How much debt is too much

Central Leader - - NEWS -

The hard­est money ques­tion I ever get asked is this: Are houses worth the prices peo­ple are pay­ing for them?

I of­ten get ques­tions along those lines, usu­ally from peo­ple who have re­cently bought or who are on the cusp of debtenslav­ing them­selves for the terms of their nat­u­ral lives to own a slightly de­crepit, too-small prop­erty in a sub­urb with a half-de­cent school.

I con­sider it an im­pos­si­ble ques­tion to an­swer and typ­i­cally re­spond with a mix­ture of ‘‘Yes’’, ‘‘Good God, no!’’, and ‘‘Maybe’’. And yes, I ad­mit my an­swers are not the most help­ful a money writer could give.

New Zealand house prices, viewed from one per­spec­tive, are an ex­am­ple of ex­treme hu­man folly. Af­ter all, are we re­ally put on this earth to slave to buy a mod­est, draughty home and never be able to step off the tread­mill of gain­ful em­ploy­ment?

Do we re­ally want a so­ci­ety in which vast swathes of our young are ex­cluded from mean­ing­ful par­tic­i­pa­tion in our once-proud home-own­ing democ­racy?

For in­vestors who aren’t savvy enough to buy smarter than the over­all mar­ket, gross yields of around 6 per cent seem com­mon.

Once you take out in­sur­ance costs, mort­gage in­ter­est and all the other costs of own­ing a home, there’s not much left ex­cept hoped-for cap­i­tal gains.

And let’s not for­get the con­sumer spend­ing power sucked out of the econ­omy.

Viewed from an­other per­spec­tive, house prices are a re­sult of the com­mon­sense reaction by parts of the pop­u­lace to low in­ter­est rates, ready ac­cess to debt and failed govern­ment pol­icy. In­di­vid­u­als recog­nise the way the wind is blow­ing and fill their boots.

And hey, most peo­ple, ac­cord­ing to a re­cent sur­vey by BNZ chief econ­o­mist Tony Alexan­der, wouldn’t mind if house prices rose fur­ther still.

I won’t re­hash the sorry con­clu­sions of the re­cently pub­lished Priced Out: How New Zealand lost its Hous­ing Af­ford­abil­ity (it is worth a read).

But in my view the same fac­tors are likely to keep driv­ing up prices in ar­eas such as Auck­land and Christchurch.

So the only sen­si­ble re­sponse I can give to the ques­tion of are house prices worth it is this: Gains are a func­tion of the prices peo­ple will pay to­day.

They can dis­ap­pear to­mor­row or next year or over the next 10 years.

Debt is much more real. A bank may for­give some of it but they’ll ex­tract ev­ery cent they can be­fore do­ing that so tak­ing on debt is not to be done lightly.

Ev­ery gen­er­a­tion faces some to­tally aw­ful prob­lem, some­times more. Some gen­er­a­tions have had war and been packed off to fight and die. Some gen­er­a­tions have faced racism and sex­ism. Oth­ers have faced un­em­ploy­ment at lev­els we have for­got­ten.

House prices seem to me to be the present younger gen­er­a­tion’s hor­ror and no, long term, I do not per­son­ally be­lieve they will be sus­tained at th­ese high lev­els com­pared to in­comes.

But ev­ery ex­pert I have ever met has been wrong most of the time about most things or right for to­tally wrong rea­sons.

I do be­lieve I can say this with­out fear of be­ing wrong: The larger your debt, the higher risk that some­thing can hap­pen to you or so­ci­ety that will plunge you into a per­sonal fi­nan­cial cri­sis.

Only you can de­cide how much debt is too much debt. Only you can de­cide whether the price is too high and whether your fam­ily is fi­nan­cially ro­bust enough to pay it.

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