Population Growth and Growth in Property Values

[rmbbrave]

The sh!t is very near the fan now.

Very near indeed.

Mortgage stress explosion in NZ
Soaring interest rates and house prices have triggered an explosion in "mortgage stress", with the number of households devoting more than 40% of their take-home pay to home loan repayments tripling in just three years.
Home is where the heartache is


New research for the Sunday Star-Times by economist Brian Easton shows that half a million New Zealanders are now living in mortgage stress, spending more than 40c in every after-tax dollar their households earn on the mortgage.

"There has been a sharp rise in households under financial pressure because of their burgeoning mortgage bills," said Easton.

Overall, 175,000 households, or 11.2% of all households, are in mortgage stress, in figures to June 2007. The figures represent a large swath of the mortgage-belt, as only about 30% of all households have a mortgage.

In 2004 just 3.7% of all households were in the mortgage stress zone.

Easton said while for some households heavy mortgage repayments were a deliberate part of their life financial plan, for others it was a huge strain and left little in their budget for anything else.

National leader John Key said the figures "show there's real pain out there, and it's likely to get worse over the next six months".

Mortgage brokers say new entrants to the housing market are under even greater strain, with Mike Pero Mortgages saying 50% of take-home pay is now usual for first home buyers. Some are even committing 60% of their after-tax income to repaying a home loan.

"Increases in income haven't kept pace with property price rises and the cost of finance," said Mike Pero Mortgages franchise owner Matthew Mark.

Last week the international credit ratings agency, Fitch Ratings, ranked New Zealand as the world's riskiest housing market, with our prices among the world's most over valued.

In a survey of 16 developed nations, Fitch also ranked New Zealand households second only to Denmark for their debt vulnerability. With its high interest rates, New Zealand also had the worst interest to income ratios in the survey.

Key said about one-third of mortgages are due to be renegotiated over the next six months on higher levels of interest.

"That will really bite in at homeowners. Homeowners are paying the price for Labour's economic mismanagement," Key said.

He said heavy government spending was helping fuel inflation, thus forcing interest rate rises. Reserve Bank governor Alan Bollard hiked the official cash rate two weeks ago, the fourth rise in a row, pushing some floating rates up to 10.5%.

And Key said real estate agents were telling him some property owners were being forced to sell their homes and downsize in order to cope with their mortgage repayments.

Acting Finance Minister Trevor Mallard said some financially stressed families would be being helped by the Working for Families package, which would not have fully kicked in over the time period of the research. And KiwiSaver was just coming in now.

"We do recognise that home ownership has been a big part of New Zealand's national identity which we don't want to lose," he said.

"Having said that, we are definitely worried about the increasing appetite for debt by New Zealand households in recent years. The so-called `wealth effect' from rising house prices means people have felt wealthier and been prepared to get into greater debt."

Mallard said the government was likely to announce new policies later this year aimed at tackling housing affordability, with help for young families purchasing their first home, and policies that would increase the supply of affordable homes.

Mallard rejected National's suggestion the government was to blame for the high interest rates.

"What has brought about higher interest rates has overwhelmingly been the strength of domestic consumption, not government spending and we may start to see interest rates come down if inflationary pressures ease.

"We've got one of the lowest rates of unemployment in the developed world - this is a great result, but it does put pressure on inflation," Mallard said.

[rmbbrave]

The sh!t is very near the fan now.

Very near indeed.

Home is where the heartache is
Mortgage stress is rising fast in New Zealand's suburban heartland. Ruth Laugesen reports on the high price of home ownership.

On the surface, Lily and Andrew seem like exactly the sort of couple who can carry heavy, heavy mortgage debts and survive.

After two years of angst and indecision, Lily and Andrew recently threw themselves into the Queen City's hot, hot housing market, buying a wooden bungalow in middle-class Sandringham for almost $600,000.

Now each month the bank takes the lion's share of their pay packets. The late-30s couple pay $5000 to the bank, more than half their after-tax income.

Andrew and Lily have joined the 18% of all New Zealand households who may be experiencing mortgage servicing difficulties or mortgage stress, according to an analysis for the Sunday Star-Times by economist Brian Easton.

