Want to get rich? Buy a house (yes, still)

Friday, 14 December 2018

Why are Kiwi houses so pricey?

ANALYSIS: If you want to be rich, the best thing you can do is buy a house.

Yes it is sad, but it is still true in New Zealand.

Stats NZ released data on Friday that showed the net worth of the richest 20 per cent of New Zealand households is up $394,000 compared to 2015, at a median of $1.75 million.

The net worth of the bottom 40 per cent had not increased.

* Here's why first-home buyers don't actually have it easier

* Properties give their owners a tax-free windfall - is that fair?**

So how do you work out what your net worth is? Net worth is what you have left if you take everything you own, and then subtract all your debts.

For many of us, its not much.

Unless…

PUTTING IT ON THE HOUSE

It's not a coincidence that Stats NZ talks about the 'bottom 40 per cent'.

People who own more expensive houses amass equity more quickly.

That's also about the proportion of New Zealand households that do not own a house.

The biggest driver of that increase in wealth, between June 2015 and June 2018, will have been found in the property market.

According to the Real Estate Institute, Auckland median prices rose from $771,000 to $850,000.

Nationwide, the median went from $450,000 to $560,000.

What that statistic hides, though, is that the increases will not have been evenly spread.

People who own more expensive houses amass equity more quickly.

If every house increased in value by 10 per cent, the owner of a $1.2m house gets more of a wealth boost than someone in a $700,000 version.

Owning a house without a mortgage makes retirement much more comfortable.

And they don't increase equally - QV statistics show that central Auckland, where some of the priciest houses are, had the biggest percentage price increase between 2015 and 2018 (except for the equally exclusive islands).

People at this end of the market are also more likely to have the means to sell up, move around and actually get those capital gains rather than having them marooned on paper.

Anyone remember the Hosking's almost $10m house sale?

Tasty, tasty, capital gains.

WHY ARE HOUSES SUCH A BIG FACTOR?

You could argue that the share market has done equally well in recent times.

It has recorded year after year of double-digit growth. Someone who put their money into stocks in 2015 would have done well: The NZX50 gained 22 per cent last year, 9 per cent the year before, and 12.8 per cent in 2015.

But the reason that doesn't do as much for your net worth is a thing called leverage.

Let's say you bought a house for $700,000, with a deposit of $70,000.

If the house increased in value by 10 per cent to $770,000, you'd have $140,000 in equity. The amount of debt you owed would stay the same.

But if you put that same $70,000 into shares, and they went up 10 per cent, you would have only $77,000.

Of course, gearing also increases risk. If your house dropped in price by 10 per cent your debt would remain at the same level and your deposit would be wiped out.

But because houses are usually a long-term investment, most people would ride out such a drop.

And really, who's investing in the stock markets other than through their KiwiSaver? Mr Nobody. That's who.

HAVE YOUNG BUYERS MISSED THE BOAT?

If you are one of those in the so-called bottom 40 per cent, you might wonder whether it's worth trying to jump now.

Most commentators expect it to be years yet before house prices rise in a serious way again.

Cameron Bagrie, of Bagrie Economics, said people who were yet to get into the housing market faced a different scenario to those who had gone before them.

'It's getting tough to get credit and households have high debt levels so growth is not going to be credit-fuelled or assisted.'

Adviser Liz Koh said previous generation had the benefit of high inflation, which reduced the real value of their debt while generating capital gains. 'As we move into a new era of low inflation and changing demographics, things may play out differently for the next generation.'

But even without serious price rises, owning a house gives you an asset. As you pay down your mortgage, your net worth improves month by month. You'll also feel the benefit when you stop working. Owning a house without a mortgage makes retirement much more comfortable.

You'd have to try much harder to make that happen if you stayed renting.

There's just that little issue of getting together a deposit while earning mediocre wages and high costs of living yet still being on the top tax bracket to overcome (the top personal tax rate is 33 per cent for income over NZ$70,000).

No biggie.