Guest post by Hugh Pavletich from Performance Urban Planning
In yesterday’s New Zealand Herald article “Buyers Turning To The “Bank Of Mum and Dad ,” reporter Russell Blackstock illustrates how young Kiwis are unnecessarily taking on excessive mortgages and pressuring their parents for financial support, eroding parents’ retirement savings and encumbering their own home—and all entirely unnecessarily.
The problem is housing supply.
Young Jamie Clark and Jenna Close have just purchased their first home for $450,000, with a mortgage load of $360,000—and a deposit largely covered by their parents. Within normal housing markets* however—i.e., those with properly functioning local governments that have not taken control of land supply while losing control of their costs—with their household income of $70,000, young Jamie Clark and Jenna Close should be able to buy a new home for about $210,000.
This would give them a sensible mortgage load of just $175,000 requiring a deposit of about just $35,000. (A $35,000 deposit is much less of an issue than an unnecessary $90,000 one.) And importantly, it would allow them to be financially independent of their parents—something no doubt all involved would prefer.
Deputy Prime Minister Bill English reminded readers in his Introduction to this year’s Annual Demographia International Housing Affordability Survey that Kiwi housing used to be about 2.0 to 3.0 times annual household incomes. The Andrew Atlins’s THE REAL DEAL poster illustrates how this is still possible, as do the Annual Demographia International Housing Affordability Surveys themselves, indicating that cities cities in which land supply is not restricted by local governments are cities in which the Jemma Closes and Jamie Clarks can still by affordable housing with a price/household income multiple of just 2.0 to 3.0.
Christchurch and Auckland however are currently touching a “severely unaffordable” 7.0 times.
This is dangerous bubble territory, as even Deputy Prime Minister Bill English and Reserve Bank Governor Graeme Wheeler have made clear. They are in no hurry to see the New Zealand economy wrecked like the Irish one.
Instead of being able to purchase an affordable home however, young Jamie and Jenna, both 25 with a $70,000 gross annual combined household income, have purchased their first home for $450,000 with a mortgage load of $360,000—and likely more, when repayments to both parents are factored in.
The 20% deposit required under Reserve Bank Governor Graeme Wheeler’s new rules was a course “a problem” for them at $90,000.
It appears that both parents came to the party—one providing $45,000 cash, the other offering security on their own home. Which means the first are eroding their own retirement savings, and the second are putting their own home at risk should the young couple experience difficulties down the track.
With young Jenna’s mum and dad not having the cash (clearly lacking retirement savings and financially vulnerable, which is of no concern to the Bank involved obviously), they were only able to put their own home up as security. This clearly makes Jenna’s parents extremely vulnerable to any difficulties Jamie and Jenna experience in the years to come.
Both the young couple and Jenna’s parents run the risk of losing both homes should things go wrong.
In addition to this, it seems likely Jamie and Jenna’s actual mortgage load will be 90% of the purchase price of the property, being $405,000, which 5.7 times their gross annual household income. (Remember, in a normal housing market it should be about 2.5 times. In this case $175,000.)
So young Jenna and Jamie’s mortgage load is about $230,000 more than it should be ($405,000 minus $175,000). The banks would be even more “generous” lending $430,000 (much higher lending multiples on higher incomes … check calculator hyperlink).
Allowing for interest over the life of the mortgage, roughly double it, so the total excess mortgage costs to the young couple will likely be in the order of $460,000.
On their current household earnings, and assuming that young Jenna’s portion is about $30,000 as a childcare worker, that means about 15 years of her working life is “devoted” to being a “mortgage slave” entirely unnecessarily. Allowing for tax, even longer.
No doubt the Banks are extremely grateful to this young couple for their $460,000 excess mortgage cost “donation.”
And no doubt the governments central and local responsible for this disgrace are grateful for her contribution to their wellbeing.
This should properly be termed “The Politicians Bankers Welfare Scheme.”
After all, the New Zealand public ( 75% of young and 62% of all Kiwis) told politicians loud and clear early last December to get on ALLOWING affordable housing to be built.
In young Jenna and Jamie’s case, they are paying about $460,000 of THEIR hard-earned income for the incompetence of politicians across the political spectrum—most directed towards and “The Politicians Bankers Welfare Fund.”
What happened to our fair go culture ?
Hugh Pavletich is a Christchurch entrepreneur, the owner of website Performance Urban Planning and the co-author of the Annual Demographia International Housing Affordability Survey, 2013.
* Normal housing markets, which land supply is not artificially restricted, have historically had housing prices just 2 to 3 times household income. The Annual Demographia International Housing Affordability Surveys indicate that with significant exceptions, in cities in which land supply is not restricted by local government, most English-speaking countries now have house prices in their cities of from 4 to 9 times household income!