In a raging property market, it’s possible to have a million-dollar home and no cash, writes Joanna Mathers.

Jane lives in a spacious Pt Chevalier property that is valued at $1.5 million. She has a well-paid job but ­daily life is a constant struggle.

"I worry about money all the time," she says. "But the house is a great ­investment so I want to keep hold of it."

Jane, who did not want her full name used, has separated from the father of her child, but has financial assistance from him and flatmates to help with the household costs. Ostensibly, she is one of the lucky ones - many would envy her position in life - but it's not an easy road.

"The money invested in this place is my child's inheritance. I could downscale but I feel it's much more secure for us to have the money ­invested in property.
"So I hope I find a job that pays more than what I currently earn."

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With its million-dollar suburbs (59 at the last count), and record housing prices, Auckland's property market is still sizzling hot.

And encouraged by record-low ­interest rates and ever-increasing valuations, Auckland's well-heeled flock to pay over the odds to ensure the quality and location of their homes is in line with their ­aspirations.

It's "keeping up with the Joneses" on steroids, as banks happily ­furnish those on large incomes with the ­mega-mortgages needed to fulfil their big dreams.

But behind the putty paint-jobs of many a restored villa is a disquieting crack in the facade.

Statistics New Zealand data ­reveals about 20 per cent of Aucklanders are spending 60 per cent of their income on mortgages. Forty per cent is generally considered the high end of the affordability scale.

And labouring under the weight of enormous debt, often unable to pay for life's little emergencies, some of Auckland's moneyed elite may fit the description of a new type of ­struggling household.

Meet the new "wealthy hand to mouth". They may ­inhabit luxuriant ­surrounds, but their disposable income after mortgage isn't dissimilar to that of those struggling on a minimum wage.

Appearing to sit on top of the world, they are, in fact, uniquely ­vulnerable to the tides of the economy, fluctuating interest rates and unexpected life events.

The phenomenon was explored in a paper written by three leading American academics last year. The wealthy hand-to-mouthers (or WHTM) have little to no liquid wealth but often millions tied up in property. Their combined incomes may be well into the six figures, but there is nothing left for the piggy bank at the end of the week.

They have been variously dubbed the Henry's (High Earners Not Yet Rich), the Faux Riche and the ­Affluent Poor.

But the researchers who investigated households in the US, Canada, Australia, the UK, Germany, France, Italy and Spain identified that as many as one in six people fit the criteria - people who live from pay check to pay check without anything left at the end of the week.

One of the paper's authors, Greg Kaplan from Princeton University, presented this research this year at Auckland University.

Dr Ryan Greenaway-McGrevy, a senior lecturer in economics from the university's business school, says many Aucklanders fall into this category and identifies a number of signposts.

"Firstly, our housing market is similar to those countries ­investigated in the survey, especially ­Australia. If it's happening there, it's likely to be happening here.

"Then there are housing costs. In Auckland this has increased hugely, without a corresponding increase in income.

"These people may bring home large salaries, but the 20 per cent [identified by Statistics New Zealand] are likely to be struggling to pay for the basics. After the ­mortgage, food, electricity and the essentials, there's not much left."

They are not predominantly young people with low incomes, says Greenaway-McGrevy, but tend to be in their late 30s to 50s, with a high income. And they face a huge risk from any international wobble in the ­economy and pose a potential problem for the wider economy.

"From the macroeconomic perspective, the wealthy hand-to-mouth can exacerbate an economic downturn into a full-blown recession.

"These households do not have any liquid savings to fall back on, so they will quickly cut back on spending if their incomes fall, thus further reducing demand for goods and ­services in the economy," he says.

"The bigger concern is if their ­incomes fall to the degree they are forced into selling their property.

"If that happens en masse, ­property prices will fall, and they could be left with an underwater mortgage. If they have any debt overhang after selling the property this will continue to drag on their ­consumption even after selling the family home."

Economist Shamubeel Eaqub also feels there could be wider economic consequences if the market changes.

In an economic downturn, there will be a tendency to hunker down,
In an economic downturn, there will be a tendency to hunker down," Economist Shamubeel Eaqub. Photo / Supplied

"If there is an economic downturn and people with high mortgages lose one of their income streams, there will be a tendency to hunker down. This means money won't be flowing into the economy and can have ­negative effects on the country."

He also feels heavy investment in property can undermine the entrepreneurial spirit embedded in our society.

"New Zealand is based on small businesses and the funding for these has traditionally been raised by borrowing against your house.

"In the Auckland market, people have no chance of doing this as their debt levels are already so incredibly high."

Jane's reticence around being identified is typical of those in the midst of this cycle. None of the wealthy hand-to-mouthers contacted for this story were prepared to be identified.

A lot of shame is involved in ­admitting you're struggling ­financially, especially when to all appearances you're at the top of the heap.

