Coffee and Cars

May 1, 2007

Articles — Tags: — admin

With hundreds of emails being posted on the Herald website, it seems that my comment on coffee and cars has created quite a stir and considerable debate. Four short sentences, but a week later and the phone still hasn’t stopped ringing.

I seemed to have polarised the community. Many replies have said that it can’t be done and that I’m a hypocritical baby boomer who is out of touch with generation X’ers. However many people have agreed with me and it was pleasing to see that Herald reporter Simon Collins checked my figures and confirmed my belief in an article he wrote.

To clarify, my comments were not a criticism of generation X’ers. I was trying to point out that it has ALWAYS been difficult to obtain your first property and that it takes time and a bit of sacrifice to achieve it. In addition, I was not trying to suggest that everyone can own their own home or that everyone should.  It’s your choice how you lead your life and your life will evolve based on the choices you make. Renting provides great value and allows you to live in accommodation that would cost a lot more if you owned it yourself.

My comments were aimed at those people who were actually in a position to buy a home but believed they couldn’t. Often this was because they spent their money on non-essential lifestyle items rather than saving it for a deposit. I believe that we have developed a culture of “must have it now” and that this is restricting peoples ability to buy a home. This phenomena isn’t restricted to Generation X’ers, however.

It is really pleasing that many of the emails I have read are from young people who have set out to own their own home and taken steps to make it happen. This was often in contrast to their friends who spent their money on items such as mobile phones, cars, electronic equipment etc. A few years later our home owners are looking to upgrade their homes and their friends are complaining that they can’t get onto the first step of the property ladder.

Sorry folks, but you made your choice and you must now live with it. Don’t complain that you missed this round of property price rises and it is now unobtainable. Don’t blame others for the choices that you made. Look at what your homeowner friends did and learn from them. If you really want to own your own home, think to your future, look at where you spend your money, reprioritise and start saving for the deposit now. With a bit of luck you will own your home before the next upward movement in the property cycle.

There are some other facts of life that prospective homeowners should be aware of. You probably won’t be able to buy a home immediately. Your first home will not be your dream home. It will not be new and you will probably have to fix-it-up. It will be more expensive to own your home than to rent it, but you will be better off in the long run.

If this doesn’t sound appealing then another equally valid choice is to take the cheaper option of renting and have more money to spend. Remember, it is your choice. Do not blame others if you have a change of heart in a few years.

One group that has received a lot of blame for rising house prices are property investors. A common thought was that these money grabbing parasites should be taxed out of the market for all the pain they have caused first home owners. (There is certainly a depth of feeling out there).

On the face of it I can understand this point of view, but a couple of questions need to be asked. Is it really property investors’ fault that prices have increased over the last few years and would extra taxes really help the situation?

There is no doubt that property investors and first home buyers compete in the same market. However there are a few misunderstandings about the situation. Many people believe that because investors are able to claim expenses, such as mortgage interest, they have an advantage over home owners. However these expenses are merely taken away from the rent investors receive and they must pay tax on the balance.  This is just like any other business and doesn’t make buying a property any easier for investors over home owners.

Many people also think that investors out-bid first home buyers. In my experience it is the other way around. First home buyers fall in love with a property and HAVE to have it. They often pay more for the property than the investor who is more concerned with finance and isn’t so emotionally involved with the property.

For these reasons property investors are price takers rather than price leaders. They want to pay as little as possible for the property and should walk away if the price is too high. Property investor associations all over New Zealand are educating investors in how to achieve this. The Auckland Property Investors Association (www.APIA.org.nz) is holding a seminar on this very topic next month, May 27. Contact details for these industry Associations are at www.NZPIF.org.nz.

However assuming that investors did force up the price of property, would taxing them more really help first home buyers?

The fact is that the cost of renting a home in New Zealand is considerably cheaper than owning your home. This situation allows renters the opportunity to save for a home deposit if they want to. If rental property owners were taxed more it would simply drive rental prices up. This in turn would make it harder for renters to save for a home deposit.

There are no easy answers to controlling house prices and in fact there are a lot of reasons why you shouldn’t try as it just causes anomalies. Affordability is certainly an issue at present, for both home owners and investors, and this should be enough to slow the growth of house prices.  If it doesn’t then we need to thoroughly investigate what really is driving the market.

Immigration could certainly be a factor, however it provides many positives as well. One of the criteria for many people to be allowed to live in New Zealand is a good financial situation. We can hardly make wealth a criteria for acceptance and then restrict how they spend it when they get here.
There are also seminars being held overseas where New Zealand rental properties are being sold to overseas investors who will never live in New Zealand. They have the opportunity to borrow at lower local interest rates and property here looks cheap compared to their own country. For them it is good business, but are they out-bidding all of us and how many are actually doing this?

The fact is that we don’t have good information on what is currently driving house prices. If it is local buyers, then affordability issues should have an affect over the following year and the normal nature of the property cycle will come into effect. If it is overseas buyers then perhaps we need to look at whether this is good for our nation and, if not, what we can do about it.

What we shouldn’t do is make long term political changes based on populist but uninformed opinions from the masses.
All the best with your investing.

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