Future shock for hope of home ownership?

Press, 10 August 1985, Page 14

Future shock for hope of home ownership?

Warning signs show that rising mortgage interest rates could force radical changes in Our lifestyles.

Home Line

with

Bill Harrison

“What happens when interest rates reach 50 per cent?” is a question that I have been avoiding. But, my conscience keeps bringing me back to the interest rate question because it was not asked facetiously.

The sincerity of my questioner, a modest academic tutor with an obvious ability to stimulate the thinking process, challenges me to at least address the question. Horrendous as it may seem in a free market economy anything is possible, even if 50 per cent interest rates do appear highly improbable. .On October 1 interest rates charged by Trustee Bank Canterbury on all new and existing first mortgages will reach 19 per cent.

This increase affects more than 16,000 of the bank’s customers.

Re-state the question as, “What happens when interest rates reach 19 per cent?” and far more people become involved and concerned.

Under a headline in “The Press” of July 23,“Builder Says Some Will Go To The Wall” the president of the Ashburton Master Builders’ Association, Mr Bill Tomlin, has already expressed the growing concern of many builders.

Trusteebank Canterbury has also shown concern about the ability of its mortgagors to pay higher interest rates.

Rather than ask for increased payments, the term of existing mortgages has been extended.

In recognising the difficulties that many of its

clients will face, the bank’s actions could be interpreted as concealing the real cost of mortgage money.

The bank’s concern for its clients is quite understandable in the light of a reply by the Minister of Housing, Mr Goff, to a parliamentary question recently. Answering a question by Mr McClay (Waikaremoana), Mr Goff stated that, “for the period April Ist 1985, to June 11th 1985, the Housing Corporation had provided refinancing assistance to 179 applicants whose homes were in jeopardy because of hardship.”

But the answer to the previous question on the same order paper could be used to support the argument that high interest loans are affordable, and in demand.

When asked, “Which month in the past 10 years had shown the highest amount of house finance from the Housing Corporation?” Mr Goff replied, “The highest amount advanced over the past seven years was during the four-weekly period ended May 28th, 1985.”

• Soon after that date the Post Office Savings Bank

was forced to curtail its offer of $60,000 at 19 per cent when the demand exceeded funds available.

It is acknowledged that the demand for both Housing Corporation and private ( institution finance for new 1 houses comes mainly from two-income households. These applicants know that building costs are rising, (Consumer Price Index inflation rate: 16.6%), and have, perhaps, an expectation that interest rates may fall.

Given the cost and scarcity of acceptable rental accommodation they have a Clayton’s option. So, what is happening as interest rates reach 19 per cent, and can they reach 50 per cent? I put this question to Mr Keith Jones, general manager, Marketing and Development, of Countrywide Building Society, in Auckland, when he was in Christchurch recently. “Interest charged is set by what it costs to attract the money in, and there is still a strong demand for loans at the current rates,” he said.

“Recently, when travelling from the U.S.A, into Mexico I was surprised to see a bank advertising loans at 50 per cent.” But, he hastened to assure me, “they” would not let that happen here. Well, I for one, certainly hope “they” do not. What is abundantly clear is that one-income households will lose their option of buying a house of their choice. They will have to seek affordable rental accommodation. (There is already a Government rental subsidy scheme of $5O a week in place, though surprisingly it is little used as yet.)

Those already committed to increased housing costs for mortgages, rates, and insurance, will have less disposable income for other essentials.

The effect of restrained consumer spending on other sectors of the economy will soon become measureable unless wage and salary earners receive compensating adjustments from the coming wage round. Property maintenance and spending on non-essen-tials will, of necessity, be curtailed. Two-income households wishing to retain their options of housing choice will need to stay two-income, or face a change of life-style that may require trading down to a more affordable home.

This is an option some are finding difficult to exercise at present as houses in the $60,000 to $lOO,OOO range are slow to sell. Last month 78 house sales (an increase of 33 per cent) are reported to have fallen through, due to a lack of affordable finance, and the withdrawal of P. 0.5.8. loans.

The New Zealand goal of one day owning a freehold home will recede. It will be replaced by the need to meet interest payments only, with the anticipation of a future capital gain. (Recently property sales report homes selling for almost three times their 1980 government valuations). Housing preferences will change and the formation of households will decline. Young people will find the independance of flatting uneconomic.

Sole occupancies of homes may also decline as the need to share costs increases.

Better utilisation of the existing housing stock will lead to a decline in private house building, to be offset by the need to build affordable state rental accommodation.

hat happens when interest rates reach 50 per cent?: culture shock of a magnitude sufficient to change the life-style and housing expectations for at least a generation of New Zealanders. Since 1935, when the first Labour Government introduced far-sighted housing policies, people have aspired to and achieved home ownership. If the nation’s housing expectations, maintained for 50 years, must change in the pursuit of a free market policy to correct an unbalanced economy, so be it.