Friday, February 15, 2008
See the whales dive
Have you too been watching housing for the last half-decade, marvelling at how those values have gone up and up and up? It’s been optimism all around. Those who’ve bought houses since the turn of the century have been on to a very, very good thing. It’s all been so fabulous that few imagined a time could come when the value of our dwellings might not only plateau but slide, just like a whale arcing up out of the sea and then slipping back down again, propelled by its own great weight.
At least three years ago I chatted with a young (well, 30-ish) friend about real estate’s great cycles. She and her man were buying property after property, leveraging each one on the back of the one before, starry-eyed about the future and confident that their returns would always cover their outgoings and that values would keep rising for ever.
I told her about a place we tried to sell in 1998. We’d paid close to $320,000 for it just a few years earlier, and it was in a prime location. The best offer we got was little more than $290,000. We sighed and accepted it. We were buying again on the same market and so could move on to something similar for about the same money. But the point I was trying to make to my friend was that prices had tanked then – that they can and do go down sometimes. She listened politely but was convinced that long-term they’d be fine. Which is probably right but there's still the short-term to get through.
The drive to make a killing has kept on building, fuelled by all the TV property programmes showing the thrill of doing up houses, flicking them on and looking for the next one. It’s a strategy that’s worked beautifully, with people making delicious (and untaxed) capital gains. I mean, why wouldn’t you? Lots of us have done it, or cheered as our kids did it. And yet. And yet.
I watched a local show a few weeks ago about a young couple who are dreaming of establishing a property portfolio of 20 houses. Their idea is that when they finally retire, a few decades hence, all that rent income will fund an ongoing good lifestyle.
But six houses later, the combined rent was failing to keep up with their mortgage payments and they were having to top them up out of the husband’s reportedly average salary. The wife had no salary, being a stay-at- home mum. Some people might have sold a house or two to get back on even keel. But no. Their solution was to buy two more places because the rents from these two new places were going to be (applause, applause) around $900 a week.
Aided by a smiling broker, the couple borrowed still more, blithely increasing their indebtedness to $1.8 million. One. Point. Eight. Mill.
I sighed again a month ago when I read a New Zealand Herald story by Simon Collins about how 10-15% of all new mortgages are now going to people borrowing 100% of the cost of their homes. He interviewed a hard-working couple who looked like really good citizens, both working fulltime to raise their two lovely kids and repay $1500 per fortnight back to the bank.
They’d just paid nearly $400,000 for what was described as a “modest house”. Judging from the latest stats, the value of their Birkdale house may already have dropped. The Real Estate Institute reports that the median North Shore price sagged from $516,000 in December 07 to $495,000 in January 08.
Not so much, you might say. Just a few thousand. But they, and many other hundred per centers, must be hoping like hell that this is as far as it goes. And that they don’t lose their jobs. Or get sick. Or have an accident. Or get divorced. Or encounter any obstacle to the continuance of happy life in their pleasant home, with their careers secure and their expenses stable. Fingers crossed, everyone
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