How much debt is too much

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.