Are this couple stressed? They don't look it. They earn well, are good with money and never went out much anyway.

But probe a little deeper and you find the real sacrifice they made, painfully submerged. The costly item that has had to be pruned out of their budget is a baby. They don't know when they will be able to afford to have children.

"If we didn't have this mortgage, we'd be thinking about having a baby this year. But we certainly can't afford it. The reality is you have to have a dual-income household," says Andrew.

Their awkwardness and sadness about this means they do not want their real names used for this article.

Easton's new research gives a glimpse of the hidden strains such as these emerging in the suburban mortgage belt as towering house prices, coupled with savage interest rate rises, begin to hit home.

Easton used latest Reserve Bank figures on household borrowing to June 2007, combined with Statistics New Zealand data from the 2004 Household Economic Survey.

The figures make for sobering reading. In 2004, 3.7% of all households were paying more than 40% of their take-home pay in mortgage payments. But in just three years, that proportion has tripled - to 11.2% of all households. This is a fair swath of the mortgage belt - remember only around 30% of all households actually have a mortgage. The rest rent or have paid off their homes.

These are households living in a state of "mortgage stress", a level of debt that gobbles up an onerous amount of after-tax income for debt servicing.

The numbers living in mortgage stress have risen from 56,000 to 175,000 households in a three-year period. That's over 100,000 extra households in this position in just three years.

A sea change of this kind in the mortgage belt carries with it real political dangers. In Australia, mortgage stress has become a growing issue ahead of this year's general election, with Prime Minister John Howard accused of presiding over interest rate rises and soaring house prices.

Here, interest rates have risen sharply too, and are now well over 10% for many floating rates. Two weeks ago Reserve Bank governor Alan Bollard put the squeeze on mortgage-holders again, with his fourth interest rate hike in a row.

So what is a fair measure of mortgage stress?

In Australia, 30% of gross income is widely used as a benchmark for mortgage stress. To come up with a roughly equivalent figure with data available here, Easton used a benchmark of 40% of disposable income, or income after tax.

He says thresholds for what causes financial strain will always be a matter for sharp debate.

"Certainly they involve judgements, but any reasonable alternatives would lead to the same conclusion. There has been a sharp rise of households in financial distress because of burgeoning mortgage bills," says Easton.

He says the figures should be interpreted with caution, as some of those experiencing stress will be couples or single adults more able to cope with debt. And some families will be better off from April this year when Working for Families payments were increased.

On the other hand, he says, the figures don't include the high consumer debt repayments many households are also carrying on top of their mortgages.

In fact, New Zealand's own homegrown measure for housing affordability would cast the net much wider than the Star-Times measure of mortgage stress. The Ministry of Social Development's annual Social Report uses housing costs of more than 30% of disposable income as a benchmark for housing affordability problems. In this band, not all households experience strains, but low-income households are at particular risk of running into difficulties.

By that measure, Easton's figures suggest 18% of all New Zealand households are living with either affordability difficulties or mortgage stress. That amounts to 265,000 households and 750,000 people.

Kiwibank chief executive Sam Knowles says he believes that when repayments start hitting 30-40% of disposable income, "those kind of ranges are where you start to hit stress".

"There are some people who don't have other commitments, who are very good managers with their money who could go above that, and there are other people who have five kids who no way could they afford anything like that. It depends on the situation," says Knowles.

He says while once mortgage lending criteria had clear bars on how much after-tax income a couple could spend on their mortgage, now criteria are fuzzier. Past credit behaviour is now a major factor. If a couple have been scrupulous in paying back debt in the past, a bank will be happy to lend heavily.

But, he says, household mortgage debt simply cannot keep increasing as it has been doing.

Credit rating agency Fitch Ratings report that New Zealand households now rank second in the developed world for their debt vulnerability, according to a survey of 16 developed countries. With its high interest rates, New Zealand had the worst interest to income ratios in the survey.

At Kiwibank, the numbers of households falling in arrears with mortgage payments has been climbing for the past year.

