How will the generations born in New Zealand after 1980 afford to buy their first home?
This is the crucial question for the baby-boomers running the country. It is central to the economic challenge facing the Reserve Bank and the Government.
The answer will decide how many of those New Zealanders born here will stay and start families. The answer will also be an epitaph for a generation who benefited from what now looks likely to be a tripling of house prices between 2000 and 2020.
Prime Minister John Key gave his answer loud and clear this week: load them up with debt and hope very fast wages growth and low interest rates allow the young and indebted to dig their way out over the next 20 years.
The spotlight fell on the problem in an interesting way this week. The Reserve Bank reiterated its plans for "speed limits" on the growth of high loan-to-value ratio loans. This is one of its so-called macro-prudential tools to allow the central bank to slow down Auckland's housing market without putting up interest rates for everyone.
Governor Graeme Wheeler said he hadn't finalised these limits but was clear they would apply to first-home buyers and rental property investors, because first-home buyers make up almost a third of the growth in new home loans.
This issue has Key's political senses tingling. He knows it's not a good look to take away some of the rungs from the steep ladder to home ownership for young buyers. This week he said he was pushing the Reserve Bank to give first-home buyers some sort of exemption or special treatment.
This is the crux of the matter: how does one generation get to sell their houses to the next generation at the toppest of top dollars when that new generation can't leverage up?
Key sees low-interest debt as the solution to an older generation's desire to keep house prices over-valued. The irony is painful. His Government has staked its reputation on reducing government debt to keep interest rates low, but his solution to over-valued housing is increasing the debt for young home buyers.
Young New Zealanders are often already heavily in student debt and are on low post-tax income. The only way they can afford to buy a first home in the big cities is by gearing up to their eyeballs. Taking away that ability to leverage up breaks the model and exposes the problem much of the developed world faces.
When assets can only be passed from one generation to the next with the help of obscenely high debt, we need to ask: are those assets over-valued? The Reserve Bank certainly thinks so, and that's why it is bringing in speed limits.
Key's opposition to applying these consistently betrays his purpose: to protect the wealth of his fellow baby-boomers. He is betting high growth and low interest rates will solve the problem. That's a big bet, and only one generation will pay the price if it doesn't come off: the young.
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