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  1. #1
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    Default Population Growth and Growth in Property Values

    The loan you never repay

    Saturday September 2, 2006
    By Anne Gibson


    Just as people get used to a lifetime debt sentences with 50-year mortgages, out comes a new idea for cash-strapped house buyers: "deathbed mortgages".

    An Auckland financier is promoting a new type of housing loan which might never be repaid and could be passed from one generation to another.

    While other financiers eye the prospect of offering 50-year loans to help resolve the housing affordability crisis, executives at Greenlane-based Cairns Lockie are offering 10-year, interest-only mortgages.

    If a homeowner was prepared to keep renewing the loan, these mortgages could be used to avoid ever repaying any principal. So a house - and its mortgage - could be passed from one generation to the next.

    Borrowers "can in fact have a mortgage that never gets repaid", Cairns Lockie says on its website.

    While interest-only loans are not new, until recently they have usually been short-term - typically for up to two or three years.

    And in an unusual move, Cairns Lockie has also written one 20-year mortgage for an 85-year-old woman. No one expects her to live to 105 before she owns the house debt-free, says executive James Lockie. "It just suited her needs and she could afford the repayments."

    If the interest-only loans take off, the spectre of today's young homeowners still paying mortgages well into their 80s might well become a reality.

    Mr Lockie said the mortgages were attracting landlords rather than homeowners because the investors wanted to defer paying principal and keep spare cash free to buy more houses. They could also claim tax deductions for debt.

    As Auckland's regional median house price climbs to $405,000, Mr Lockie expects more people to want different types of mortgages.

    But the Consumers Institute's David Russell is concerned.

    "It flies in the face of all advice that's been given whereby you pay off your mortgage as quickly as you can and start saving," he said. "This is just a soft option but an incredibly expensive and inter-generational option."

    Hugh Pavletich, Christchurch-based co-author of the Demographia International Housing Affordability Survey, predicted such mortgages would become increasingly popular.

    "As housing prices continue to escalate due to inadequate land supply, these desperate mortgage products will be seen as necessary," he said. "Sound and sensible mortgages can only flourish in sound property markets where housing affordability is achieved.

    "It takes Aucklanders the equivalent of 6.6 years' full wage or salary to pay off a house but household mortgages should not be any more than 2 times a household's total annual income."

    Problems had been growing for a long time as urban areas became more strangled and until land supply was opened up, housing would not become more affordable, he said.

    British house buyers are being offered deathbed mortgages designed to be passed from one generation to the next, with only the interest paid.

    They are saving up to $500 a month on repayments.

    Borrowers can take out a 25-year interest-only loan and then extend it by another 25 years. When someone dies, they can pass it on to the next generation. But Mr Lockie said these loans were aimed at avoiding punitive death duties in Britain.

    The idea of a 50-year mortgage for Kiwis emerged last month to help resolve the housing affordability crisis. The Commonwealth Bank and Westpac are considering 50-year mortgages and GE Money is offering 40-year loans in Australia.

    Westpac said last month long-term mortgages sounded scarier than they were. The benefits were reduced monthly repayments, which meant people could buy more expensive houses.


    Till death do us part

    Monthly repayments on a $400,000 loan at 9.55 per cent: Interest-only, 10-year term: $3183.
    Combined interest and principal, 10-year term: $5186.
    Combined interest and principal, on a more usual 20-year term: $3741.
    Source: Cairns Lockie


    Borrowing big to help others

    Dean Letfus of Paku
    \"The overweening conceit which the greater part of men have of their own abilities [and] their absurd presumption in their own good fortune.\" - <b>Adam Smith</b> - <i>The Wealth of Nations</i>

    The information you have is not the information you want.
    The information you want is not the information you need.
    The information you need is not the information you can obtain.
    The informaton you can obtain costs more than you want to pay.

  2. #2
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    It is a great idea for investor landlords who normally like to refinance every three years to get the deposit for another property.
    I think that Auckland house prices double every 10 years not 7.8 years as he claims. I think as long as you can refinance every few years on a renewed valuation its a winner. A self funding property should get you into the next self funding property every three years look at the shamozzle you could leave when you kick the bucket. macdunk

  3. #3
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    Sorry Duncan,

    The above post was barely started before I was interupted.
    \"The overweening conceit which the greater part of men have of their own abilities [and] their absurd presumption in their own good fortune.\" - <b>Adam Smith</b> - <i>The Wealth of Nations</i>

    The information you have is not the information you want.
    The information you want is not the information you need.
    The information you need is not the information you can obtain.
    The informaton you can obtain costs more than you want to pay.

  4. #4
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    and prices doubling every 7.8years or 10 years it doesn't matter...

    look how much capital is pumped in to the "do up" and renovations to get these figures. They never take into account the amount of $$ constantly thrown at houses in NZ esp areas of high mainentance...ie our 80-100yr old villas.

    his calcs are floored from word go.

    I would love to know the TRUE figures minus all labour and capital inputs to house maintenance.

  5. #5
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    quote:Originally posted by Pennywise

    and prices doubling every 7.8years or 10 years it doesn't matter...

    look how much capital is pumped in to the "do up" and renovations to get these figures. They never take into account the amount of $$ constantly thrown at houses in NZ esp areas of high mainentance...ie our 80-100yr old villas.

    his calcs are floored from word go.

