First-home buyers urged to 'think small'
First-home buyers may have to lower their sights, and seek mum and dad's help, to get into a home.
Economic commentators have a history of blaming the baby-boomer generation for everything from inflating house prices to keeping all the good jobs.
Some of their claims are true, simply because the bulge of boomers created huge demand on whatever it was they were crying out for at the time - post-war state housing, new schools, blocks of flats, 1980s homes and now retirement villages.
One claim that is hard for boomers to swallow is their responsibility for the woes of today's first-home buyers. Though this new generation of buyers is small, the earthquakes have put the normal supply-demand equation out of kilter.
At a time when lack of competition should be keeping prices down, we have an under-supply equivalent to what age bulges have created in the past.
So what to do? If baby-boomers are the lucky ones, then some of them should be able to assist their offspring into a first home. There have been noises about tweaking the rules of KiwiSaver and some kind of assistance to first-home buyers should the Reserve Bank tweak loan-to-value ratios.
But government grants further inflate house prices. When we bought our first home in the 1980s there was government assistance through cheap second mortgages, and we know what that did to house inflation.
If a boomer has a freehold home, there are more risky and less risky ways they can help their offspring, all of which should be checked by solicitors.
The risky way is to put your home up as security for their mortgage. If they stop paying, you lose your house.
A better way is to take a revolving credit facility against your home so that while they are possibly paying only the interest, you can chip away at the principal yourself. Once you are back at freehold, their interest payments on the principal still outstanding becomes another source of income for you.
If they struggle, there is much more flexibility from you to give a rent holiday, or to stay on interest only, than there is from a bank. If neither party can handle this, it should never be taken as an option.
One observation I would make, however, is that today's first-home buyers have much more grandiose ideas of what their first home should look like. My wife and I sold our cars and biked to work for a couple of years in order to afford our two-bedroom home in the 1980s. Many boomers will have similar examples.
But what sacrifices are first-home buyers willing to make before putting their hand out to good old mum and dad?
Unfortunately, existing homes in traditional suburbs are being dragged up in price by the massive building programme in subdivisions, where houses are seen to start at $440,000.
These new homes are what boomers would have expected to go into as maybe their third home. Yet some first-home buyers are stretching themselves to buy these out of frustration, without giving a thought to what happens when interest rates rise or they go down to one wage.
Our demand for bigger and bigger houses has not helped. The Draft Land Use Recovery Plan states: "What is increasingly apparent is that there is an insufficient supply of smaller, more affordable homes to offer greater housing choice and meet changing housing needs."
Until we provide the market with the smaller homes of yesterday (120 square metres to 130sqm for a three-bedroom house, albeit without the quarter-acre section), first buyers will be forced into risky prices.
There are plans afoot, by one developer, to build such two to three-bedroom homes on smaller sections, provisionally priced at $355,000 (two bedrooms) to $373,000 (three bedrooms).
They could go some way towards giving young buyers a risk-free reality option without borrowing against mum and dad's home.
Let's hope that in a market of rising building costs, such homes become reality for the sake of inter-generational peace.
Tony Brazier has worked in the property industry for 26 years and owns a real estate company selling and managing property. This column is not a substitute for professional advice.