Peter Thompson: House ownership carries risk, but offers great rewards

Peter Thompson
Peter Thompson: House ownership carries risk, but offers great rewards

Now probably represents the best time in the past six years for first time home buyers to enter the Auckland housing market.

That was how long ago it was since the Reserve Bank introduced loan to value ratios (LVRs) on trading banks, heralding the introduction of a barrier that for some years acted as both a physical and psychological stop sign to first time buyers.

In recent times requirements around LVRs have loosened while house price increases have stalled, interest rates are at their lowest ever and choice is good.

For those who are prepared to go with ‘next generation’ housing – apartment living or close density, terrace type housing with a minimal section – the pipeline of developments hitting, or about to hit the market, makes choice even better.

It is a golden situation that is likely to exist through the remainder of this calendar year and may even get better if mortgage interest rates fall further than those on offer currently.

Naturally, there are hurdles to overcome.

There is still the question of getting a deposit together, but there are far more options for those starting out on the home ownership path than in 2013.

Possibly one of the greatest current barriers is having the confidence to take the plunge when negative headlines abound about the stalling economy, debt to income levels rising to record levels and speculation about ‘house prices collapsing’.

I’m not one of those who subscribes to the view that a retreat in prices is inevitable, and I certainly don’t believe that a price crash would be good for the housing market or the economy.

The only people who would benefit by a sudden and large retreat in house price values are those who participate in the transfer of wealth that would occur.

Based on what has happened over the past 50 years the most likely scenario is that if prices were to decline it would be caused by a major external event, prices would fall by less than 5% and that within a few years prices would head north once again.

It is what has happened on the three occasions in the past 50 years when the current year’s average price fell below that for the previous year and stayed down for two more years.

The first time was in 1957 to 1959, when wool and butter prices fell; the second time in 1991 to 1993 when world oil prices escalated; and the third time in 2009 to 2011 when the global financial crisis occurred.

On each occasion the fall was triggered by world events outside the control of our economy.

And on each occasion prices fell less than 5%, within one-year prices were on the rise again and within a three-year span were ahead of the previous peak.

When it comes to financial performance, history is no guarantee of future outcomes, but nor is there any reason to believe that a 50-year track record is without meaning.

If a future price decline was to occur in housing the most sensible approach would be to sit out the rough times and wait for time to solve the issue – which is exactly what past generations of homeowners have done.

What those in the market at present can be sure about is that the current record low mortgage interest rates are not about to increase anytime soon. If fact, the latest forecasts are that they are likely to decline even further.

One of the more sensible comments I’ve seen about rising debt levels recently was from Chris Lewis, Federated Farmers Dairy Chair, when being interviewed about rural debt levels.

He said while the Reserve Bank concern around farm and housing debt was fair enough – “it’s their job to worry about this stuff” - ultimately the burden was always going to come back to individual choices.

“If you want to follow that dream and buy your first farm or first house you’ve got to pay the market price.

“And as always, as with my parent’s generation, you put everything on the line to make that first purchase.

“That means you borrow a lot of money. The principles haven’t changed at all.

“The problem is that the numbers are getting bigger and bigger.”

Chris' words sum up those who are intent on home ownership for the benefits it offers them and their family.

There are few who, having bought a home and are now debt free, doubt that ultimately the sacrifices made, and the risks taken, were truly worth the reward achieved.

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