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Even lower priced homes are now likely to require total mortgage payments of $1 million or more for many buyers in the main centres

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Even lower priced homes are now likely to require total mortgage payments of $1 million or more for many buyers in the main centres
<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

Rising property values in Auckland, Wellington and Christchurch mean home buyers in those cities are increasingly likely to have paid more than $1 million in mortgage payments by the time they have paid off their home loan.

The high cost of housing in the main centres is forcing many home buyers to take out 30 year mortgages so that they can afford the repayments, but the downside of a longer term  mortgage is that it significantly increases the total amount the borrower will pay over the term of the loan.

The point at which the total payments on a 30 year mortgage would hit $1 million (using ASB's current five fixed interest rate of 6.49%) is a loan of $441,351.

Assuming the interest rates did not change, a $441,351 mortgage for 30 years would require 780 fortnightly payments (comprising principal and interest) of $1282.06, which would total $1,000,006 by the time the loan was paid off.

While it is currently possible to obtain a mortgage at interest rates below 6.49%, current rates are very low by historical standards, and it's possible and perhaps even likely that rates would average above 6.49% over 30 years, so the total repayments on a $441,351 loan could end up exceeding $1 million by a significant margin.

If a property was purchased with a 20% deposit and $441,351 loan, it's purchase price would be $551,689.

That is below the average property value in the Auckland region and many parts of Wellington and Christchurch.

According to Quotable Value, which estimates the average value of all properties throughout the country, not just those which have sold recently (although average values are adjusted to take account of recent sales), the average residential property value in the country's main urban areas is $575,053, which is $23,364 above the million dollar total mortgage payment threshold using the formula outlined above.

Not surprisingly, mortgages requiring $1 million-plus in total payments are most likely in Auckland, where property prices are the highest in the country.

According to Quotable Value, the average dwelling value in the Auckland region is $761,858 and properties in most of its districts, including all of Rodney, the North Shore, Waitakere and Central Auckland, all have average housing values above $551,689.

Only those districts on Auckland's southern flank - Manukau Central, Manukau North West, Papakura and Franklin, still have average values below the $551,689 threshold.

In Wellington City, its western, eastern, central and southern districts all have average property values above $551,689, making $1 million in total mortgage payments more likely in those areas, while the northern suburbs of Wellington City and the Hutt Valley are still below the million dollar repayment threshold.

Christchurch is also a mixed bag, with average values in its central, northern and hill suburbs all above the million dollar repayment threshold but its eastern and south west suburbs still below it.

Of course mortgage payments aren't the only expense home owners face, there's also rates, insurance, repairs, maintenance and home improvements to be paid for, all of which add considerably to total property costs.

That does not mean that buying a home and paying it off over 30 years is necessarily a bad thing, because hopefully the costs involved will at least be matched and possibly exceeded by rising incomes and property values over time.

But it is still a sobering thought that so much of many people's future incomes will be tied up in paying for the home they live in, for such a long period of time.

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52 Comments

Not much left over to sock away for anything else in that case. It would suggest to me that the best way to counter this is to invest in one's own education for income generation or some kind of scalable business venture. Or go and work for a bank keeping your nose down, pleasing those higher up, and keeping your eyes peeled for progression. 

What's more, if so much income will be tied up in living costs, how does that bode for spend in the wider economy? The supermarkets category lines already look maxed out to me. There seems to be much comeptition for limited discretionary spend going forward.

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Good article. Spread that over 30 years evenly and its $33,333 per year. Assume a 33% marginal tax rate and it is pre-tax earnings of close to $50k needed. Just for an average place to live. Very sad.

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This overall cost should be offset by cost of rental if one chooses not to buy a house.  A bit one-sided

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It depends on how you look at it. Opportunity costs for buying and paying a house over 30 years do exist. 

 

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Also known as indentured servitude.

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People borrowing 80% will generally be buying the lower quartile rather than the average house. So thats a bit of an exageration.

More concerning is the RBNZ housing loan approval statistics, these show the average loan was quite steady since 2003 around $125k, but since 2010 it has trended upward to over $200k. Suggesting current price rises are all debt fuelled and the next recession could see a lot of people struggling to make repayments.

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.......yep, no need to enslave the masses in a ball and chain anymore, just convince them it's 'normal' to spend your entire life getting out of debt.  Gotta be a better way to spend the few nano seconds of what we call life before returning to dust.

