Sunday, August 20, 2006

Welcome Home Loan: Govt measures just add fuel to the fire.

Reading the Welcome Home Loan scheme, one would wonder if this Labour Govt monetary approach to resource inequality is stupid or just plain stupid.
The rising house price in NZ for the past few years can be attributed to simple inequation of supply and demand. There is simply too high demand for housing, attributed to high immigration, high employment and whatever else. The NZ population is growing for the past few years, but the investment in housing has been sluggish at most times.
This sluggishness can be attributed to high interest rates in the past, (Reserve Bank has been trying to control inflation) too many red tapes in approval of new housing lands.
Monetary measures like this make encourage people who previously could not afford house interested in buying one. This will increase demand for housing at the bottom prices. But given the scarcity of housing, house price would simply move up. Its true that rising house prices would encourage the building of new housing by developers. But it normally takes 18 month to 2 years for a new house to be built from planning to completion.
Instead I would have prefer fiscal approach to help people on the low income to afford housing. Government should acquire land and build to sell houses using one of its agencies to provide people on the low incomes. Give chance to Housing New Zealand tenants to own their house by selling it to them, then use the money to build more housing. Yes by all means, government agency get involved in the housing market. There is nothing wrong with that, because the duty of government is to reduce inequities and inequality, not letting it be.
This article from Sunday Times.

Time for some bitter home truths


An initiative to get more people on the housing ladder may not be enough. Greg Ninness surveys the options for the wannabe home-owner.

House-hunters will be able to take out bigger mortgages without paying a deposit under changes to the government's Welcome Home Loan scheme, expected to be announced today.

But the maximum amount they can borrow under the scheme is likely to remain at $280,000, meaning few home-buyers in Auckland are likely to benefit from the changes.

The Sunday Star-Times understands the changes were approved by Cabinet last week and will be announced by Housing Minister Chris Carter, as concerns rise about housing affordability.

The Welcome Home Loan scheme was set up last year and allows first-home buyers to borrow up to $150,000 without paying a deposit or up to $280,000 with a deposit of 5%. The mortgages are provided by banks, but the scheme is underwritten by the government.

However, soaring house prices have meant the lending limits were too low to be of use to most buyers, and only about 1800 have used the scheme; the government had hoped for 5000 a year.

It is understood that today's announcement will increase the amount that can be borrowed without a deposit and reduce the amount of deposit required on higher loans up to the existing $280,000 limit.

However, while the changes will enable more people to borrow up to 100% of a home's purchase price at normal mortgage interest rates, they will still need to be able to afford the repayments. It may get some people into their first home a little quicker, but it does not address the underlying problem of declining affordability. Figures released last week by Quotable Value show that while the growth in house prices has slowed, they are still going up. And it appears unlikely that they will start to come down soon.

If that situation persists there could be fundamental changes to the way the housing market operates.

One possibility is that more new housing will be sold on a leasehold basis, where a developer or investor owns the land but sells the dwelling that sits on it. The buyer owns a leasehold title and pays the landowner ground rent, usually a fixed percentage of the land's value, reviewed every six or seven years. As the value of the land rises, so does the ground rent.

This reduces the initial purchase price, but means the home owner pays more in the long term as the ground rent rises. It also significantly reduces the opportunity for the homeowner to make capital gains.

Several terrace housing and apartment developments in central Auckland have been sold on a leasehold basis over the past few years and the huge Albany City project about to get underway on the North Shore will also be a leasehold development.

Such titles are not without their critics. Martin Dunn, a director of central Auckland real estate agency City Sales believes many people who have bought residential properties on leasehold titles have paid too much.

When the leases come up for review owners are likely to be hit with huge ground rent increases, potentially forcing down the resale value, says Dunn.

He believes there needs to be a bigger discount for buying a property on a leasehold title compared to freehold, as is generally the case overseas.

The government is also considering introducing equity share home ownership schemes to help low income earners buy their first home.

Equity share schemes are common in the UK and in their simplest form function as an interest-free loan.

They work like this: Say a property had a price of $300,000 but a family could only afford the repayments on a $200,000 mortgage. The bank would advance the full $300,000, but only require repayments on $200,000 of the loan. To offset the other $100,000, it would take a one-third stake in the property.

When the property was resold, the bank would recoup its money and get a one-third share of any capital gains. Or the homeowner could refinance when their circumstances improved and buy out the bank's share.

The government is looking at such schemes in the UK, and Kiwibank chief executive Sam Knowles says officials have talked to him about it. "We haven't seen the detail," he says.

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