Was home-buying financial idiocy?
OPINION: Were people who bought homes in the last two years foolish?
That case was made to me this week by a friend, who lacked sympathy for people finding themselves in negative equity, owing more than their house was now worth.
‘‘If you’re going to join in the game, you need to know the rules,’’ he told me.
One of the rules he was talking about was that when the Reserve Bank Te Pūtea Matua cuts interest rates, it drives down home loan rates, house buyers can borrow more, and do, pushing up prices.
Reserve Bank Governor Adrian Orr says the bank warned the public that the effect on house prices when it cut the official cash rate to stimulate a Covid-threatened economy would not last.
It now expects house prices to fall by 20% from their peak.
But is it fair to say that recent buyers were the authors of their plight, and should have held off until prices fell?
Not in my book, it isn’t. People’s buying windows are relatively short, if they want to pay their home loans off before they draw NZ Super.
Their buying window is generally dictated at least in part by the date of their birth.
They work hard, save hard, and end up with a deposit, probably topped up by the Bank of Mum and Dad. But they arrive at their buying moment in a universe that does not care about them. It can be randomly cruel.
I arrived at my first buying moment when all the stars aligned, not in a pandemic, not in the year before a global financial crisis, not in the year before an unemployment spike.
Others are not so fortunate. It’s tempting to think young buyers in the past two years should have read the tea leaves, and put off their home-buying until prices had fallen back to more reasonable levels.
But I’ve met some very smart people over their years who were completely off with their house price predictions, and yet they were so certain at the time.
Somewhere in the garage, I have a battered copy of The Day the Bubble Bursts by property investor Olly Newland. It was printed in 2004.
If experts can’t time markets, why would we expect younger, less-experienced people to do so, especially ones we’ve terrified by letting prices race up so fast in the past decade that many have been left behind already?
People buying their first homes may have to make their decision to buy under quite significant pressures.
They are most likely renting, which often means rotten housing. They may be getting ready to have children. Clocks are ticking.
They have bought at a time when the media is relentlessly writing about house prices racing up, making them fear they could be locked out of the market, if they didn’t act.
Sure, there might have been a few stories of caution on negative equity, but few people remember periods of negative equity from days past, especially if they were children at the time.
The idea of swooping in on homes at opportune times is also a wee bit laughable right now.
Buying acceptable homes to live in (as opposed to sticking tenants you don’t really care about in) can be hard.
I have just finished a conversation with a young woman who has been shopping for a place for nearly eight months with her partner.
Some weekends she does 10 open homes.
Some people will be ready to buy at opportune times, and their subsequent enrichment does not prove they are financial geniuses.
Others will be ready to buy at less propitious times. It does not prove their financial idiocy, and nor should they be blamed for it.
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