Which generation has faced the biggest house-buying hurdles?

The baby boomer generation had it easy. Or did they? Ask parents if their children will be able to buy a home and the answer is often “no”. Is that badmouthing baby boomers narrative that Kiwis buy into a reality?

The argument that first homes are impossible to buy in New Zealand isn’t borne out by the facts. First-home buyers are finding their way into the market in decent sized numbers. James Wilson, director of valuation innovation at property analysts Valocity, points out that 26 percent of buyers taking out mortgages in Auckland are first-time buyers. Nationwide it’s 28 percent.

At the same time 11 percent of Auckland homes are still classed as “affordable” - priced below $600,000. For the entire country that figure is 45 percent.

Yet the experts OneRoof.co.nz contacted are all in agreement that it’s harder to buy now than in previous decades. Economist Shamubeel Eaqub, who wrote Generation Rent, says that in the future it may be only the children of home owners who will be able to buy.

In 2016, the Reserve Bank of New Zealand noted that overall house prices had tripled since 1994. Another indication of how hard it is to buy is the housing affordability index, the multiple of household income required to buy a home. For decades that multiple sat between two and three times salary, but is now more than six times income nationwide.

Back in my day

Today’s buyers don’t necessarily understand just how hard it was for former generations. When mortgage broker Stuart Wills bought his first home in 1990 the mortgage payments on his first and second mortgages combined were greater than his entire take home pay. His food and living expenses came solely from his flatmates’ rent. Many would say that story tells it all.

Yet comparing the 1970s, 1980s and early 1990s with interest rates that topped 20 percent at times isn’t a fair comparison, says Eaqub.

A better measure of how much harder it is to buy now, he says, is falling home ownership rates across all age groups. “That’s the main measure that matters, everything else is noise,” he says.

Professor Robert Hargreaves, Emeritus Professor in Property Studies at Massey University, agrees about following the falling home-ownership rates, which he expects to see drop further in the latest Census data when released. Yet whilst home ownership rates are falling, they are still higher now than they were in the 1940s, when another generation was renting.

The high interest rates that boomers often complain about were a double edged sword. Although mortgage payments were eye-wateringly high thanks to the interest rates in the 1970s, 1980s and 1990s, inflation ate away at the debt, making repayments affordable relatively quickly.

“Rampant inflation effectively saw the mortgage debt wither away rapidly in real terms before normal interest rates returned, but more importantly, the house surged in value,” says property investor Sir Robert Jones.

Gareth Kiernan, economist at data analysts Infometrics, agrees.

“It was still darned hard for the baby boomers to get into the market. The house price to income multiples weren’t bad [but] there was interest rates and credit rationing alongside that which made it very difficult for the first couple of years. Because you had very strong wage growth your total amount of debt shrank,” he says.

Credit rationing meant that unlike today, where if you tick the boxes you get a mortgage, you had to go cap in hand to the bank. If you were a woman, for example, and didn’t know anyone you could forget it.

The real questions of then versus now, says Eaqub, are: “how easy it is to save the deposit?” and “how long does it take to pay the loan off?”. In both cases current first-home buyers are considerably worse off.

Help at hand

Whilst interest rates are cheaper now than they’ve been for decades, they are higher than buyers paid from 1935 until well into the 1950s. First mortgages for either all or some of the value of the house could be sourced from the Mortgage Corporation of New Zealand and subsequently the State Advances Corporations.

The catch was that many buyers like Stuart Wills had to go looking for second mortgages at higher rates in order to buy their home.

What’s more, says Sir Robert, today’s low interest rates are not the benefit they appear. “That’s illusionary as in turn they’re partly responsible for driving house prices up,” he says.

Today’s buyers have KiwiSaver, which can provide a good chunk of the deposit. Earlier generations had other schemes to help them onto the housing ladder. In July 1957 the Government announced the commencement of a home lay-by scheme through the Post Office Savings Bank and trustee and private savings banks.

The Family Benefits (Home Ownership) acts in 1958 and 1964, allowed a benefit paid to parents to be capitalised up to £1,000 (more than $45,000 in today’s money) and used as a lump sum for a deposit on a home. This wasn’t free money in the way the KiwiSaver HomeStart grant is because they didn’t receive their benefit, having taken it up front.

In the mid-1980s the Mortgage Guarantee Scheme for housing provided a guarantee for home buyers by the Housing Corporation in a similar way to the Welcome Home Loans currently. In 1986 2774 home loans were guaranteed. “HomeStart” assistance was available to low and middle-income buyers over the age of 26. They received a 3 percent loan with no repayments for five years.

It has always been hard

James Wilson sits in the harder to buy a home camp as well. The big BUT, however, is that it has always been hard to buy a home and required sacrifices to save for the deposit, he says. That’s not something that young people want to hear.

