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Are the market values the driver for homeowners to buy and sell in short succession and why is the housing stock aged or behind home buyer’s expectations?

 

 

Market Values and Home loans

Reasons for Homeowner’s slavery

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Do Market Values drive the market?

 

Every day is something new in the media to read about market values. If you are not a property investor (less than 10% actually are), why would you care? Well in my observations, the obsession by pre-occupied homeowners with house values plays a prime role why homeowner buy and sell in relative short succession. If you believe the statistics from last year, nearly 65% of homes were in NZ owner-occupied and homeowners sell and buy after approximately 7.5 years. 

 

Whether these figures are right or not the question remains why do homeowners buy and sell in such relative short time frame by signing steady rising home loans (debts)?

 

Mortgage holders actually don’t own a home

 

Would you sell a house purchased for 300k Dollars few years ago for 400k Dollars today and buy another house for 600K Dollars? An acquaintance of mine did exactly that by doubling his mortgage. A bigger house is a great display but does it increase the wealth of the buyer?

 

Well two thoughts come to mind – firstly as long as the mortgage is more than 50% of the market value of a property, people lose in net wealth because of liabilities to the bank (interest payments on debts).  Why would you compete with the “Joneses”? Be sure there will always be someone who spends more than you. Secondly, selling and buying in the same market is good for lawyers, the real estate industry and banks are rubbing their hands with glee.

 

In a similar example I looked at the interest payments for a 30-year mortgage compared with a shorter loan term — see the table below:

 

Home loan for 400,000 on 7% interest

 

As you can see paying on the 30-year loan 557,960 Dollars interests only is more than the sum of borrowed money. That is 109,860 Dollars more in comparison with a 25-year mortgage. People with a small deposit have the same problem, they work for the bank and not for their home.

 

True, at the moment the interest rates are below 5%. That changes the gravity, but who knows how long super low interests drive the market?

 

 

 

 

 

 

 

 

 

 

 

 

Reduce mortgage costs and lift up living standards

 

Instead of paying the bank for a larger home, upgrading a smaller house by doing major home improvements for energy efficiency and higher living standards that would make life better instantly but also create equity. Equity in your home can be treated like repayments on the mortgage.

 

On the opposite people with high levels of debts lose even more in slavery to bank. For instance we did exactly that—reduced our liabilities, paid off the mortgage early and  with cash savings we renovated the house. We upgraded everything we wanted like double glazed windows, insulation and central heating to suit our lifestyle. In other words we created our affordable dream home.

 

Why did it work without difficulties for us? Well, do you know the “principle of compounding interests”? If you pay less interests, spend more on insulation and reduce your energy consumption —you automatically have more cash available.

 

How many homeowners do that? Looking at NZ’s housing stock (as investor I have seen a lot), you will find houses from all bygone decades still in original conditions, but have had many different owners. Houses from the 40s, 50s, 60s - freezing cold,  none insulation, no heating (even with open fireplace) and all in very poor conditions. When money is tight why then wasting it?

 

 

Politics drive home unaffordability

 

With housing unaffordability becomes an increasing political issue many first home buyers feel pressured not to miss out by taking on high (and unaffordable) debts. That might be okay for people who have a secured career.  But what happens to people on job hunt and in cities with high density housing or high living costs (commuting to work, etc)? The often asked question is —how far can house prices go up? The answer is easy. It will stop when people don’t buy and banks don’t sell unaffordable home loans. As long as people are willing to be a slave,  market values will react accordantly to buyer’s demand.

 

 

The deadly rule of snowballing results

 

The golden rule of becoming wealthy is the principle of compounding interests. If debts run out of proportion compounding “negative” interest deliver snowballing results – debts grow bigger. And that is often misunderstood – an owner occupied home is not an investment, it is a liability.  Or let me say, see it as an investment with high expenses and no return. An investment is characterized by the Return On Investment (ROI).

 

Be honest to yourself, what is the ROI on your home. Maybe you start debating about “capital gain”, well that is another post, visit the blog posts library.

 

 

Take Away

Think twice, as long as you have to pay a mortgage, make repayments but not politics to your business. Become financially savvy before listening to the bank. Debts are only good for financial institutions. (Nobody tells you that) Inflation is homeowner’s biggest expense, a hidden tax on everything to pay for government household’s deficits, follow the blog and I tell you why and how to deal with that.

 

 

 

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Klauster Blogs lead to a real person, IT professional, investor, landlord and business owner with interests in technologies, residential properties and healthy lifestyles. 

 

The passion of making experiences available comes from renting in different countries and working with people who are interested in home ownership. Helping people to avoid pitfalls has been most rewarding, when forming relationships.

 

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Repayment 

Loan annually

Monthly Repayments

(loan calculator)

Total

Payment to the bank

Interests

only

25-year mortgage

16,000

2,827

848,100

448,100

30-year mortgage

13,334

2,661

957,960

557,960