'It is harder for young people these days to buy a house than it was for the Baby Boomers. This is not because of greed by older people,' Tony Alexander says

Cartoon by Jacky Carpenter

BNZ chief economist Tony Alexander has sought to explain himself, further to his boss apologising for the “inflammatory” remarks he made in his weekly newsletter last week.

BNZ CEO Anthony Healy, as well as BNZ’s marketing team, took to Twitter last weekend to clarify that Alexander’s “typically provocative” comments around young people being able to get on the property ladder if they made the same sacrifices as the baby boomers, reflected “his personal views rather than the view of BNZ”.

Following a week of heated debate on the issue through the media and over Twitter, Alexander has prefaced his latest Weekly Overview saying: “Many thanks for the messages of support received this past week. But not everyone got the main points of last week’s overview so we go over them again.

– It has become harder to buy a house not because of one generation’s buying but numerous factors we have discussed hundreds of times in this publication since 2009 whilst warning about the upward house price implications.
– Young buyers these days need to make deep sacrifices in spending on other things if they want to purchase a house and if such sacrifices cannot be made home ownership could well remain out of reach.
– Getting credit from banks has become harder and further rationing of an increasingly limited supply of funds is coming.

Alexander then starts off his newsletter (which hasn’t yet been emailed to interest.co.nz as it usually is this week) saying:

“Helping New Zealanders Be Good With Money – This is one of our aims at the BNZ and something strongly emphasised and repeated through discussions within the bank and outside it.”

Alexander proceeds to explain:

The aim exists because there is research which shows that many people are not always good with their money. They borrow too much, they spend too much, they spend on the wrong things, they save too little. In particular, they fail to appreciate that achieving key life goals involves sacrifice. You want to achieve top marks at school and university, you sacrifice some of your social life, sports and immediate income. You want to be top in sports, you sacrifice some of your other learning and time doing other things. You want a mortgage, you cut back on non-interest payment spending.

“One part of maturing as an individual is realising that whenever you take on a new thing like a partner, a car, a child, or a global trip some other thing or things need to be dropped. You have to make choices, otherwise you never grow up.

If you want to buy a house you must sacrifice spending on a great number of other things and you must not aim to buy your dream home in one step. Buy something you can improve using your own labour in your own time. Home ownership is expensive in terms of the deposit size, the purchase price, the stress, then the running costs, especially for young people with little furniture and starting a family. Pursuing home ownership will bankrupt some people. It ends in disappointment for many others as the repair bills come in. Relationship breakups will impose forced sales on some, and some relationships will fail because of the financial stress and the inability to spend on things which non-home owning friends may continue to enjoy.

People need to think very carefully before signing up to a large mortgage which will fluctuate in cost, with future changes almost guaranteed to be upward, by perhaps 2% for floating interest rates over the next two years. Budget for a 3% rise just in case. Home ownership is also dangerous because it reduces your ability to shift location should you need or want to. So think carefully before you try and lock yourself into a particular city and suburb for many years. Get it wrong and you can suffer financially from shifting house and be simple bread and butter for real estate agents.

Such commitment to a place does not make sense for most young people who face a massive range of opportunities here and overseas. Be very, very certain before you look your partner in the eye and say here, in this place, this is where I make my stand, and you are the one I make it with.

The key message of last week’s Overview was that it is harder for young people these days to buy a house than it was for the Baby Boomers. This is not because of greed by older people, as one politician recently claimed, but a long list of factors we have repeatedly emphasised in this publication since 2009.

The list includes planning and building regulations, foreign buying, double income households, New Zealand no longer being a big farm, the concept of Brain Drain going out the window, the technological revolution causing people to want to live and work nearer to other people, a structural decline in interest rates, loss aversion by retirees, widespread forecasts of strong tenant demand, and so on.

These things are not going to radically change. It will remain hard for young people to purchase a property and that has been the key message here encapsulated in predictions of rising house prices since 2009. Anyone who acted on those price rise predictions rather than holding off for a price collapse will currently be sitting reasonably comfortably equity-wise.

If purchasing a house is your goal then there is no shortage of things which those who already have purchased sacrificed as they built up their savings, worked at reducing the principal to improve their position, and adjusted when their interest rates and/or expenses went up. Things people have cut out have included…

· Cafe visits
· Going to restaurants and bars
· Smoking
· The latest telephones, games consoles, cars
· International travel
· Weekend and evening leisure time because they took an extra part-time job.
· Hired help like dog washers, landscape designers, etc.
· Subscription tv, gaming, music
· Privacy – by taking in flatmates, student boarders, or renting out space on Airbnb.

If you want to buy a house these days now that prices compared with incomes have structurally jumped to levels they will never much decline from, then you will need to make sacrifices. If you can’t then think carefully. You could keep renting and accept the uncertainty that brings in terms of rent levels and tenancy length. Either way, putting and keeping a roof over your head has become structurally harder in this country.

Following on from this discussion last week we introduced a new element which is worth going over again this week in case you missed it.

The world has changed. Following deregulation of the financial markets and institutions over 1984/85 the main problem for anyone wanting to get a loan shifted from rationing of a limited credit supply to price. It is now shifting back again. Banks face far greater demand from people wanting to go into debt with our assistance than we can satisfy through raising funds domestically.

Some credit rationing has already occurred via the LVRs. Some has manifested itself through new property developers struggling to find a financier. Next will likely be large corporates having to source funds in their own name from offshore and maybe via bonds. Without increased deposits or access to funding further rationing of credit is on the way, with the next housing cycle almost certain to see it in the form of Reserve Bank imposed debt to income ratios, as sought by the RB and recommended this week by the IMF.

While preference is likely to be given from here on out to home buyers, businesses need financing too, especially SMEs. Hence the market opening up for foreign banks (Chinese almost certainly) to enter NZ to service the larger companies over the next few years.

Therefore the relationship between you and your bank is changing. It is shifting from the bank offering deals and discounts to get your business, toward them raising interest rates, reducing discounts, even introducing fees as a means of rationing demand, and picking and choosing between the many mortgage applicants. Preference will be given to those who show an ability to build savings over an extended period of time through (by definition) sacrificing expenditure.

Baby boomers will understand this need to build savings over many years before seeking a mortgage. But the younger generation used to businesses chasing them continually for their dollar will take some time to cotton on to the implications and figure out how to get to the head of the queue.

Some have already figured it out – the bank of Mum and Dad. But there are bad social stability implications from this development with home ownership decreasingly available for those without generous relatives. What will happen to counter this trend?

We will eventually see some changes in legislation favouring the tenant and penalising the high flexibility which landlords enjoy. Changes in this area will likely move quite slowly.

We will also eventually see the development of proposals for government financing of home purchase by those without family means, well beyond the small grants and savings withdrawals currently available from Kiwisaver. Given the way in which concerns are growing about regional depopulation and the high cost of buying a house in Auckland, these financing proposals will likely focus on regional housing markets. But they won’t amount to much and history shows that in the absence of a township jobs surge it is unrealistic to expect any substantial movement of people out of the main cities to small localities.

But keep an eye on the area covered by the Waikato District Council (WDC). It uniquely straddles the gap between Auckland and Hamilton. Since 2007 population growth per annum has averaged 1.8% in the Waikato District versus 1.2% for all NZ, 1.6% for the Auckland Region and 1.3% for the entire Waikato Region…