration, who would assume that risk of paying 10% on the loan hoping to earn 15% or 20% on shares? That's not how the lending market works. Because if that was true, then the whole lending industry would not care about mortgages and instead, buy shares directly for the greater returns. They don't lend because the risk is extremely high compared to lending on houses. Consider a business plan on what the banks require to lend. But it's highly probably the person that earns their own income from a business will have no problems buying a house. Buying shares is the last thing they would consider in terms of investments. It makes me wonder why people are in Kiwi Saver to begin with if they don't own a home over their head.

[mfd]

You've got to be kidding. No bank is going to lend on the equity of the house AT comparable mortgage rates. Sure at 10 or 15% but not at 4% that we see for home mortgages. Even greater consideration, who would assume that risk of paying 10% on the loan hoping to earn 15% or 20% on shares? That's not how the lending market works. Because if that was true, then the whole lending industry would not care about mortgages and instead, buy shares directly for the greater returns. They don't lend because the risk is extremely high compared to lending on houses. Consider a business plan on what the banks require to lend. But it's highly probably the person that earns their own income from a business will have no problems buying a house. Buying shares is the last thing they would consider in terms of investments. It makes me wonder why people are in Kiwi Saver to begin with if they don't own a home over their head.

If you mortgage your house, how would the bank stop you buying shares with the proceeds? Also, margin lending rates are significantly lower than you think.

[SBQ]

If you mortgage your house, how would the bank stop you buying shares with the proceeds? Also, margin lending rates are significantly lower than you think.

The bank won't stop you. I'm talking the reality aspect of borrowing on a line of credit (or against the house you live in) AND investing it into shares. The bottom line is you need a return on shares consistently over the long term that betters the going lending rate (currently around 5% or 6% floating). Look at it from the bank's perspective. Why would they lend at 5 or 6% when they could buy shares directly and earn say 10 or 20% a year? It's because it's far easier to extract the $ from the working person while having the ability to own the house in a foreclosure.

[mfd]

The bank won't stop you. I'm talking the reality aspect of borrowing on a line of credit (or against the house you live in) AND investing it into shares. The bottom line is you need a return on shares consistently over the long term that betters the going lending rate (currently around 5% or 6% floating). Look at it from the bank's perspective. Why would they lend at 5 or 6% when they could buy shares directly and earn say 10 or 20% a year? It's because it's far easier to extract the $ from the working person while having the ability to own the house in a foreclosure.

I'm not sure why you quote floating rather than a sub-4% fixed interest rate. If you have a setup where this is deductible against your share profits, it's even easier.

Banks have a very different business model and risk profile to share investors. Your question is like asking why a bank would lend to a farm rather than just growing food for a profit, why lend to a house investor rather than just buying the house themselves and renting it out? Different entities have different motives.

Your other point comparing share investing to property ignores the possibility of a housing crash, which have happened before, will happen again, and could happen here. Being careful with leverage applies equally to property investors as it does to share investors.

[JBmurc]

I'm not sure why you quote floating rather than a sub-4% fixed interest rate. If you have a setup where this is deductible against your share profits, it's even easier.

Banks have a very different business model and risk profile to share investors. Your question is like asking why a bank would lend to a farm rather than just growing food for a profit, why lend to a house investor rather than just buying the house themselves and renting it out? Different entities have different motives.

Your other point comparing share investing to property ignores the possibility of a housing crash, which have happened before, will happen again, and could happen here. Being careful with leverage applies equally to property investors as it does to share investors.

And especially as houses in NZ are at record highs + record high av. household debt..low NZ incomes etc

Of course the equitiy market can be horrible in the crash .. I do remember the GFC (I had over 300k in loans in the market) but thats why I have my Sharetrading structured in a company... still got a few tax credits to use up from the GFC.

But property ian't perfect (just ask some CHCH home owners)

Also Good luck selling your NZ property in a major market downturn when several others are for sale on the same street and new R.V's come out with 20% reduction in value and wipes out all your equity.

Also you can buy an ETF or Gold company that will do well during a market crash ..make money while other investment are going down in value.

