Banks do like increasing property values with larger home loans. How much money will homeowners have left over to spend after paying bank and council rates? Do homeowners feel rich, despite the fact that properties actually are held by banks?
Housing politics—Bank Loans, Levies and Growth
Banks do not like people but money
Pushing up property values go hand in hand with larger amounts of borrowed money – no doubt banks like more profit for less work. The attempt to regulate the housing market by interest rates is another failure where banks profit from. The misconception is, as mentioned here, that the housing market is a homogenous body. In fact buyer’s interests is focussed on areas with economic growth. Higher interests rates impose even more difficulties in areas which are fallen behind.
Statistics reveal the average interest rate over decades in NZ is 7.5% - saying BUY, BUY, BUY as long as the rates are under 7% - is that a good deal, really? As said, the Reserve Bank uses interest rates to control the market therefore relying upon politics tools can be deadly. But actually only households with mortgage repayments that cost them more than 30% of their income and first-home buyers are vulnerable if interest rates rise significantly.
If only a small percentage of homeowners and investors is affected, how can you regulate the housing market by bringing on the other hand businesses and service providers to their knees? For instance not long ago I paid 10.5% interest on home loans compared with the EURO zone, which had less than 2%.
Home buyers – do they feel ripped off?
Well, it is an interesting time as far as the housing market is concerned. Housing shortage in economic hot spots, high immigration numbers and demographic shifts with lone person households or professional couples drive the demand on housing and fear to miss out is understandable.
With conflicting media reports regarding LVR (loan value ratio) for first-home buyers and uncertainties about interest rates emotional decisions take over easily. People see things bigger than what they are and to minimize the impact individuals need to take a long-term view to assess personal circumstances like career path (income), relationships (buying as couple) and family plan.
I illustrated an example here, where people pay for a mortgage of 384k in total 967k to the bank, twice of the purchase price only for interests to bank. If people would save two or three years longer to pay an higher deposit or shorten the duration of a home loan from 30 to 25 years that would reduce their interest payments by hundred thousands of Dollars. Are you sure that the losses you have due interests are set-off by capital gains? Example
True, finance is home buyers’ concern, but actually the transition renter-to-homeowner is the real challenge. Renters use to walk away under certain circumstances but for homeowners a house is a liability. How much money will homeowners have left over to spend if bank and council rates, insurance and costly defects, maintenance and repairs are draining their wallet. When reality kicks in who does not feel ripped off?
Investors – trapped by cross collateralization?
Banks prefer cross collateralizing as it gives them greater control over assets and more options to manage the risk of exposure if the market values drop. Tying up multiple properties as security over one loan reduces investor’s flexibility.
For instance selling a house from the property pool and the bank keeps the money locked in as equity, what can you do? In this scenario the bank might charge you additional fees (e.g. for breaking a fixed loan, refinancing, etc). By using multiple lenders that puts you in the position to eliminate unnecessary risks.
Feel rich - prices go up
That is what people like to hear—getting rich by doing nothing. Politics reported in the media tend to hit people’s nerves and messages leave many readers wondering where markets are heading. I read recently
“Notably, Australia’s median wealth per adult of US$194,000 is the highest in the world, well ahead of Switzerland at $US87 and Norway at $US79,376,” as the report says.
Wealth statistics based on market values for people’s homes are meaningless. House values driven up by a shortage of housing, as you can see today in Auckland, tell you nothing about what you get when the day comes selling your home. Why would you feel rich when you can’t access the money frozen in your house? Borrowing against a risen paper-value is another “can of worms” (similar to reverse mortgages). You can speculate but never know the market value before selling.
Turn your eyes to the EURO zone. The Germans turn out in such statistics among the poorest people in Europe. The reported net worth of a median German household is less than the half of the people in Greece, because of reported home ownership. Compare the living standards between (rich) countries in crisis and Germany.
Let me guess, we are about to see a whole lot more of statistics about the EURO zone, USA and China that is going to join the party. Australia currently is facing an economic trend downwards triggered by the mining industry. How many (housing rich) Australians sell their home to compensate loss of income?
Land values and growth in suburbs versus cities
NZ has only one city - which region has actually grown in comparison with Auckland? Except the earthquake rebuilds in Christchurch what else has appreciated more?
In contrast the latest QVs for rate assessments and Median house price statistics show a different story, why? They are the basics how homeowners are being taxed.
Many homeowners live in houses with low land values. When I queried the new rates based on QV, council told me I pay for services not for the land.
In my observation politics classifying homeowners as rich, despite the fact that properties actually are held by banks (as long as the mortgage hasn’t been paid off). The same concept applies to homeowners (landlords) being charged by councils for services supplied and consumed at occupant’s address.
Instead of building infrastructure to increase productivity politicians are focussed on interest rates to stimulate the housing market. Have you ever thought what would happen when homeowners could pay off a mortgage faster with lower interest rates and banks would take the risk financing productivity?
Klauster Blogs lead to a real person, IT professional, investor, landlord and business owner with interests in technologies, properties and trading.
His passion, making experiences available and helping people like you, comes from extensive travelling and the principles of life—how to avoid pitfalls in unfamiliar territory when investing or forming relationships.
The philosophy to treat life, partnerships and hobbies as an investment has helped people in his circle. Life is a dream with a deadline, happiness comes from making the right choices and having realistic expectations.
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