The announcement today of the government’s proposed initiatives to deal to the issue of housing affordability seems to be generating a unanimous negative reaction as judged by feedback mechanisms of various websites. Whilst I think there is a general consensus that addressing affordability is a laudable goal the proposed idea of shared equity is entirely flawed as a solution.
Far from achieving the stated aim of supporting low income families attain the home ownership dream as expressed in the prime ministers speech it would clearly create a further rampant speculation in the housing market sucking in further demand to an already restricted supply market (see the blog post on 2008 house prices) as the “subsidy by another name” would fuel the fire of the selected few deserving families who the government would choose to anoint with this shared equity, allowing them to speculate to accumulate!
The issue here is that the proposal seeks to provide a second mortgage secured by the government which is non interest bearing and repayable on sale of the property. So let’s examine this scenario.
Couple A on a joint income of $55,000 are interested in buying a 3 bedroom house in Auckland at $300,000 – thanks to previous government support and the kiwisaver home start incentive they have saved $20,000. Now on their income the deposit is less than the 10% and a bank would not lend due to credit history lets say anything more than 85% of the purchase price – also the mortgage on even the 85% ($255,000) would be $515 per week – far more than they could afford on a take home wage of $850. But here comes the shining white knight of our government to offer an interest free loan as a second mortgage of $130,000. Now the situation becomes very different.
Couple A now need only borrow $150,000 which of course is only 50% of the value and pay a mortgage of $300 per week. This all sounds wonderful – a perfect solution – Couple A can now start their property climbing aspirations, a shining example of a helping hand up rather than a hand out!
Now lets examine the situation 3 years down the track when one of 2 scenarios have occurred:
- Firstly Scenario 1: Couple A have acted responsibly – maintained and even with a great bit of kiwi ingenuity and hard work enhanced their $300,000 home and have decided to sell. The property was bought in a good area and property prices have risen 7% per annum each year. They sell for $400,000 (7% inflation would means a growth to $367,000 plus the property improvements of $33,000 added by Couple A). Couple A now repay kindly their government second mortgage of $130,000 leaving them with $115,000 net of their mortgage repayment! – so in 3 years thanks to our government they have achieved an annual return over 200%.
Now the key thing is this successful financial return has been achieved on the back of taxes paid by hard working New Zealanders. So where is the shared risk, shared reward of shared equity?
- Now for scenario 2: Couple A are not as diligent and committed as in the first scenario, they become a little slack with mortgage repayments, unfortunately they also bought in a less well maintained area where property prices have not grown as the local factory and processing works closed. Mysteriously one day when the Baycorp people pay a visit they discover that nobody lives at the house, the copper wiring has been stripped out with anything else of value. The property would have been worth around $290,000 in good order but now looks like a tough buy at $230,000. The bank want their $148,000 mortgage back from the mortgagee sale as a first mortgage, leaving the government with the balance after fees of $76,000. Now that does not look to be such a smart investment by our government! Oh and by the way that was our collective $54,000 that was just lost, let alone the loss of interest opportunity on the original second mortgage over the 3 years.
This is an election year and the lolly scramble has started in earnest, just let’s hope that the majority of the population have the intelligence to see beyond the smart spin!
