Interest Rates - Where to next?

[Ptolemy]

Having a home is affordable. Its affordable for those who choose to sacrifice the baubles of modern consumerism and save a deposit. Its affordable for those who work to get an education and a job that pays more than mimnimium wage. Its affordable for those who are prepared to take a step on the property ladder and not expect to get to the top rung on the first go. Its affordable for those that choose to rent - owning a house is not a prerequisite for creating a home.

Affordable on what basis? Certainly not a historical one.

Let's take the average property price ($346k), historical average interest rates (8%) and average wage ($46k or $725 a week).

Lets assume a 20% deposit (BTW do you know anyone on $46k who can save $70k whilst paying rent) - the mortgage payments on this loan would be $950 per fortnight or $475 a week over 30 years. This is before rates, insurance etc. Leaves about $200 a week for utilities, food etc. Doesn't sound possible - in fact I am pretty sure the bank would not loan on that basis.

Now I know you will come back with the following arguments - dual incomes, interest rates are not 8%, they could find a cheaper house etc.

Let's deal with these one by one:

- dual incomes - yes I will concede that most couple both work, but lets assume that at some point they want kids. For average salary earners the cost of childcare eats a good percentage of the wage. I sure helps the equation but also puts a lot of pressure on relationships and family life. At least some period out of the workforce should be budgeted for and once there are two pre-school kids it is marginal for average salary earners to pay for childcare.

- interest rates - yep no doubt they are lower than 8%. It would be a gamble to assume they will stay where they are for more than 12 months. Ceratinly based on yield curves the markets are expecting them to rise rapidly next year. 5 year fixed rates are at 5%. It is not inconceivable that interest rates could go higher than 8%

- cheaper house - sure, they could find a cheaper house. But they could find a more expensive one to. That is why the average wage and the average house price is used. If I used Auckland the average salary would be about $50k but the average house would be well over $400k.

By any international measure NZ property is overvalued and unaffordable. Only Australia has a more overvalued market (probably because of their first homeowner grant) - Case-Shiller housing affordability report supports this.

Who wants to be saddled with 30 years worth of debt?

This probably should have been on the other thread.

[minimoke]

Affordable on what basis? Certainly not a historical one.

Let's take the average property price ($346k), historical average interest rates (8%) and average wage ($46k or $725 a week).

At least 5,878 people thought that buying a house was affordable last month.

Lets not take the average house - why should a person heading out on the property ladder expect to leap immediatly into an "average " house. Lets actually take a house that is affordable relative to a persons income. Heres's one in South Ackland(http://www.trademe.co.nz/Trade-me-pr...-237805252.htm) 2 bedroom for $185k). Or for another $100k what about this 3 bedroom (http://www.trademe.co.nz/Trade-me-pr...-234325368.htm). Sure they aren't average (cos' I don't know how we would define average) - but they are less than the $400k average reported by REINZ.

Lets not take your interst rates. Lets take 6.39% for two years and 5.79 to free up a bit of short term cash. It is of course wise to budget on increased interst rates and a drop in income - but look at the risks and weigh up if they can be taken.

Lets not take a 20% deposit - you can get a loan at 10%. That means on the two bedroom house above you need to find $18,500k. Now take out a pack a day smoking habit (there's $3,650 a year), the weekly lotto ticket (another $780 a year), that dozen of beer or bottles of wine each ($1,040 a year) and you already have $5,500 a year saved - thats only 3 1/3 years you have to save. Flag away that flat screen TV, that Subaru WRX and the coffees and that time drops even more. A real good investment might be a pack of condoms to stop you breeding until you have your mortgage sorted. A home is affordable if you want it.

And don't see debt as your enemy - its your friend. And theres no reason why it can't be a lifelong relationship.

[minimoke]

Affordable on what basis?

Here's another basis - because the Government reckons so. Today State Home tennants are going to be eligible to buy the house they are curretly living in. QV will value the home (nudge nudge wink wink) and Welcome Home Loans will get people up to a $350k loan.

So if a State House tennant is seen by governement as an ideal prospect for home ownership - others can do it as well.

[Ptolemy]

Here's another basis - because the Government reckons so. Today State Home tennants are going to be eligible to buy the house they are curretly living in. QV will value the home (nudge nudge wink wink) and Welcome Home Loans will get people up to a $350k loan.

So if a State House tennant is seen by governement as an ideal prospect for home ownership - others can do it as well.

Hmmm. Do you think that the Government might have a vested interest here?

In terms of your affordability examples - your response was rather predictable I have to say. I can also find houses in Mataura for $60k.

On the interest rate - if you think that it is going to stay at 6.39% for the term of the loan then I think you are being a bit naive. Purchasers should at least budget on average.

So lets take your Papakura house - after borrowing $170k (lawyers fees, mortgage costs etc) at 8.25% (this is where the 5 year rates are currently at and so the market is telling us this is where they are going) the repayments on a reducing loan will be $755 per fortnight.

But now our average salaried worker needs to pay $100 in petrol and transport expenses to get into town and they can't fit more than one kid in the house even if they could afford one cos they are living in a two bedroom unit in Papakura.

I'll ask another question to you - if NZ is so affordable, why do international studies using the same methodology for all markets consistently find NZ and Australia as having the most unaffordable housing in the world.

[minimoke]

In terms of your affordability examples - your response was rather predictable I have to say. I can also find houses in Mataura for $60k.

But can you find work there? I suspect there's a better chance of finding work in South Auckland.

On the interest rate - if you think that it is going to stay at 6.39% for the term of the loan then I think you are being a bit naive. Purchasers should at least budget on average.