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A house worth $575,000 in Auckland will rent for around $520 p/wk today. How much will a tenant pay in rent over 30 years, factoring in inflation?

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You're asking the right question. Rental costs have the highest weighting in the CPI at 6.87%. Given the changes in NZ society with more people renting, calculating future rental payments needs additional variables, more than your average banker or broker is likely to churn out. 

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Roughly around the $800K mark (allowing for inflation and renting for 25 years).....but with no asset to show for it at the end of the day....

 

Horses for courses I expect.

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$520 (weekly rent) X 52 (weeks) = $27,040.

$27,040 X 30 (years) = $811,200.

Now add inflation!

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According to my calculations with starting rent of $520/wk and inflation of 3% per year you would pay $1,350,000 over 30 years!!

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Pretty much exactly the same cost as P&I repayments at 7% interest. Only difference being one of these people owns an asset at the end of the term - likely to be worth well in excess of the $1,350,000 paid.

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The rent however will include rates, 30 x 3K (in Auckland not allowing for inflation) = 90K

Insurance of the property 30 x 1K = 30K

Maintenance 30 x 3K = 90K, not looking at major renovations to maintain value and sellability. If you buy an older home you will be needing/wanting a new roof, kitchen and bathroom over that period, carpet, new window frames, the older style aluminium ones are useless, etc. 150K

Not many of us stay in the same house over such a period, say 2 shifts, real estate costs total 50K.

Loss of flexibility with job changes and a host of other intangible advantages that renting gives. But there are also disadvantages in that category.

Add it all up and the comparison is debatable as to which one is financially better. And all the time it is based on the value of the dwelling increasing which it may not.

 

 

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With prices like that you're no longer buying to own (a house).

You're paying a 6.49% tax to reserve some equity.

This is how farms were invested in 40-50 years ago.  First generation never went in expect to own or paying it off in their lifetime.  In fact that's exactly why mortgages and multigenerational inheritance exist.

The first generation might pay 40k a year for all their working life (eg 20k each).
When they are old it is expect to either cash out the equity, or for the family dynasty to take over the payments. Often the old folk will cashier out with a bit of loan to a small retirement place somewhere where property prices and lifestyle are more relaxed.

Next generation then continues the property interest, except they come into the asset 20-50yrs later.  It was bought at 500k, so whats it worth market value now?  And they only have the remaining mortgage to worry about AND they _own_ the property interests (ie they don't have to outbid anyone, or fight to raise finance/capital.)

The 2, maybe 3 generations down the line, people are saying how insanely priced things are, and they're completely freehold and the property itself is worth millions.

That's the kind of dynasty financing I was brought up under, and why I see attempts by government and shortsighted 99% to seize inheritance to be absolute criminals.

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Possibly....but it is rather fanciful to believe the suburbs of Auckland are going to give way to "dynasties." They already exist to some extent but not in the middle income classes. And this is where your whole narrative breaks down. 

Where did you grow up?

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Financially it does not make any sense to get an 80-100% loan to own a house in this market (very poor quality material-wise generally with lots of constant maintenance required according to a structures engineer friend of mine and generally not energy efficient or properly insulated) unless expecting to sell it quickly before assets deflation hits. In other words, the only reason I can see is speculation. Nobody needs to buy at these prices in order to have a roof above them. I hope not to read things like "we didn't know this was going to happen", "everybody was doing it" or cries for taxpayers bailout when the prices of the houses are way below the mortgages and some face real struggles not to lose their properties and still owe money to banks. Symptoms of the bubble and inminent deflation (unemployment and lower salaries eventually) are there. Good luck to all the greedy speculators getting out of the market on time.

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Most would be home buyers compare the rent price weekly to the proposed weekly mortgage repayments.  -   If the mortgage repayment is not much higher (or even lower) then they think -  may as well buy. 

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Sure if the median multiple of 3.0 times or less, currently Auckland is 8.2 so perhaps hold off untill the looming crash?

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True. But do they forget about the variable "time" and the fact that rents will always be more attached to salary and socioeconomic current situation while buying (through debt) is attached to the price at certain point of time which could be much different in 20-30 years? Or they simply don't question that because they truly believe in the ideology (it's not a fact) that house prices never go down?

As a long term investment it doesn't make any sense given the current global economic situation, the diminishing returns (over investment) and debt based growth.