"It's reached its limits, not for everyone, but clearly, that's what all these figures are saying.

"The real question you've got to ask is, do New Zealand households have the resilience to manage through this current peak of interest rates, or will we see bankruptcies and things come in," Knowles says.

He says whether jobs remain secure is the key to what happens next. "It's a very fragile situation, it's a risky situation, but it's by no means a doom situation."

For those buying homes now, chances are they will have to go well beyond the mortgage stress zone of 40% of disposable income. At Mike Pero Mortgages, franchise holder Matthew Mark says typical borrowing for new borrowers is now 50%, with some going up to 60%.

"It's becoming more common. Increases in incomes haven't kept pace with the increase in prices and cost of finance," he says.

Those levels of debt, he says, are "a little bit scary".

"It doesn't leave a lot of room for anything that's unforeseen, and in that situation we definitely advise the client to consider very, very carefully what they're looking to do," Mark says.

Retirement Commissioner Diana Crossan says the problem for many borrowers is they have little choice but to take on heavy debt.

She says in 1980 in Wellington, it would have cost a person in an entry-level public service job three times their annual income to buy a house. Now it would cost someone on the same entry-level public service job seven or eight times their annual income.

"My concern is in the long term we end up having a group of New Zealanders who can't afford to have a house. Our whole system has relied on New Zealanders getting to retirement owning a house," she says.

At budget services around the country, clients from the middle-class mortgage belt are no longer a rarity. Auckland-based Presbyterian Support budget service manager Maureen Little says one family whose bank account she manages have been brought to their knees by recent interest rate rises.

Their mortgage bill eats up more than half their $2500 fortnightly take-home pay. Their North Shore home is worth close to $500,000, with a $212,000 mortgage.

When they came to Little, their power was about to be cut off, their mortgage was $5500 behind, and they had final letters about their failure to pay insurance on the house.

"This is a couple who are relatively well off. They've had to basically lower their expectations of a social life. They basically don't have one. They go to church, they make sure their daughter gets to school, well-dressed and well-fed. They've cut back on food," she says.

She believes extra borrowing on the mortgage was this family's undoing. "Had they just left their mortgage alone, they would have been fine," Little says.

"I think there's been a real splurge on credit in the last three or four years. I've even got older people who have kept on dipping into their mortgage. And now they're getting closer to retirement age they realise with horror they still owe as much as they did 10 or 15 years ago," she says.

Little says her clients include couples earning $80,000 to $100,000. Once, says Little, a budget crisis was a symptom of poverty. Now it is just as often a symptom of consumption and heavy debt

[rmbbrave]

A baby or a house?

What kind of life do you have if you have to chose between that?

[minimoke]

Home is where the heartache is


But probe a little deeper and you find the real sacrifice they made, painfully submerged. The costly item that has had to be pruned out of their budget is a baby. They don't know when they will be able to afford to have children.

They could trade the house for a $350,000 in Papakura

[moe]

Or two houses in Dunedin.

[Sideshow Bob]

Or two houses in Dunedin.

Maybe 1 and a bit houses. Median price in Dunedin is about $260K. The average house here isn't worth that!

[moe]

Here you go, for example.....

http://www.realestate.co.nz/573295?max_price=300000

http://www.realestate.co.nz/570232?max_price=300000

The cheaper of the two is about 5 minutes drive to the university and could be rented out easy. The other is is a allright area close to schools and golf course.

You'd get change out of $350k for these two places in Dunedin. I think Aucklanders need to cut back on the Flat Whites, cocktails and big screen tv's. Try saving some of those 6 figure salaries for a couple of years...you can't have it all now.

[Arbitrage]

Look, housing has been a political football since adam was a cowboy. Politicians can play with policy as much as they like but the market will always win in the end.
Prices are higher in some places because more people Want to live there (hence the difference between Dunedin and Auckland). Affordability is a meaningless populist tool except that it fires up peoples imaginations and wins votes.
The market will determine affordability in the end. Prove me wrong with some real analysis please.

[Sideshow Bob]

Why is affordibility a meaningless tool??

[Arbitrage]

Can someone explain to me what they think it means?