The Ground is Shifting
Tony Alexander, the Bank of New Zealand's Chief Economist, has written an open letter to "Millennials" who have been complaining that buying a house in New Zealand is now virtually impossible for younger people entering the work force.
It is a tongue-in-cheek piece, but as is often the case, there is an undercurrent of sober truth in it.
BNZ chief economist Tony Alexander says young people priced out of the market are wrong to point the finger at retirees. He said there had been a number of structural changes that had altered what New Zealand house prices were worth.
New Zealand was no longer one big farm, he said, and shift of focus to cities had put pressure on their house prices. Another change was the relative return on and cost of property. Interest rates are now much lower than they were up to the 2000s, which affects what people will pay.
"The cost of borrowing to purchase a property has plummeted and because of this structural jump in demand for property, prices have lifted.
Those Baby Boomers people are dumping on paid mortgage rates in the late-1980s around 20 per cent," he said. Older people were turning to property investments because they did not have the stomach for sharemarket volatility, he said. That also drove up prices. Accelerated population growth and the spending power of double-income households played a part, too.
He said young people wanting a house should buy a "dunger or even a meth house to strip, and do it up". "Basically be prepared to do what the Boomers did in many instances," he said. "Start out in a desolate new suburb of clay soil far from work, do up a piece of shite, or build and live in what will become your garage whilst building the rest of the house around you in the following few years.
"And how to finance it? Go to cafes and spend as much on lattes, muffins, frappes, wraps, etc. as often as the Baby Boomers did," he said. "Hire as many gardeners, landscape designers, decoration consultants, plumbers, feng shui consultants, window washers, dog walkers, dog washers, cat whisperers and general handymen as they did.
"And hope to hell that when you come to retire you don't sit looking at your bank statement shaking your head because when you had a mortgage the bank charged you 20 per cent but now that you have term deposits you're only getting 3.5 per cent all whilst listening to people saying you and your profligate ways are the problem."
Alexander said there was a "ground shift" under way that would hit in the next two years as the banks worked to avoid an asset bubble. Young buyers would find it much more difficult to get a mortgage, he said. "Question your assumption that when you are ready for a mortgage you will be able to get one as quickly as everyone has been used to over the past quarter of a century. And question your ability to finance expansion of your business at the pace you would like. The ground is shifting." [Stuff]