Imho cash (liquidity) will be the king

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Second hand houses are cheap. It's the land that's expensive. If you're buying a 1960's weatherboard it will bo solid. Sure you need to insulate and rewire often but give me this over a new house any day.

If "nobody needs to buy at these prices" how do they buy a home? Move to Taupiri? 

I bought my first home at the peak of the last boom - because I wanted a home for my family. I wasn't too concerned about market cycles. I bought my second home in 2011 when people were saying there was going to be a 30% drop in prices... because I needed a bigger home for my growing family. Despite the risk of immenent property deflation we wanted a home. We weren't prepared to plan our lives around property cycles. Since then I've been buying investment properties for the future income streams. Prices will go up and down but in the long term I have multiple income streams. Most people buying houses are buying homes and future income streams. Neither group are that concerned about property cycles. There are very few true speculators. It's a risky game.

 

 

 

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"If "nobody needs to buy at these prices" how do they buy a home? Move to Taupiri?"

Simply not buying. I am a happy renter :-) and don't understand/see the need to own a property in an overpriced market (too late to buy) under the belief that tomorrow would be more expensive (maybe tomorrow, but not the day after tomorrow) other than to speculate (which is your choice) or irrational cultural factors (social success through assets).

 

If I were to buy or if I were to do a long term investment like acquiring a property I would be concerned about property cycles. But I would be more concerned about the extraordinary events that may result from the extraordinary events that have happened, which makes things difficult to predict as there are no precedents.

 

This is not the 70s anymore in many ways. There has been an over investment (over capacity) based on false forecasts (about BRICS and huge returns that never happened). Energy Returned on Energy Invested is decreasing. Interest rates are at historically lowest levels (not much margin there). Monetary supply is insane and has gone towars speculative financial economy because productive economy simply doesn't return what was expected. It's been a while since global growth is debt based and not that much productivity based. It took a financial crisis to shake the whole world (if no credit, no consumption, no growth). Quantitative Easing has a limit before the faith is lost in the fiduciary system..

 

My point being does anybody really think that house prices can be sustained or even increased over time? That would require many variables to be sustained or even increased:

  • Same jobs or more in the future
  • Same salary or more in the future
  • Same markets or more in the future
  • Same resources or more in the future
  • Same returns or more in the future
  • Same births/deads ratio or more in the future

 

And if like me, you think that it's unlikely then it is only a matter of getting out of the property market before things get ugly, or, in my case because I am an inmigrant who came with little and late, a matter of not doing any crazy thing and keep paying for a service (renting) and supplying income streams to landlords like yourself :-). The risk should be all yours, unfortunately the risk has become systemic.

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Auckland house prices are going to keep on increasing. 

If NZers can't afford them - that's irrelevant -  our housing market is open to all 6 billion people on the planet. 

NZ is a safe haven in many ways. - allows any buyer, allows strong immigration flows, encourages high numbers of international students,  safe from terrorism and internal strife. 

A free standing house, on a section, in any NZ city, in a leafy suburb, is probably one of the best investments, and safe, in the world. 

Low interest rates elsewhere helps foreign buyers who finance on other properties and use those funds to buy in NZ.  

Houses, free standing with land, are quite cheap on a global scale. 

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Perhaps, but I don't believe it will happen.

Strong migration flows happen when there is strong job opportunities. International students come because of the above, thinking of "investing" in their education in order to remain in the country afterwards. International students don't come due to the high level of education or cutting edge system. It's is pure business. If job market slows down or becomes unattractive, international students will stop coming.

 

I am going to give you an example of this.

 

Where do immigrants go? Mainly Auckland.

Is it because of the safety regarding terrorism or internal strife? quality of life? No. It's because jobs and investment opportunities are in Auckland.

 

I don't see many immigrants relocating/investing in Invercargill and I'm sure it's a safer place than Auckland (I myself lived in Invercargill for a while and the only way they have to attract young people is through subsides because there are not many good jobs and salaries are unattractive_my salary was half back then)

 

Investors will always invest there where returns are bigger/certain. Auckland market has had its fun, but it will last as long as the good job opportunities last and as long as speculation is encouraged and rewarded (policies).

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This reminds me of the commentary on interest.co.nz a few years back. Many were warning of the immenent 30% drop in house prices for all the same reasons you are stating muntijaqi.

