Every dollar of debt increases the risk
‘‘Is now a good time to buy a house?’’ a friend asked me last week.
‘‘Will prices continue to go up?’’
I told her I thought it was the wrong question.
With the sound financial sense expected of me I said what mattered was that she didn’t take on a debt so large it could scupper her.
I was right because every dollar of debt brings more risk but I was wrong about her question being ‘‘wrong’’.
What I was really being asked was whether prices could fall.
That’s not a wrong question.
As a prospective buyer my friend was acutely aware that debt is far more real than house prices.
Borrow $300,000 and that’s the sum the bank wants back, regardless of your circumstances.
Pay $350,000 for a house and should you have to sell it, that may well not be the price it’ll go for.
She, like many, is trapped into borrowing more than is decent or reasonable to buy a home in an area grimmer than the one she grew up in.
Oh, the area will gentrify as people like her move in and poorer folk are forced further out.
All being well in her life (no accidents, no illnesses, no protracted periods of unemployment, not too much time raising kids and being out of the workforce) and barring financial or economic crisis (touch wood, everyone) she’ll be fine in a few years, even if her retirement savings are a bit slim.
Hers is the lot of many and it is an indictment of a society that’s consistently failed to have a vision about what it wants for its young people.
The result is from the numbers.
New Zealand’s back on the debt growth path after a few years of holding its breath.
A report earlier this month from the Salvation Army says in 2003 the average debt per household was $86,000.
At the end of September last year, it was $121,200.
That tells only a part of the story.
Debts are not just bigger, but longer-lived.
Mortgages used to be 25-year affairs.
Now 30 years standard.
The Sallies say that we are heading towards ‘‘levels that have proved
is the unsustainable in other countries’’.
I agree, but what is a person who actually wants a home to do?
Lifelong debt slavery may well be unpalatable but lifelong renting, or strategic short-term renting in the hope of prices falling, also bring big risks.
Some engage in what I think of as clever property gymnastics – contorting one’s life to find a way to pay less and still live decently.
For example, I have one friend who has bought a rental in Taupo to one day retire to because she can’t afford to buy here in Auckland now.
Another bought a place with her husband (predictably far from the city centre) and has rented out rooms to boarders.
Others swallow hard and borrow big. But, if you do that, have a plan. Don’t just repay the minimum. Reduce the debt as fast as possible.
And have contingency plans.
Make sure you know what you would do if your income was disrupted.
That means being able to make payments without borrowing more for at least three months.
It means consulting with family.
Family should never guarantee loans, but that doesn’t mean they won’t help bridge a gap.
It also means mortgage repayment insurance.