Of course rates are going to go up. Look at the risk and fix an appropriate amount for an appropriate term.

But now our average salaried worker needs to pay $100 in petrol and transport expenses to get into town and they can't fit more than one kid in the house even if they could afford one cos they are living in a two bedroom unit in Papakura.

So your buyer did have two incomes before they decided to breed - shame they didn't save more between them to get a bigger deposit. Chuck in a single income and Working For Families and some cash is coming in. Why should I have sympathy for a person who aspires for a three bedroom house when their immediate need is for a two bedroom one. Get a floating rate on part of the mortgage, hammer it then breed again. Get your extra WFF and move to the three bedroom.

I'll ask another question to you - if NZ is so affordable, why do international studies using the same methodology for all markets consistently find NZ and Australia as having the most unaffordable housing in the world.

I've never said home ownership is for everyone and I have been clear that there is no god given right to own a home. Horses for courses!

[beacon]

if NZ is so affordable, why do international studies using the same methodology for all markets consistently find NZ and Australia as having the most unaffordable housing in the world.

Which studies in particular are you referring to. Undue Governmental Interference in market will result in NZ underpricing its housing stock for international investors. haven't we learnt a lesson from the sharemarket yet. How many NZ stocks do NZers own? How many big businesses? And then we cry when the Aussies milk us for dividends with their banks, waste management ...

[minimoke]

I'll ask another question to you - if NZ is so affordable, why do international studies using the same methodology for all markets consistently find NZ and Australia as having the most unaffordable housing in the world.

Perhasp its because there is underlying value in NZ housing. If you compare with the USA which is one of the more affordable would you actually want to buy a house there. Go to Youngstown OH/PA - one of the more affordable in the world. You've got 14.2% unemployment - good luck gettign a job to pay your low mortgage for yoru cheap house! Conversely you have Kiwis reckoning the grass is greener on the other side of the Tasman - where housing affordability on the Sunshne Coast is rated worst in the world. Thats not stopping them moving and getting on with life.

[Ptolemy]

I think my point about Mataura was exactly that. And by your own admission if you can't find income or your income is low then houses should be more affordable. Ergo, NZ houses are not affordable on an income basis. This is actually the basis of most of the surveys into house affordability. I guess you have read the same reports since I see you have quoted the most affordable place in the US from the report

http://www.demographia.com/dhi.pdf

I think we can agree that there are houses that people could afford to buy on the average salary if they are prepared to make sacrifices but that doesn't make NZ houses affordable. When I bought my first house in 1994 it cost me $185k in Sandringham. It was a 3 bed cottage. It was a first home buyer house and still is. I was earning below average wage and my wife and I with both pays and payrises and two flatmates were able to make short work of the mortgage - we paid it off within 6 years. That same house with minimal improvements has a GV now of 625k. That house is not in range for first homebuyers unless they have significant salaries and deposits - and then they will spend most of their lives paying it off.

I reiterate, housing is not affordable today. I don't know why you think debt is your friend? It is just a different form of slavery - to the bank rather than plantation owner.


Beacon, i'm not sure what you are referring to in terms of "undue Government interference" but I am assuming you think that the government shouldn't get involved "controlling" prices in the property market through CGT and the like.

Isn't a governments function to provide the regulatory environment so it's economy can improve it's productivity. It is only through productivity gains that the a country can improve the standard of living of its citizens (i.e. companies make more profits and can afford to pay their workers more). NZ productivity has dropped over the last 10 years - we now sit well into the lower half of the OECD.

By allocating most of NZers wealth into property we have created a masive amount of foreign debt (only because prices have risen not because we have built heaps of houses). This increase in the "market cap" of housing hasn't resulted in greater output - rents haven't kept pace with the price increases. The end result is we still have to pay the debt back - aren't we lucky interest rates are historical lows. I see it very much in the governments remit to make sure that the current distortions are not perpetuated. I don't agree with CGT as the method to do it though. That just creates more distortions (why have CGT on houses and not businesses or shares).

Anyway, off topic. This was an interest rate thread - sorry for highjacking.

[minimoke]

I don't know why you think debt is your friend? It is just a different form of slavery - to the bank rather than plantation owner.

Back in 94 you made a move without anyone holding a gun to your head. You voluntarily went to the bank and asked them to loan you some money to help you achieve one of your ambitions. Like a "friend" they stepped up and gave you a hand and it came at a cost called interest. It was a mutually benificial relationship - quite unlike slavery. Indeed you could have broken the relationship wheneever you liked - you just had to either save harder or get flatmates (like you did) or sell your house. But there will be a time when you reckon you can make more by using someone elses money than your own - and debt will again be your friend.

Your second paragraph sums it up nicely - housing is affordable if people are prepared to make sacrifices. Its the largest thing most people will ever buy in their lives - its not supposed to be easy. Thats why I think people struggle buying their first home under the guise of inaffordability - its because they want an average home half way up the property ladder rather than starting closer to the bottom.

[Ptolemy]

MM

I think you miss the point - is that house in Sandringham 15 year later worth nearly 3.5 times more when incomes have only gone up 40% in that same period. If I was buying now on the same relative wages I would be contemplating living a tiny two bedroom unit in Papakura. If I chose to do that if would be a significant tradeoff to my lifestyle. The argument was about the affordability of house in general not whether someone could afford a shoebox in the booeys. You will always be able to find a house you can afford to buy (Mataura, Papakura) if you look hard enough but to what ends do you want to sacrifice life - that is the point of having an affordability index.

Anyway, I doubt either of us will change the others mind. Debate is good. It is an important topic for most NZers given most of us have most of their life's saving tied up in it.