    I would love to know the TRUE figures minus all labour and capital inputs to house maintenance.
    You can never get true figures about anything. If i give you the true figures of my share investing for instance, then draw a comparison to yours i think you will find its chalk and cheese.
    Property is much the same, what is good for one is not so good for another. When i look at a house to buy to rent out as an example this is what i look for.
    1, exterior maintanance free for at least ten years other than a quick paint job [3days work for me].
    2,I know c steel or decramastic tiles are good for 35 years i deduct the age of the house to see whats left.
    3 I know its a paint and paper job every 5-7 years
    4 I sell the house before a major repair is due at the top of the property cycle.
    5, I only invest enough in the house for the rent to cover everything, and expect the house price to double in value in ten years time.
    6, By buying right i expect a ten pc deposit to start the ball rolling, then look forward to the extreme rises and falls in the market place.
    7 extreme rises is a time to sell extreme falls is a time to buy.
    Property is much easier to understand than the sharemarket dont miss out by being negative. macdunk

  6. #6
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    never missed out Duncan, purchased first property at 22.

    best investment I ever made was buying a place and converting to commercial use...took time with RMA but yeild and returns were far better than residential.

    + better tenants (looked after place well) and the first GST claim is mine forever as you can sell it as going concern. tenants pay gst.

  7. #7
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    Whilst perhpas not quite on topic I beleive that we as a country just have to accept not everyone can afford to own their own house.
    Perhaps not a scenario that is appealing but simply realism.
    If you live in Auckland (I don't) and earn the average wage with say a wife a 2.4 kids the chances of you being able to afford a house even at the average end will be very low indeed.
    I understand % of people who own their own homes has decreasd quite sharply.
    If people are going to get involved in 50 year mortgages then they are failing to face the reality of the fact they can not afford to own their own house.
    I bought my own house at 22 through a bit of hard work and some investment sucess. I would now need another $250,000 to repeat that again today. No question it has got hard, throw student loans into the equation (my last year at uni) and perhaps a bit of a debt mentaility (cars, stero, house stuff etc) and it is very difficult indeed. When it becomes so tough that you are sacrificing everyhing else (including any chance of investment or saving) you need to question wether we are building false hopes for a significant chunk of NZ.
    Anyway those are my thoughts for what they are worth.

  8. #8
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    Bah I picked mine up one year ago, at 23 - I take a pretty long view of the matter i.e world=finite space, population=growing...In the specific case of New Zealand I think that we are in for a year or two of stagnation, and hopefully wages will catch up a bit (this is where the problem is I suspect) before I believe we'll be off again...

    But then again it depends who you ask, someone who owns a house, or someone who doesn't...

    RMB's projections on population growth are, as I understand it, quite correct given that birth rates are slowing down continually over time (to what eventual level, who knows).. What it doesn't take into account is that places of massive population density like Asia, some of Europe etc are rapidly expanding in population - They can only build up for so long before theres going to be massive migration...

    To places like NZ.

    Thats my opinion anyway

  9. #9
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    Trackers I tend to agree with your big picture view.
    However I suspect that you, me and probably 90% of posters on this site are more finacially aware than the general population.
    As such we tend to have a better understanding of what is good debt (assets that increase) and bad debt (those that do not). Sacrificing immediate consumption for medium to long term progress is something that many potential first home buyers have a problem with.
    A few generalisations above which may not unviersally be correct. I have always seen a house as providing me stability first and foremost and other benefits further down the list.
    Many NZ'ers are financially useless and tend to have unrealistic expectations of what their first house will be (ie want something pretty impressive).
    Was talking with my bank manager the other day. He mentioned that young professionals (eg accountants, lawyers etc) had a huge appeitie for debt and thought they deserved a $700,000 house at a fairly young (mid 30's) age. Of course they have the income to handle it but even then it is a given that both husband and wife are working to service house debt along with the other debt loading they carry.
    That is all well and good for that group but for many this is just not acheivable and I personally belive a lot of people will end up having a miserable time iether servicing a massive debt or forever feeling they have missed out.
    The comment that it depends whether you are an owner or not is very valid.

  10. #10
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    Trackers,

    I have used the figures that assume Medium fertility rates an Medium immigration rates.

    I am not so optimistic on the immigration front as you are at least with regard to "quality immigrants".

    Lets assume English-speaking countries ie US, UK, Can, Aus, NZ and Ire will only take English speaking immigrants.

    All things being equal most immigrants would have NZ as their 5th choice out of this bunch - meaning NZ will have difficulty attracting 1st class immigrants. I suspect that even many of the 3rd class ones that come here view NZ as a stepping stone to OZ.

    In addition NZ has the lowest wages of the lot so NZers are also emmigrating to the other 5 countries as well as a few others.

    NZ could always boost it's population by immigration by lowering it's standards.

    This is always a possibility and not nearly as bad as it sounds - as measuring peoples "quality" by the number and type of qualifications they have is far from an exact science.
    \"The overweening conceit which the greater part of men have of their own abilities [and] their absurd presumption in their own good fortune.\" - <b>Adam Smith</b> - <i>The Wealth of Nations</i>

    The information you have is not the information you want.
    The information you want is not the information you need.
    The information you need is not the information you can obtain.
    The informaton you can obtain costs more than you want to pay.

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