Why work when you can just own houses?

Median price up 19.3% in 2020 so house 'earned' $121,000; Homes 'earned' $250b tax-free since Labour elected; Rents up 3.4% since lockdown & up 10% since Sept 2017, despite mortgage rates halving

TLDR: REINZ figures today show New Zealand’s median house price rose 19.3% or $121,000 to $749,000 in 2020 despite the biggest economic shock in living memory and virtually no net migration since March. December quarter inflation was the fastest on record and the market is on track to surpass the record annual inflation rate of 24% set in 2004.

House values have risen by $250b or 24% to $1.3t (that’s t for trillion) in the last three years and that capital gain was untaxed. If it had been taxed at a rate of 33%, the Government would now have no debt.

Our houses are now worth 4.1 times our annual nominal GDP and 6.7 times the value of New Zealand’s stock market. In America, which has a capital gains tax, its houses are worth 1.5 times GDP and just two thirds the value of its stock market. Australia’s housing market is worth 3.6 times its GDP and 1.1 times the value of its stock market.

Elsewhere, Stats NZ figures today show New Zealand’s rents have risen 3.4% since the lockdown ended in June and are up 10% since Labour was elected in September 2017. That’s despite mortgage rates halving to under 2.5% since then, unemployment rising and population growth slowing this year. The Government pledged on November 24 to review settings for housing demand and supply. It says it will have something to say about the review in the “coming months.”

Meanwhile, Prime Minister Jacinda Ardern, 40, has ruled out taxing that housing wealth in her political lifetime and said last month she saw her job as moderating inflation to levels homeowners expected, rather than improving affordability.

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Those are the raw facts as of today, but how do we feel about them?

Here’s how a homeowner might view them, if they described how those facts affected their personal finances and reflected how they voted in local and general elections, rather than what they think they might feel or say in public.

A quick caveat. This writing below is me being a bit cheeky, if only to show how things actually are, rather than how we think they are, or would like them to be. All the numbers come from official stats. I don’t believe anyone would actually say the following below in public for fear of being lynched, but more than half of the electorate certainly act in a way to support these views in local and general elections. The clue is in the byline.

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By Smuggy McSmugface*

I’m lovin’ this. My house/s just earned a lot more than I did this year and I didn’t pay a single dollar in tax. Why work for a living? And why would I vote out the current Government? I thought Labour didn’t love us property owners, but we’re now $250b richer since the 2017 election. And we could be up another $250b by the next election.

Yay for the Government!

Life couldn’t get any better really. The sun is shining, and I live in Wellington (this is a weather joke Wellingtonians will appreciate), and it’s a city where the median house price rose $127,251 to $812,251 in 2020. Don’t forget the $251. That’s mine. And no-one can take it away from me now. I earned that money, along with the other $127,251. It says so in my homes.co.nz listing.

In fact, that’s a useful reminder for me to work out how much equity I have in my house/s and then try to gear it up even more so I have plenty to pass on to my kids, or at least rent my houses to them. There’s no way they can afford to buy their own houses under their own steam and having me for a landlord will be much better than some other bugger. I’d much rather they paid our mortgage than some other landlord’s.

I also won’t kick them out at a moment’s notice. They will be able to bring up my grandchildren safe in the knowledge they won’t be forced to move suburbs or schools to find a rental they could afford. And I’ll make sure they’ll be warm and dry and safe.

And popular.

When they bring their girlfriends and boyfriends around to meet the parents they’ll know they could marry (or at least partner up) with a family that is able to support a stable, safe, growing and happy family. It’s not like some sort of dowry. These rental properties are more like insurance. Peace of mind in the family-building department.

We’ll just have to watch out for the gold-diggers and put things in a trust so no ratbag runs off with half of their inheritance. Or even better, just rent to the kids and the grandkids. That will keep them from heading overseas with the grandkids or moving somewhere else for a better job. And they won’t get too lippy over the Christmas dinner either.

Because we’re worth it

We worked hard back in 2000 to buy our first house. It cost us $203,000, which was just under three times our household income back then. We had to come up with a 20% deposit of $40,000 between us and we started off with a mortgage rate of 7.99%. That took plenty of saving, although we were lucky we didn’t have to pay student fees or pay back a student loan. The cost of servicing that mortgage worked out at about 27% of our after-tax pay or $255 a week. That was slightly more than our rent at the time, but it was worth it.

That cost rose to over $450 a week when interest rates rose under Helen Clark to almost 11%. No wonder we voted them out, although we should have kept an eye on the price, which doubled between 1999 and 2008. But there was no homes.co.nz then do we didn’t notice…

National was great

Then things got much better under National from 2008 to 2017. Interest rates fell to 4.8% so our mortgage costs dropped back to $150 a week by early 2017 and the house price kept going up. It rose another 60% to $650,000 before Winston Peters did the dirty and put Jacinda Ardern and Labour into Government. That means our equity — life savings to you and me — rose from $40,000 to $610,000 over those 17 years and our housing interest costs fell by almost a third. We didn’t pay back much of the loan because we eventually turned it into an interest-only mortgage and topped it up to buy a new car and for capital to start a new business. The business doesn’t make much, but that’s ok. The house makes up for it.