Comparing earlier decades isn’t like for like. Barriers to entry to the property market have morphed over the generations. Previous generations had impediments that the current generation can’t imagine.

Buyers in the 1940s had to deal with a drop in house building thanks to materials shortages and the builders being away at war. Up until the 1990s it was very common to need second or even third mortgages to buy at high interest rates.

Whilst families got a leg-up by capitalising their family benefits from 1959, single and/or childless buyers did not benefit from the family benefit capitalisation in an era when couples usually married, bought a house, then had children. What’s more economic historians have noted that people of limited financial experience with no savings behind them were entering into large commitments that some couldn’t handle.

By the end of the 1970s when the boomers started to buy, mortgage interest rates had gone sky high. Floating rates hit 10 percent in January 1976 and at the same time real house prices were falling, pushing repayments out of many potential buyers’ reach. Banks would only lend the first mortgage if your income was high enough to meet repayments. By January 1980 interest rates were at 12.98 percent and broke the 20 percent barrier in February 1986.

Single women, for example, often found it impossible to buy because the banks would only lend to men or couples.

Falling for the myth

One of the big barriers today, Wilson says, is psychology. “There is definitely wide support for the narrative that it will be impossible,” he says. “That is somewhat scary if it becomes self-fulfilling and they give up on the goal,” he says.

Another psychological issue facing the current generation of buyers, says Wilson, is that the numbers sound insurmountable. Even though their salaries are larger than previous generations, a $100,000-plus deposit seems impossible to some first home buyers, says Wilson.

The growing size of the Kiwi home is part of the picture. The median building floor area sat at 110m2 in 1940, and kept rising until 2011 when it hit 200 square metres, says Nick Goodall, head of research at CoreLogic NZ. Since then it has been fallen to 175sq m this year, driven by the move to apartments and medium-density housing.

Professor Hargreaves says comparing a 110 square metre house on a bare section from the 1970s with the current new house, which may be 250 square metre, with more elaborate features such as internal garaging, ensuite bathrooms and serious insulation is not comparing like for like.

Other factors making home ownership in the current market more difficult, says Hargreaves, include the lack of time to do DIY, competition from property investors, fewer homes being built, people marrying and having children later, and changing attitudes about housing with young Kiwis putting more emphasis on travel.

Wilson says the first-home buyer statistics show there are ways to buy. Buyers need to think differently and not expect to live in the style of property they were raised in.

“There is an expectation where they will look to enter a market,” he says.

“We need to focus on where first-home buyers could look to buy, not on the medians.”

That is actual entry level options such as flats and townhouses and less desirable suburbs and areas, he says. “It is a matter of managing expectations. That forms part of the bigger picture of how do we refocus the market participants with the housing stock available.”

It’s harder now, but …

Not everyone wants to accept that it was hard for their parents to buy their first home or buy the smashed avo generation’s narrative that it’s impossible these days.

Generation warfare is rife with both sides playing the blame game. When BNZ economist Tony Alexander dared say the boomers shouldn’t be blamed for high house prices, social media exploded.

He argued that young people of today weren’t willing to buy a run-down house in a bad area and do it up as their parents had, spending their money in cafes instead.

Many would argue that KiwiSaver makes it easier with couples qualifying for up to $20,000 free money per couple from the KiwiSaver HomeStart grant plus employer contributions and the government’s member tax credits all being available for first home purchases.

Young Kiwis have access to a lower rung of the housing market than their parents and grandparents: apartments, although banks usually charge a higher loan to value ratio, meaning the deposit is proportionally larger than for other types of property.

Although he doesn’t think it’s harder to buy a home now, Sir Robert believes we should reintroduce a scheme similar to the Family Benefit capitalisation.

As well as the vastly different expectations for first homes, he points out that many non-housing expenditures that were once not part of Kiwis’ budgets we now consider essential. “Sixty years ago very few people had a car let alone a television, cell-phone, extensive wardrobe and so on. Life was more Spartan and over and above the basics such as food, incomes could focus on gaining a house deposit and at least in the initial years, paying down a mortgage.”

Whatever you think about the smashed avocado argument that young people aren’t willing to stop spending, the reality is there are so many more temptations to spend your money on in 2018, which does make it harder to save unless you have an iron will. Some first home buyers do manage to make those sacrifices and build up the savings needed for a first home.

Our changing lifestyles have positive implications for homeownership, says Wilson. Back in the 1960s and 1970s workers were much more likely to live near their place of work. They couldn’t move to Rotorua or Invercargill and work remotely on the Internet. Now some can do just that, says Wilson. First-home buyers whose jobs allow such as teachers, doctors, police officers, lawyers, public servants and many others can work where house prices are cheaper.