Only innovation and lateral thinking – and a platform on which that can take place – will help ease New Zealand's overheated property market, according to the CEO of new fintech, Power Finance.
While the Government's budget predicted a "very sharp" drop in house prices in coming years after recent moves to dampen matters, not all economic commentators agree – and Power Finance's Dave Corbett thinks different steps have to be taken.
Corbett says Power Finance's "future of finance" platform is the beginning of a secure and more community-based finance system as an alternative to mainstream lenders, an ideal environment for new thinking to help with the difficulty of buying a first home as well as trading up.
"That has significant multi-generational implications, the potential for sending us back to a time of landed and non-landed classes," he says, "so why not take a new approach?
"You typically hear young Kiwis saying they can service a loan but they can't save enough for the deposit – and they're right. With house prices heading up, their goal gets further and further away from them, especially if they are trying to save in traditional bank accounts with almost zero interest.
"They need a property ladder product, one that allows them to pin their savings to house prices, so the goalposts don't get shifted out of their reach all the time."
Corbett says the financial instruments needed are complex – but work well in some overseas markets. The concept involves melding a young saver with a homeowner, probably a retiree, who is asset rich but cash poor. The young person directs funds over time to the homeowner as a kind of fluid down payments and, when the homeowner either passes away or sells the house, the cash paid in is repaid along with a proportion of the capital gain involved.
It's a complicated arrangement, says Corbett, and carries a risk factor as the investment goes up or down in line with the movements of the housing market: "I think that's one reason it doesn't happen in this market; it's a bit like reverse mortgages – they work but most banks don't offer them because, if something goes wrong, there can be some bad publicity if the homeowners involved didn't understand what they were buying into."
That education factor, however, can be addressed – and property ladder product is one example of the innovative thinking New Zealand's housing market needs.
Corbett also queries the system traditional banks use to assess people seeking mortgages, applying a measure of prospective borrowers called "probability of default" and "loss given default".
The first is an assessment of the lender's salary and expenses; the second looks at the security that could be called upon if the lender is unable to keep the mortgage up: "It's a distasteful measure of wealth," says Corbett.
"It doesn't take your potential into account, so even if you are an excellent individual with a great work ethic, you don't get a chance because your ancestors weren't wealthy. It's just another way the wealthy get wealthier."
Corbett also asks why all mortgages are dispensed at the same rate: "There are different circumstances, different people, different abilities to pay, different security – so why are they all the same price?
"There must be some cross-subsidisation for that to occur so it would help a lot if there was more competition in this area."
Community housing is a major area that Corbett feels can take some heat out of the market. PowerFinance is also focusing on community projects – partnering with an iwi on a community housing project, using the flexibility of their platform to lend to an iwi as opposed to an individual, which Corbett sees as a possible solution to Maori land lending issues.
Traditional lending is hampered by restrictive lending practices, he says. Traditional banks, for example, will often not lend to community housing projects (CHPs), like those built by iwi or community-based groups like the Salvation Army because the iwi projects involve land that is owned by 50-100 people or more.
However, innovative thinking and development of products on the Power Finance platform can help, he says. CHPs receive subsidised rental cash flows from the government – and that income can be diverted to service debt. That would bring finance costs down from 5-6 per cent to about 2-3 per cent, he says.
"Everyone agrees – New Zealand needs to build more houses and this is one way to do it; it's financial engineering, a starting point for that to happen in a safe way."