The Curse of Low Interest Rates on First Home Buyers

The word ‘mortgage’ appeared in the Middle Ages, and means ‘death pledge’, or more literally ‘mort’ or death and ‘gage’ meaning chains, or ‘chains until death’.

There’s a cheerful image, but apt enough as the current low interest rates and high capital investment turns our children into mortgage prisoners.

Buyers determine the cost of property.  In the 1980’s, the capital price of property was low and the interest rates were high (18 – 24 per cent).  Everyone complained about high interest rates but it was a blessing in disguise.

The parents of today’s first home buyer received their blessing when interest rates dropped, their low capital borrowings were locked in by the capital advanced at the time of purchase. Lower interest rates meant these buyers could freehold their properties quickly with no increased cost.  

And this blessing emerged in a period when this country had some of its highest capital gains.

Lower interest rates have turned the tables on today’s buyer. Today’s first home buyer suffers the curse of low interest rates (four to five per cent) due to the market’s price link to buyer affordability.   Low interest has driven up the initial capital investment in property.  The market’s conversion from high interest low capital cost to low interest high capital investment means buyers in today’s market will never be able to escape high cost housing for the duration of their mortgage. We are locking our children in mortgage prison.

Auckland’s overheated market must deliver one of two results. Mortgage terms will get longer as larger mortgages need 30 – 35 years to pay off, or in those areas with high capital gains young kiwi families will not be able to buy their own home.

Young kiwi families will become renters for life with the risk of creating an underclass.  Both results will affect the young kiwi family’s personal superannuation scheme, which was in the past generally based on paying off the family home quickly and saving a nest egg for retirement. The family home would be freehold forming the basis of family’s security.  This is unlikely in places of high capital growth such as Auckland and Christchurch.

In areas of low supply, buyers are being confronted by houses they would like to buy being sold before they can even get themselves in a position to make an offer.  In many cases this erodes the buyers’ deposit savings through multiple due diligence costs, something they can ill afford.

We may soon see the government’s new responsible lending regulations limiting the amounts banks will lend to buyers as the banks are forced to consider all aspects of the borrower’s ability to pay and the effects on the borrower. This regulation will affect many buyers on short term contract employment or with other lending risk impediments by pushing their level of borrowing up.       

Wellington has been protected from the damage of high capital gains suffered in the Auckland and Christchurch markets, primarily because the Wellington market has not suffered the same pressures from stock shortages and immigration which seem to be largely contained in the Auckland and Christchurch areas.  

Wellington also offers good employment and lifestyle prospects, creating a prime target for young kiwis wanting the kiwi dream for their family.

For lower initial deposit savings and for little more than the average rent, young families can buy good Wellington properties in safe suburbs to comfortably carry them into the future, without the risk of market corrections affecting buyers in the Auckland and Christchurch markets.  

Young families buying a house today need to consider more than owning their own home as their parents did. They also need to consider the effect their financial commitment may have on the quality of life for their whole family.

Kate Foot is a  Wellington Real Estate Agent with Leaders