In the UK, Adam and Megan Brownson became overnight inter­net pariahs after admitting they feared the costs of privately educating their two daughters would leave them "financially broken", despite a healthy-sounding joint annual income of $430,000.

They faced a barrage of vitriol for drawing attention to their "first world problems" - but lifted the lid on a real concern.

Adam is a management consultant and Megan an injury lawyer and the couple own two properties with a combined value of more than $2.25m, putting them in the wealthiest one per cent of households in Britain.

But the sheer cost of middle-class life means they are stretched to the brink. Hannah McQueen, founder of ­financial advisory Enable Me, ­understands the reluctance to talk about a growing sub-class. She has been there herself.

People feel they should be getting ahead on what they earn. They aren't,
People feel they should be getting ahead on what they earn. They aren't," Hannah McQueen. Photo / Supplied

"A few years ago I was in exactly the same situation," she says. "My husband and I both had great jobs, but the mortgage and my love of shopping meant we had incredibly little left at the end of the day.

"I started this business to help people in similar situations work out a way to get ahead."
McQueen estimates 50 per of her clients are struggling under the weight of prohibitive mortgages, even though their incomes are high.

"For many there is a real disconnect. People think if they earn more money they will get ahead, but the more they earn, the more they spend."

For most of these clients, life is pay-day to pay-day. "The overwhelming comment we get is that people feel they should be getting ahead on what they earn. They aren't.

"They are spending all their ­money on the mortgage and feel miserable and trapped." She says maintaining a very large mortgage is contingent on a number of factors.

"In homes that are dependent on two incomes, both parties need to be able to maintain their employment at their current income or higher," she says.

"If either of them gets sick, or there is a parting of the ways, the situation becomes precarious."

Greenaway-McGrevy says that although an equanimity - albeit precarious - can be maintained if households are bringing in large weekly incomes (and while interest rates are at a record low), problems are inevitable if this changes.

This, for him, is the crux of the ­issue. "Obviously, being WHTM is a concern for those in that situation. Any unforeseen expense or loss of ­income could put them in a situation where they have to sell the house."

He also says that heavily investing in a single proposition goes against basic financial logic.

"No financial planner would advise anyone to invest heavily in one asset. But so many Aucklanders are choosing to do so.

"If a recession hits, or interest rates increase - which they will at some stage - a lot of households won't be able to afford to pay their ­mortgages, and could be forced to sell their homes for much less than they bought them for."

Herne Bay could be seen as a ground zero for residential extravagance. Squirrel Mortgages is located just down the hill from New ­Zealand's first $2m suburb and founder John Bolton says his clients are no strangers to massive mortgages.

Housing developer John Bolton from Squirrel Mortgages.
Housing developer John Bolton from Squirrel Mortgages. "The 'house prices never go down' story is urban myth." Photo / Doug Sherring

He says it is hard to generalise about what income-to-home loan ratio is realistic for these people, but Squirrel brokers are very careful to highlight the affordability factor when talking about home loans to clients.

"We like to get a sense of what people can afford, their living costs at the time we see them. Anything above those costs takes you into ­uncharted waters."

Bolton says many people on very high incomes underestimate how much they spend and make ­borrowing decisions based on this.

Sometimes they are surprised by how much lifestyle adjustment will need to take place to service their weekly repayments.

"While the house prices are going up, the pain feels better," he says."But if prices start going down, and people aren't seeing any return from their investment, reality kicks in."

Many people are becoming too dependent on the record-low ­interest rates and they may start to feel the burn when they inevitably rise, says Bolton.

But those people with high lifestyle expectations are turning to ­ever-eager banks to furnish them with cash for life's luxuries.

"These people often don't feel like they are short of money because credit is so freely available. They ­borrow against their homes and this is fine while the house prices keep going up.

"But if the market conditions change then people will face some tough choices."
But Bolton believes his clients are spending with less impunity than before the GFC.

"People are well aware of what is happening in the property market," he says. "The media is obsessed with ­mortgage interest rates. Syrian ­refugees may get a mention but ­interest-rate fluctuations seem to be a national obsession."

He says most people are mindful of the implications of borrowing huge sums of money.
"I think people are aware of what could happen if they borrow too much and the market changes."

David Chaston from Interest.co.nz feels that those who invest ­heavily in mortgages with the idea that ­prices will continue to rise are in for a shock.

"The Auckland housing markets are in dangerous territory. Very low interest rates allow borrowers to pay prices that are too high.

"Strangled supply, plus booming immigration, plus perceived tax ­advantages, plus low costs of money are a toxic combination," he says.

"As soon as investors sense one of these legs is uncertain, the chair will tumble."
He says relying on long-term ­unabated property price increases is unrealistic and this will spell ­trouble for many overcommitted home owners.

"The 'house prices never go down' story is urban myth. In nearly every market apart from Auckland, it is demonstrably untrue. We are about to get a clear lesson about the effects of overbuilding by looking at Christchurch. Building continues after sufficient supply is in place."