Ev­ery dol­lar of debt in­creases the risk

Auckland City Harbour News - - NEWS -

‘‘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

clear

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.

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