The rent you pay over the next 30 years will far exceed the mortgage payments I will make on the same property you are renting. And at the end of the day I will own the property and you will own nothing. And to top it all off you will have to continue to pay rent but my mortgage payments will come to an end and your rent will just be 100% my income. All this will happen irrespective of property prices. 

I agree with MortgageBelt. Time will tell though. 

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Just one question regarding your opinion, which seems to be that the risk of deflation is gone.

 

Is the world in a better situation now than a few years back? Has the global economy improved despite the massive injections of money to sustain it and despite the lowest interests ever? What if the QE are stopped? What if the ECB stops buying debt? And if the Chinese property bubble blows? There are so many variables that could hit NZ..

 

If it didn't happen a few years ago does that mean that it won't happen?

I agree, only time will tell :)

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Agree.

and these are just the short range / "black" swan issues.

Demographcis alone still dont stack up medium term, eg BBs spending habits changing and retiring.

 

 

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I agree with muntijaqi,  just look at London  were  house prices fall by more than £30,000 in a month.

Can thappen here though surely?

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If only Auckland were London and the CBD the "city".. :-)

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I agree house prices will go down. And then they'll go up again. And down and up and up and down. Over time though I believe they will continue to trend upwards.

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I dont agree at least in a significant trend upwards.

The thing is though where you really make money (and avoid losses) is to move in and out of asset classes at the right time.   Being in just one asset/investment and especially where there is a risk of a substantial correction would seem unwise.

as always "this time it is different"

except it isnt.

 

 

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... and in the end it doesn't matter. You'll be mortgage free and won't be paying rent. You'll live virtually for free.

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House prices, like any other asset, do go down and will go down. But when..?

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That is the billion dollar Q, that and how far.

If against wages we accept that houses are x2 to x2.5 the norm of 3 to 1 then that suggests a  correction of a magnitude of over 50%, maybe 75% back to fair value.

To do that in NZ I think we need to see a major external to NZ event or 2 first that shatters confidence and causes large sell offs by some [sub-]sector of speculators.

So its a confidence game, or maybe ponzi scheme is more accurate.

 

 

 

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While on the surface, this article sounds right and all, but some fatally wrong assumptions were made:

  • The value of $1 is not constant, due to inflation.  Future payment, even if nominally the same as today's, will be lower in real term.
  • At times of high interest rate, inflation will be high, shrinking the debt faster.
  • House value also go up over long period of time.  Due to underlying inflation as a result of the fractional reserve system.
  • Therefore, 1M over next 30Y is not the same as 1M now.

Peace.

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Its not rocket science, pay off your house in 15 to 20 years. What you are paying back each week is not significantly more than rent anyway and in the end you own it, rent is dead money your spending to help someone else pay off the mortgage !. $1M in 30 years time will be like $100K is now and we will all be going, gee houses were cheap back then. You simply cannot afford to retire if you do not own your own home, do the math, the $733 a fortnight for a single person on a pension pays for your food and bills only, not your rent or mortgage.

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A couple of things:

- $1m paid back over 30 years at 1% inflation (the current rate) has a NPV of $869k

- Interest only on an 80% mortgage at the best curently available rate of the house I rent would be $875 a week. Add in rates, house insurace and fixed water costs and this goes to $962/week. I pay $650/week in rent and invest the difference. Rents increasing at the current 2%/year would take 21 years until buying was cheaper (actually longer as rates wil increase).

 

Takeaway is that in a low inflation environment, you do not want to be in overpriced assets. If it turns to deflation then pain increases exponentially for owners as assets cost more each year.

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Demand is high and growing

Supply is tight and tightening further

Everybody needs it and will always need it

They are not making any more of it

The replacement cost is higher over time

The price dropped 56% in the last 2 months

 

I am talking about oil but house prices are subject to the same forces. How many people predicted this fall? How many said high prices were here to stay? How many said that even at the high prices it was still good value?

 

 

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Tui board "peak oil"

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There has been a lot of talk about the economy heading towards deflation recently. Would that result in lower house prices?

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When inflation is present, there is an incentive to buy now as that asset will cost more in the future. When deflation is present, there is an incentive to wait as the asset will cost less in the future.

 

This is why deflation is so bad. People/businesses delay spending which hits everyone's cashflow putting businesses into default and people out of work. For this reason, central banks are currently working very hard to try to generate inflation.