I thought a Labour Government would be bad for those life savings, especially with all that talk of a capital gains tax and all the anti-landlord talk. Higher Government spending and all that noise about 100,000 new Kiwibuild houses would surely push up interest rates and lower house prices, we all thought.

During a lull in the market, we decided to use some of that equity and guarantee our retirement by buying a rental property or two. The bank was very helpful and loved our track record. It also loved the valuation for our house that Homes.co.nz spat out every month. It was easy money for the bank. A borrower they knew with lots of equity, an income or two, low housing costs and security over something that wouldn’t fall in value.

We saw a nice little two-bedroom brick and tile place around the corner for $400,000 that rented out for $400 a week in late 2017. Freehold with no body corporate and not far from a bus stop and the hospital. It was easy. We took $150,000 of equity out of our family home and borrowed the other $250,000 from the bank. With a 4.5% interest rate on an interest-only mortgage, that meant the rental’s mortgage and our mortgage only cost us $480/week in interest. We were even making a small profit after the rates, maintenance and the insurance, which has doubled since the Christchurch earthquakes. It’s a Wellington thing.

And Labour is great too

However, after a couple of years of Labour, I could see that things were looking better when the Prime Minister announced in April 2019 she wouldn’t do a Capital Gains Tax in her political lifetime. She was popular then after the Christchurch attacks and she’s even more popular now after the Covid-19 response and her ruling out any sort of land or wealth tax or stamp duty in this term. No wonder she won with a landslide!

I know the whole Kiwibuild thing failed, but that’s not such a bad thing really. The Government hasn’t borrowed the money for it, which means interest rates can stay lower, and all that extra housing supply might not have been good for my capital gains or rents. It was also great to see migration pick up strongly in the year before Covid-19, despite all that anti-migrant talk from Winston and Labour before the 2017 election. Net migration of almost 100,000 in 2019 and a couple of hundred thousand extra temporary work visa people who needed to pay the rent and earn a few dollars.

All in all, this Labour Government has been great for our family. Our home in Wellington is now worth $812,251 and our rental is now worth $512,000, according to Homes.co.nz. The tenant in the rental is now paying both our mortgages after we put it up to $440/week after the lockdown. Our equity in both our houses is now up to $914,251 and is still rising. Our mortgage costs on the $560,000 of mortgages we have is now down to 2.5% or $270/week and falling.

I see Westpac is now offering 2.29% because it was able to borrow from the Reserve Bank a couple of weeks ago at a rate of 0.25% through that special lending facility. It’s also great to see the Reserve Bank printing that $100b to buy Government bonds to keep pushing longer term interest rates down. That is fantastic for my capital gains and mortgage costs. I’m feeling in a good mood and am a bit worried the low interest costs mean I’ll have to pay tax on the rental.

Should I borrow more to buy more rentals, or expand my small business by employing people.

I don’t really want to employ anyone. That’s quite hard work and I don’t really have anything for them to do. All I have to do is sit in our house and make sure the value keeps rising and interest rates stay low.

That reminds me. I must write that letter to the editor of the free local paper to protest against that double-digit rates increase the useless Council is planning. They want to spend all that ratepayer money on infrastructure for all these extra people who want to live in Wellington. All that money on fancy new buses, footpaths and those stupid green cycle lanes, which just leaves less room for me to drive to work.

I didn’t ask for all these people to come. I quite like a quiet life. And not having to work too hard. I also need the time to plan my new rental purchase. I see the banks are cracking down on landlords, but all we need is a 40% deposit. The banks won’t lend to developers for new houses or to people buying apartments that might be leaky or quaky. But they are keen to lend to people like me with plenty of equity wanting to buy another two-bedroom brick and rental.

We need to buy a second one to ensure we get the capital gain and have somewhere for our kids and grandkids to rent. I see everyone is complaining about this housing boom, but I can’t see the problem. As long as you work hard and save and buy property you’ll be fine.

Anyone who is complaining about this just didn’t work hard enough or wasn’t clever enough to buy when they had the chance. I know there’s a few of our kids’ mates whose parents didn’t buy a house, but that’s just bad luck.

Perhaps they should find someone nice with parents who do own a rental or two. They’ll be fine then.

Meanwhile, I need to start a campaign against all these horrible apartment blocks they’re planning to build somewhere near us. We just want a quiet life in our nice villa. Why does everyone want to mess up our nice suburb? I hear Labour passed a draconian new National Policy Statement on Urban Density that wants to rezone all the suburbs close to the CBD so they can ‘build up’ three or four stories.

Who would want to live in one of those shoeboxes anyway? You can’t bring up a family in an apartment. Why don’t they just rezone that land up the coast near the beach and build proper three and four bedroom homes for families. We’ve got our eye on one or two of them. We’ll need the extra bedrooms for when the kids come to visit and for our home offices.

Anyway, I’m off to the beach for a swim and to check out the McMansions. My house here doesn’t need me to look after it this afternoon. It’s doing fine all by itself.

* Obviously, Smuggy McSmugface is not a real person. But he is certainly doing well for himself. :)