Aiming too high blinds young buyers to reality that the property ladder starts at their feet
I have an opinion on the first question from a reader in your column last week.
While housing affordability is a problem relative to international standards, your reader's attitude is typical of many first home buyers.
They can't see how they can afford a first home when the average price is $500,000.
They do sums based on this amount. Herein lies the problem.
They should be looking at the cheapest home available - say, $300,000. First home buyers simply can't afford the average price. They have never been able to.
Your buyer needs to drop their aspirations and look at an area they can afford. With time and patience they will slowly climb the property ladder into a better house in a better neighbourhood with a mortgage they can afford.
You're not the only one to make this point. Says another reader: "There are many entry-level options at realistic prices for potential home owners, beginning with apartments on leased land, freehold apartments, townhouse units and condominium developments. All of these are in the $250,000 to $450,000 range.
"Until potential home owners move away from the narrow focus of buying a stand alone three- to four-bedroom home in the suburbs with garden, toolshed, etc, the house market will remain both skewed and inflated on a very narrow base."
Message to the young: You're not meant to have wrinkle-free skin and a flash house all at the same time. As you lose one, you gain the other.
We oldies should concede, though, that even humble abodes cost considerably more, relative to wages, than when we started out.
The Reserve Bank's nifty CPI inflation calculator - see Quicklinks on the home page of www.rbnz.govt.nz - tells the story. In the 1960s and 1970s, wages grew faster than house prices. But by the 1980s and 1990s, annual house price inflation was about one-and-a-half times wage growth. And in the decade just ended, annual house price inflation was more than twice wage growth.
From the first reader's letter in your last column: "Compare this to the US where the average salary may be about $50,000 but the houses are only about $250,000 on average. My numbers will be a bit off but I trust you get my point. Why is there such a disparity [between New Zealand and the US]? Are we just heading for a massive meltdown like in the US?"
Your contributor needs to be careful drawing conclusions from broad averages about a place as big and varied as the United States.
One upward price factor in metropolitan housing is that many people want to live where the jobs and other amenities are. Those living close in are those most able to afford it.
Many people in the US have for years commuted one or even two hours each way to get to their jobs because they can't afford to live closer.
That would be equivalent to travelling each day to Auckland from Huntly or Hamilton, where presumably your writer could afford to buy a house.
On the other hand one could probably pick up a lot of floor space quite cheaply in urban Detroit. There just wouldn't be any jobs. In New Zealand we often seem to think the "system" or the Government sets the scene rather than economics.
America is, indeed, an amazingly diverse country. And you're quite right. When I worked for the Chicago Tribune, a few of my fellow business reporters commuted a couple of hours each way. It's one way to make the numbers work.
Look out Huntly, the hordes are about to descend upon you. But wait, there are alternatives, as our next reader explains.
Mary, your first contributor last week earns $62,000 living in Auckland and obviously can't afford an average house at over $500,000.
Why don't these Auckland people think of living in the provinces? I have lived all my life in Wanganui very adequately. Just to compare house prices, I checked one advertisement in the local weekend property magazine. There were 10 Wanganui house properties listed, ranging from $495,000 to $130.000. Two others were on offer below $200,000 and three others below $300,000.
I know that many other factors influence where people live, but Auckland people need to realise that there is life elsewhere. Wanganui house prices have not fallen significantly, and there is negligible unemployment. In fact the job scene looks pretty open, and we have a job for a good sales assistant if any Aucklander wants to apply.
Well done on the marketing.
In these times of relatively high unemployment, I don't see why this column shouldn't act as an employment agency - just this once.
Anyone interested in filling your vacancy can email me, and I'll forward their contact details to you.
In the absence of anywhere else safe to invest, I take your meltdown rhetoric as a personal attack on my retirement security.
Have you been to China? Our residential property is world class and will be in demand.
It's an investment I can control, maintain and enhance, unlike your abstract alternatives, where "professional" advisers like yourself are the only sure winners.
Yikes! Where did that come from? I am not a financial adviser, and never have been.
As a glance at the bottom of this column will show, I earn my living from: writing columns and personal finance books; lecturing on financial literacy at the University of Auckland; representing consumers on the board of the Banking Ombudsman Scheme; and presenting seminars about personal finance for employees, lawyers' and accountants' clients and others.
I also do work for the Retirement Commission and government departments, broadly about boosting financial literacy.
The idea behind all of it is to help New Zealanders do the best they can with their money.
I could earn more as an adviser, but I've chosen not to. I enjoy what I do.
But when people make comments like yours, I get a bit crabby.
Please note, too, that I don't benefit financially from anything I write - other than being paid by the newspaper or publisher.
In fact, quite often I write against my own interests. For example, now. I have more money tied up in property than in any other type of asset.
However, partly because of my worries about property prices, I diversify as much as possible into other assets.
And I strongly suggest you do the same.
The point here is that - whether you or I like it or not - the economics suggest housing is overpriced.
And I worry more about people struggling to buy even an apartment on leased land in Huntly - if there is such a thing - than I do about property investors who are not open to alternatives.
Oh, and as for China and the quality of our residential property, I'm not sure what that has to do with the price of - well, houses. The quality of something is not related to whether it's priced in a rational way. There's a "too high" price for everything.
I have the same feelings about house prices and the yawning gap between them and average incomes. We have two major situations. One is that the cost of building new houses has gone up as regulatory requirements on leaky homes, insulation, etc, have been added of late. Higher new house prices have an effect on old houses (substitutes factor), so the average house price goes up.
The other factor is lack of land released to new demand, due to RMA regulations. If smaller subdivisions in so-called rural areas are allowed, land prices will significantly be down; so will average house prices. Just imagine - a person living 2km from Albany mall in the Rodney District needs at least 1ha to build a house. They need only about 350sq m just 3km away in Glenfield.
The first factor is not changeable, I suppose, but the second one is - which will make house prices more sensible rather than the current ridiculous level.
Yes, let's keep the leaks out and the insulation in. Houses are bigger now, too, so to some extent we should expect to pay more for bigger and better. Note, though, that new houses are only a small proportion of total housing stock, so changes in the quality of the average home would be gradual.
On land development regulations, I'm no expert. But I'm sure there are sound arguments on both sides about the merits of the regulations. Let's not go down that long and winding road - although it would be good to have a broad idea of how much the regulations affect prices. Read on.
In all this talk of the unaffordability of property I'm waiting to hear something concrete about why prices are high. What is the cost of building a house compared to when housing was affordable? And what is the cost of developing land now in comparison to when housing was affordable? These costs in comparison to average incomes would be helpful in finding out if these factors have an impact on prices.
Unfortunately, those numbers aren't on the Reserve Bank's calculator.
If anyone has reliable data, preferably compiled by someone with no axe to grind, please send it to me.
I assume you've already received an answer to the reader's question about PIR being "unfair", but if not, here goes:
As noted, your PIR is based on your total taxable income and PIE income in either of the last two years that end March 31.
This is to allow those who don't know how much they will earn in the current year (that is, the self-employed) to give a correct rate - important given PIE is a final tax with no ability to claim back.
The logic is this: You may not know your earnings for this year, but you should for the previous year.
However, it could be that your tax return takes a while to work out.
As such, the Government very sensibly has allowed you to look back to the year before that - in which case you should definitely know what your earnings are, and can thus always provide your manager with your correct PIR.
There are still plenty of investors who are doing this incorrectly, so your help in bringing this to their attention would be much appreciated.
As a KiwiSaver provider, you're on top of all this.
Thank you for sharing your knowledge.
Mary Holm is a part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name.
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Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.