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photo: Royal Bank of New Zealand
Have a question about personal finance or the economy? Send it to susan.edmunds@rnz.co.nz
Last week a reader asked whether it would be possible for the government to offer home loans to first-time buyers at a fixed rate of 2%. I listed some reasons why this might not work in the current environment – but some readers then wondered why it worked until around the 1970s when the government, through the State Loans Corporation, offered low-interest loans to first-time buyers at a fixed rate of 30 years.
Gareth Kiernan whom I interviewed Last week’s columnHe said that even if there is such a plan, there are some conditions.
“It appears that the 3% rate adjusts every five years, and if your income is above the allowed threshold, the rate increases to a ‘normal’ rate. So the 30-year fixed rate seems to simplify the arrangement somewhat.”
He said the lending environment then was very different from today’s deregulated lending environment.
“My colleagues have told me stories of how, even in the early 1980s, whether you could get a mortgage depended on how well you knew a particular bank manager, there were strict limits on how much you could borrow, and it was often necessary to take out a second or third mortgage at exorbitant interest rates to buy your first home.”
David Cunningham, CEO of Squirrel and former CEO of the Co-operative Bank, agrees.
“The banking system was very different then and home loans were not as much of a focus as they are today. Post Office Savings Bank was a big part of it and having a home ownership account was a pathway to home ownership.
“In short, lending was constrained. The deregulation of the financial system in the 1980s freed up access to credit, filling the role previously played by the National Loan Corporation. Rising inflation also pushed up interest rates.”
Kiernan said that as you would expect, demand for SAC loans was strong, helped by people being able to capitalise their family benefits as deposits.
“At certain times, SAC loans are limited to the construction of new homes or the purchase of previously vacant homes to encourage an increase in the housing supply and reduce undersupply.”
He said the interest rates the government was offering to first-home buyers were still lower than they were in the 1960s and 1970s and would remain at current levels if the scheme were repeated today.
But he said some things were very different.
“Competition for government dollars is more intense than it was 60 years ago. In the 1960s, government spending averaged 23.5% of GDP, while in the past decade that figure has risen to 30.4%.”
He said the financial industry now operates in a completely different way.
“Access to credit is arguably more open and fair, so there is perhaps less need for the government to play a role in this area.
“Of course, the government still First Home Loan Schemeusually for low-income people who want to buy their first home and have a small deposit.”
He said there was also more collaboration between central and local governments and developers to create new subdivisions and developments from the 1950s to the 1970s.
“Land availability seems to be much better… Let’s put it this way, a piece of land that cost $1,500 in March 1959 is now worth $42,600. That might not even be enough to pay some development taxes now.
“My ultimate question about this proposal remains: what other government services/spending would you have to cut in order to implement this policy? I’m not sure the people making this proposal understand that the funding pool is not a bottomless pit.”
In the fight to control inflation, wouldn’t it be more beneficial to increase compulsory KiwiSaver contributions across the board, rather than increasing interest rates? This would achieve a similar end result of reducing people’s spending power, but would also preserve the “lost” funds and ultimately contribute to one’s long-term retirement wealth? Arguably, a more palatable recipe?
The idea has come up a few times in recent years. Trevor Mallard first floated the idea when he left parliament.
This is definitely a valuable idea – I know a lot of people would be forced to Put more money into KiwiSaverwhich will benefit their retirement life rather than paying a higher mortgage to the bank.
But there are some problems with this idea. One of the main problems may be that only employees are likely to be affected – unless you also ask employers to increase their contributions.
It may also require the scheme to be mandatory, as people might otherwise opt out to avoid being squeezed.
Another problem is that it could disproportionately affect those on the lowest incomes. Those who don’t own a home won’t be directly affected by a rate rise. But if they are forced into KiwiSaver and the required contributions increase, they may not be able to avoid it.
The money will remain in the system. Fund managers look for ways to investwhich may mean some inflationary pressure.
In short, this idea sounds great to a lot of people, but there are some issues that need to be addressed before it can be put into practice.
Note: Recommendations are general in nature. Specific guidance should be sought from a professional advisor.
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