 

Using my example above, $1m paid back over 30 years in a 1% deflation environment will cost you $1.16m in today's money and during this time, you salary is probabaly also falling (if you have a job at all)

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Price in Tokyo used to be many times of Auckland's apartment price.  Not anymore, one can buy a decent 3br apartment for the same money as similar apartment in Auckland (may be less). And Japan has been on deflation cycle for years. 

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Horse and cart.  Deflation could be "triggered" by some event or be the event that triggers others, or even both.

I would assume that house prices declining would be a slow event triggered by a something(s) else, but it could also be self-reinforcing once it starts.

Right now events abroad would seem to be the things to watch out for. The Q is will this trigger issues in NZ  or not, in 2008/9 it didnt really.  

 

 

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Deflation is already hitting many regional cities and rural areas at the moment. 

The deflation that will be permeating throughout NZ, brought on sooner by the RBNZ tight monetary policy, will probably not hit Auckland property for some time due to money pouring into Auckland from offshore regardless of conventional economic fundamentals of wage levels to house prices. 

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What is the issue with deflation ?  It's talked about here like it's some sort of radioactive poison.  We have lived with some minor inflation for some years and coped.  Some minor deflation for a while means we will certainly do a few things differently to manage.  But what is the big problem ?

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Well if you had studied some economic history I think you would see that once it starts it cannot be controlled.

ie Deflation tends to be a self-reinforcing negative spin.

"just" having a little kind of not works from what I can see.

 

 

 

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What is the issue with deflation ?  It's talked about here like it's some sort of radioactive poison.  We have lived with some minor inflation for some years and coped.  Some minor deflation for a while means we will certainly do a few things differently to manage.  But what is the big problem ?

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......history has shown that the unexpected prevails. Global instability, be it political, social, financial, military, makes it likely a 'trigger' of some sort is inevitable - good luck to anyone who thinks NZ housing will be immune to such an event.

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It's interesting and not surprising that the doomsters are out in force again this year.  Some new alias' some old and it's the old ones that should know better.  I remember 2011 when there was a unanamous chorus of "...Auckland house prices will drop 30 - 40%..."  It couldn't have been more wrong, in fact in number terms it was about 200% wrong.  They are now choosing to ignore all the same variables that exist today that existed then, high migration (domestic and international), low interest rates se to to stay lower for longer and plenty of room for cuts, chronic supply shortage, chronic builder shortage, accummulated wealth, pro-property government, FDI, etc, etc. 

There are some ludacrous calculations above that totally ignore accumulated wealth and rental income options. 

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Lots of comments about how much it costs to pay for the mortgage costs and rentals etc above, but quite simply a property that costs $440,000 or so now, maintained could well be worth around  $3,520,000 in 30 years time, or more depending on whether the doubling value cycle is 8 or 10 years.  (Even if it didn't double ever 10 years and only doubled twice, the house would still be worth approx $1,760,000). So against the payments of $1,350,000 or so being discussed that still puts the purchaser ahead.  Not forgetting they have a property to sell at the end and that it housed them for 30 years and that in 30 years time we will be earning a heck of a lot more pa than we do now.  The freaky part is that in 30 years the spend value or usefulness of these millions of dollars will seem similar to what we see the spend value or usefulness of $440,000 now.   It's not all doom and gloom. 

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Thats a lot of assumptions, on the other hand.

a) Demographics

The BBs etc caused a huge boom, both via numbers and spending ability, they are gone in 30 years.

b) Energy

Fossil fuel/Oil, peak flow per day is now, by 2050 its all gone at the latest.  Oil drives our global economy, to grow 4% takes 1~2.5% more oil, yet we  will have none.  To even do some alternative energies will take Trillions, that will absorb a lot of spending ability.

c) Math

The wages to price of a house is 6~8 to 1, unless wages also double a ratio of more than 9 to 1 is awful let alone 12~16 to 1.  on the other hand, see energy.

Doubling value...hint. 70/7%per year is a doubling time of 10years, do you really think on a finite planet we can have expotential growth? seems so....um no I cant see it.

d) Finance.

Debt, we have inter-generational debt that is money being extracted from the economy to service it, ergo less to spend.

 

 

 

 

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I wonder if Olly is buying now, or Happy? Commdities tracking lower ,so house prices may be the next phase in the post-commodity-boom adjustment story." Oh and and the house behind Eden park is still for rent by the way. (Rent priced to high Im guessing)

 

 

 

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