The Haves and the Have Nots

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New Zealand now has a dual economy. Our socio-economic groups are clearly divided between those who own property and those who don’t – the haves and the have nots. The gap between these two groups is widening as property prices continue to surge. The winners are the baby boomers – those who have owned property for most of their lives; many of whom own multiple properties. For this age bracket, property investment has been a popular vehicle for retirement saving, second only to bank deposits. Baby boomers are wealthier than their parents were at the same stage of life. The losers are of course their children and grandchildren who have struggled to get onto the property ladder.

However, not all baby boomers are property owners. Around one in five superannuitants are renters rather than owners and this number is increasing as property prices surge ahead. In addition, there has been a marked increase in the number of superannuitants with mortgages. Data released by credit agency Centrix in November 2020 shows that one in five superannuitants still have a mortgage – that’s around 135,000 people and this number is rising. So in total around 40% of retirees are either renting or paying a mortgage. We know from Massey University research that unless you live in a small rural location, NZ Superannuation is not enough to live on, even if you own a mortgage free home. A government accommodation supplement is available for those whose income is below a certain threshold, however it is not nearly enough to cover the costs of rent or mortgage payments.

While much has been said about the plight of first home owners, there has been little attention given to the rising level of poverty amongst retirees caused by the rapid rise in house prices and rents.

What makes everything worse is that we are only a few months away from what is expected to be the start of a cycle of increasing interest rates. This is bad news indeed for those who have taken out large mortgages in order to get on the property ladder. It is also bad news for landlords, especially now that interest costs are no longer tax deductible. Higher interest costs may lead to further rent rises.

To illustrate this point, let’s look at the future prospects for someone who has borrowed $800,000 to buy a house. At the current interest rate of around 2.2% for one year, repayments are $1,406 per fortnight over 30 years. If interest rates double to 4.4% – an entirely possible scenario over five years – the repayments will increase to $1,851 per fortnight. That’s an increase of $445 per fortnight or $11,570 per year. Assuming the borrower pays income tax of 33% tax, they would need to earn another $17,268 per annum to cover this increase.

We have not yet seen the full extent of the damage caused by high property prices.

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