House of the rising sum

By ANNE GIBSON

Housing is the mainstay of our wealth as a nation and the good news is that the home-owning sector is getting richer.

Good news if you own a property - bad if you rent.

WestpacTrust's Household Savings Indicators report for the quarter to June, released last month, points out that the value of housing is the key to our wealth, whether homes are an investment or a place to live. The review was compiled jointly by Morningstar and the New Zealand Institute of Economic Research.

Rising house prices are making us wealthier, even if fewer of us own a property. Massey University's real estate analysis unit found this year that home ownership levels have dropped from 73 per cent in 1986 to 67 per cent now. House-price increases are on their biggest roll since 1997. So do we enhance our new-found wealth and save more? Not on your life. We're all spending money like it grows on trees.

Although household debt levels have increased, households are less constrained by borrowings than they were five or six years ago, the WestpacTrust study found.

Low interest rates and rising incomes mean we are more bullish about borrowing, says Doug Steel, institute senior research economist.

He says our willingness to get more into debt as a nation is driven partly by the fact that it costs so little to pay for the debt in interest rates, but it is also due to rising wealth.

"Over the past year, net worth per household has increased by $3475, to $154,265," the WestpacTrust review says.

A building boom and rising house prices are fuelling this. Investing in residential property remains the mainstay of our wealth and the value of housing assets remains the key contributor to New Zealand's increasing wealth, the WestpacTrust review said.

House prices are increasing about 7 per cent annually, house building is approaching the levels it reached in the mid-1990s and building permits suggest there is more construction growth in the pipeline.

But Steel warned that the tables could soon turn.

"Higher levels of debt and associated buildup of assets have lifted households' vulnerability to a downwards movement in the prices of those assets," he said.

"There are many reasons households increase their spending, with income growth being one of the main drivers. If households earn more, there is more to spend. But they do not need to earn more to increase their spending. They can borrow."

Which leads us on to the relatively unpalatable fact that household debt levels have increased from 83 per cent of disposable income in 1996 to 112 per cent this year.

Not only are we spending all we earn, we are borrowing to spend.

The AMP Banking home affordability report, prepared by Massey University and released quarterly, has found this year that our ability to buy a house is decreasing. Wage rates are improving around 4 per cent annually, but house prices are outstripping them.

Real Estate Institute president Rex Hadley will leave his post on September 11, but noted a recent New York Times article headlined "Economy's rock - homes, homes, homes".

The Economist of August 31 said disillusioned investors were turning from shares to housing: "A bubble, anyone?" it asked of the global land rush. Americans have US$11 trillion ($23.6 trillion) worth of shares, but US$14 trillion worth of houses, it said. Property is the world's biggest asset class. Only Germany and Japan have suffered house price declines in the past few years, the magazine said.

In his new book Financial Secrets - The New Zealand guide to everyday finances (Shoal Bay Press, $29.95) Queenstown-based author Martin Hawes points to the importance of housing investment as a form of saving to form the backbone of our wealth. His advice is to repay debt before starting saving.

"Investment in property has been a key strategy for many Kiwis," Hawes writes in his book, released in May. "It is seen as a way of becoming wealthy and, indeed, many people have become rich through investing in and developing property. It is also seen as a store of wealth - an investment for the long term that protects against or even beats inflation."

Hawes has also written Property Investment (revised second edition, Shoal Bay Press, 2001) and 5 Ways to Save More Money on Your Mortgage (Penguin, 1999).

In his latest book, he provides information on property investment in chapters on saving and investing, superannuation, housing and tax.

His housing chapter concludes with this advice:

* Taking on home ownership and a mortgage are the biggest financial decisions most of us make. Study the options and proceed with care.

* It is expensive to buy and sell houses and shift. Don't do it more often than you have to.

* Renting is full of traps for both landlords and tenants, so know the law and take good advice.

He says home ownership offers a sense of permanence which is important to most families, enforces a saving plan - repaying the mortgage provides a discipline that many people need - provides a natural hedge against any future large increases in housing costs and gives us control over our own environment.

Hawes says tax breaks on housing are one of the main drivers of property investment.

But many people will be surprised to discover just how much interest they will pay in total over the term of a loan on a house or flat.

In his chapter on borrowing, he cites the example of a loan of $100,000 for 25 years at 7.5 per cent interest. The interest alone on this will be $121,400 and the homeowners will end up paying back $221,400 principal and interest over 25 years.

He says we borrow for three reasons: for value-builders likely to increase in price, such as a home; for value-losers likely to fall in value such as a car or boat; and for pure consumption - holidays, clothes and entertainment. His advice? Don't be silly. Borrow for value-builders. Getting into hock for the others makes no financial sense.

WestpacTrust

New Zealand Institute of Economic Research

Morning Star

Economist