[SBQ]

I'm not sure why you quote floating rather than a sub-4% fixed interest rate. If you have a setup where this is deductible against your share profits, it's even easier.

Sub 4% fixed rate? The 5-6% figure is the range for 'line of credit or revolving line of credit' or basically, loans for those that want to borrow against the equity of their homes, such as here:


https://www.bnz.co.nz/personal-banki...ome-loan-rates


NOT sub-4% rates for residential "owner OCCUPIED" as such here:


https://www.bnz.co.nz/personal-banking/home-loans


and I won't get into margin lending rates from brokers like Fosryth Barr etc, they're going to be a lot higher.

Banks have a very different business model and risk profile to share investors. Your question is like asking why a bank would lend to a farm rather than just growing food for a profit, why lend to a house investor rather than just buying the house themselves and renting it out? Different entities have different motives.

Actually no. It has everything to do with the risk level involved. The bank is not going to care what you do with the $ you borrow on a line of credit if they have the house as security. Go try offering the banks that you have shares in a company as collateral and they'll gladly show you the door. The distinction i'm trying to make is, the asset class of a house is world's apart different than owning shares of a company. When it's very clear that banks that do the lending attach different rates (ie go look at lending rates for corporate or business ventures....). If you want to make the risk adjusted distinction of using funds borrowed against the equity of the house, and then go buying shares, then the base break even rate return should be comparable to what banks would lend to corporations - so around 8% or higher. Anotherwords, the person doing this venture should be considering a break even of 5% but rather, 8% or what ever the corporate lending rate would be (to factor the risk the individual is taking).

Your other point comparing share investing to property ignores the possibility of a housing crash, which have happened before, will happen again, and could happen here. Being careful with leverage applies equally to property investors as it does to share investors.

No it doesn't. The extent of past housing crashes and frequency have been minimal compared to the crash in share market indices etc. As I mentioned before the 2 asset classes are worlds apart. For starters we have the Reserve Bank that put priority to NZ's real estate than any specific corporation or industry sector. It's an issue of too big to fail - the adjusting of the reserve bank interest rate adjusts purely to keep housing prices buoyant (and indirectly, the whole economy). Any such crashes in the housing market are minimised by these monetary controls. They do not care to the extent what happens on the corporate side or the NZ share market, and because of this, this is the key reason why the banks have no issues lending on 1st time buyer of a home with NO collateral, but it's a horse of a different colour when ask to lend on share equities or business ventures without collateral.


Another thing to consider. What would be the extent of the NZ economy if there was a major housing crash? I'm talking say a 50% or 60% drop within a 2 year period? I'll tell you. Your share equities would do far worse. No one is immuned in a market crash but one thing certain is real estate fares better than any other asset class when the whole economy is turned upsidedown.

[mfd]

Yes, 4% is appropriate as we are talking about owner occupied houses. E.g., I have 50% equity in the house I live in and decide to leverage my portfolio and take out 20% equity to buy shares. A bank will offer me a sub 4% fixed rate mortgage on that (perhaps depending on age etc). They will probably do this even if I just tell them I want a flash car and a holiday, let alone something worthy like buying shares.

You still seem to think banks don't offer margin lending - if I walk into ASB and ask for a loan based on my shares as collateral, they will say 'sure, what do you have?'. The amounts they will loan against different holdings are published here

https://www.asb.co.nz/documents/asb-...ding-documents

[Schrodinger]

Sub 4% fixed rate? The 5-6% figure is the range for 'line of credit or revolving line of credit' or basically, loans for those that want to borrow against the equity of their homes, such as here:


https://www.bnz.co.nz/personal-banki...ome-loan-rates


NOT sub-4% rates for residential "owner OCCUPIED" as such here:


https://www.bnz.co.nz/personal-banking/home-loans


and I won't get into margin lending rates from brokers like Fosryth Barr etc, they're going to be a lot higher.





