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.