NZ Herald 14 April 2007

AYour idea has appeal — until you start thinking about some of the likely repercussions:

• Subsidising any group of people — whether first home buyers or farmers — always involves a transfer of wealth from others. The money has to come from somewhere.

  While many first home buyers are struggling financially, some are wealthy but have chosen not to buy a home until now. Do they deserve a gift from the rest of us?

  If we are going to get generous, how about giving more to people too poor to buy a first home, even with a subsidy?

• Subsidies distort decision making.

  A good alternative to home ownership can be renting and saving elsewhere, as we note in the next Q&A. But the existence of your subsidy might persuade people to buy a home who otherwise wouldn’t do so.

  That could lead to the opposite effect to what you want. Lots of people suddenly able to buy a home — including some who previously hadn’t intended to buy — would push up demand for houses, and hence prices, probably more than a 2.5 per cent tax would reduce demand and hence prices.

• People who are forced to sell their homes often — perhaps because they have to move for work or family reasons — would feel unfairly treated. Paying a sales tax would make it harder to buy a home of similar quality in the new place.
• Adding any new tax complicates life. Having paid taxes in the UK, US, Australia and here, I reckon one of the most important features of a tax system is simplicity.

All in all, then, I’m afraid your idea won’t get my vote.

In any case, the increase in house prices isn’t nearly as rapid as many people think.

Crunching numbers from the Real Estate Institute, we find that the median New Zealand house price has risen only an average of 7.6 per cent a year from February 1997 to February 2007.

True, in the last five years the rise has averaged 12.5 per cent a year. But in the previous five years it was only 2.9 per cent a year. Our memories are so short.

In Auckland, prices are higher but price rises are slower. Over ten years they have risen 6.3 per cent a year on average. In the last five years they rose 10.8 per cent a year, but in the previous five years just 1.9 per cent a year.

And given that New Zealand house prices are their highest ever relative to rents and incomes, continued price rises at recent rates are highly unlikely.

Another point: You mention $600,000 homes in five years. But even if current price trends do continue, $600,000 will still buy a relatively expensive home in most parts of the country. Must first home buyers have such a home?

Even in Auckland, units and small houses are on the market for less than $200,000 in some less desirable but reasonably safe and pleasant suburbs. Elsewhere, they are sometimes less than $100,000.

Maybe we don’t need subsidies so much as a lowering of standards.

AYou’re absolutely right. The government is worried that fewer New Zealanders own their own homes, and no doubt many of those who don’t own would like to. But it seems that a growing number of people are thinking the way you do.

What’s more, if you settled for living in a house of the same quality as one you might buy, you would end up with even more savings.

You shouldn’t really include all mortgage payments in the analysis, as part of that money is repaying principal and that is a gain. But rates, insurance and maintenance would more than makes up for that, especially in the early years of a mortgage when little principal is repaid.

As I said above, rents are the lowest they have ever been, relative to house prices. Currently, renting is a good deal.

In my book, “Get Rich Slow: How to grow your wealth the safe and savvy way”, I list the pros and cons of renting versus home ownership.

The advantages of renting include: You may get a higher return on your invested money, and you have greater flexibility with savings and better savings diversification. You also have less responsibility and no worries about maintenance; you can move easily and cheaply; and it may be easier to live close to downtown.

On the other hand, you can be kicked out; you don’t have your choice of decoration; you’re exposed to rent increases, and — crucially — you need to be disciplined about saving.

With home ownership, you accumulate equity in your house, which makes it easy to borrow for business and so on, and your retirement accommodation is taken care of. You have pride of ownership and security. Also, you decide when you’ll leave, and decorate and garden as you please.

On the other hand, you have to take care of maintenance, it’s more difficult and expensive to move, and your “savings” — or mortgage repayments — are inflexible and undiversified.

Also, you need a good credit rating to get mortgage. That’s still an issue, even these days, for those who have had financial problems in the past.

At a recent seminar, participants added that if you smoke or own dogs, it can be hard to find rental accommodation. Issues like that can decide it all for you, and that’s fair enough.

Given that the financial numbers can quite easily come down on the side of renting, as you have shown, it may be best to let some of the non-financial issues mentioned above guide your decision.

One other point: The rate of return suggested on the sorted website, as you note, is a real rate of 2.5 per cent. “Real” means after taking inflation into account.

It’s comforting to know that the $462,000 you came up would buy, in 30 years, what $462,000 buys now — perhaps including a house at that point.

And, as you say, returns on shares, a share fund or property fund are likely to be higher than that, even after allowing for inflation.

At 5 per cent after inflation, in your example you would end up with more than $700,000 in today’s dollars.

And, if you were lucky and made 7 per cent after inflation, the total would be more than $1 million.

Home ownership is clearly not the only route to wealth.

ANot at all. I like your use of the word “happily”. What else is retirement supposed to be about?

You might want to check through the pros and cons listed above, to see if anything there changes your mind. For example, it would probably be horrid to be kicked out of your home if your landlord decides to sell the property.

To some extent, though, this worry can be reduced with a long-term lease. And you have eliminated other worries, such as what to do if you suddenly discover you need an expensive new roof.

I suggest you also try out the retirement and “60plus” calculators on the sorted website, to see how your savings might hold out under different scenarios. Recent returns on shares and property have been unusually high, and that won’t last indefinitely.

Still, you will probably be fine.