Actually no. It has everything to do with the risk level involved. The bank is not going to care what you do with the $ you borrow on a line of credit if they have the house as security. Go try offering the banks that you have shares in a company as collateral and they'll gladly show you the door. The distinction i'm trying to make is, the asset class of a house is world's apart different than owning shares of a company. When it's very clear that banks that do the lending attach different rates (ie go look at lending rates for corporate or business ventures....). If you want to make the risk adjusted distinction of using funds borrowed against the equity of the house, and then go buying shares, then the base break even rate return should be comparable to what banks would lend to corporations - so around 8% or higher. Anotherwords, the person doing this venture should be considering a break even of 5% but rather, 8% or what ever the corporate lending rate would be (to factor the risk the individual is taking).





No it doesn't. The extent of past housing crashes and frequency have been minimal compared to the crash in share market indices etc. As I mentioned before the 2 asset classes are worlds apart. For starters we have the Reserve Bank that put priority to NZ's real estate than any specific corporation or industry sector. It's an issue of too big to fail - the adjusting of the reserve bank interest rate adjusts purely to keep housing prices buoyant (and indirectly, the whole economy). Any such crashes in the housing market are minimised by these monetary controls. They do not care to the extent what happens on the corporate side or the NZ share market, and because of this, this is the key reason why the banks have no issues lending on 1st time buyer of a home with NO collateral, but it's a horse of a different colour when ask to lend on share equities or business ventures without collateral.


Another thing to consider. What would be the extent of the NZ economy if there was a major housing crash? I'm talking say a 50% or 60% drop within a 2 year period? I'll tell you. Your share equities would do far worse. No one is immuned in a market crash but one thing certain is real estate fares better than any other asset class when the whole economy is turned upsidedown.

Your advice is factually wrong. There are plenty of people here using Margin Loans supplied by a bank and doing very well ~ current rates around 6%. If you are returning 12%+ per year (fairly easy) then every year is a win. Go to the bank or even easier jump on Google and find out. They don’t hand a cheque over you have to stump up with equity. Very similar to a house but the returns are way higher.

I also find it amusing particularly in Akl where house inflation will be flat for the next 10 years - therefore reducing CAGR even further below returns from the market - people continually claiming they can’t be beat with property. This is blatantly untrue.

Go build a spreadsheet and put the returns in. Heck you can even make an easy 10% CAGR with infrastructure funds ETF or managed funds with zero effort or risk. 10% CAGR means your money doubles every 7 years. The model you build will answer your questions and prove that property is not the best investment. I have built this spreadsheet and the numbers don’t lie.

I think the long run property returns 30 years CAGR were around 6-7%? This will drop in the next 10 years to zero basically due to structural issues with the NZ economy. Push CAGR to 5-6%? Sure you can drive past your houses and feel proud of yourself while you brag to friends but you could have been twice as rich by understanding the numbers.

Since you bring up the Reserve Bank I will tell you what will happen. There is no way the Labour or National Government will accept house price rises of 5% or more. They can’t afford the wage bills for public servents. If our wage growth is amazing - which it isn’t ( approx 1.1% real yoy) - then they would be more comfortable. The numbers for accomodation supplements and $ needed for the baby boomer super bill, roading, education, means that macro forces will prevail. What I am really interested in is Adrian’s thoughts on a sound housing market that doesn’t eat into our budget and hence international borrowings. I would assume he would like house price growth just above inflation.

I agree that shares have crashes but you ride them out. Longer run the average return should be in the range of 9-15% depending on your portfolio and if you are lucky to have multi baggers.

[kiora]

You've got to be kidding. No bank is going to lend on the equity of the house AT comparable mortgage rates. Sure at 10 or 15% but not at 4% that we see for home mortgages. Even greater consideration, who would assume that risk of paying 10% on the loan hoping to earn 15% or 20% on shares? That's not how the lending market works. Because if that was true, then the whole lending industry would not care about mortgages and instead, buy shares directly for the greater returns. They don't lend because the risk is extremely high compared to lending on houses. Consider a business plan on what the banks require to lend. But it's highly probably the person that earns their own income from a business will have no problems buying a house. Buying shares is the last thing they would consider in terms of investments. It makes me wonder why people are in Kiwi Saver to begin with if they don't own a home over their head.

Easy, drawing down mortgage,using their equity , an investor is able to benefit from rise in house value and share value.At a cost of 4-5% interest/year turns a good return into supernova