Sunday, January 27, 2013
Mike Butler: Green sub-prime housing
The latest Green Party policy-for-votes initiative, a rent-to-buy housing scheme, appears to have been created by someone unable to work out the numbers involved. Green Party co-leader Metiria Turei announced the policy on January 24, 2012, at Ratana festivities. The scheme involves building about 10,000 state houses for up to $300,000 each, in conjunction with tribal corporations, local government, and community groups, which families would live in and eventually own. The Crown would initially own all the equity in the house because families would not need to pay a deposit.
Families would make weekly payments, similar to rent, to cover the Crown's investment cost - $200 a week on a $300,000 house at a government bond rate of 3.5 per cent. They would eventually make additional weekly payments to buy equity in the property until it is owned outright.
So how long would it take occupants to pay $300,000 at a rate of $100 a week? Three thousand weeks, or 58 years. How much money would the government make out of these deals? Two hundred dollars a week for 58 years is $603,200.
The total amount these buyers would pay for these $300,000 homes would be principal of $300,000 and rental payments of $603,200, giving a total of $903,200.
Purchasers in such a scheme would not be required to pay $100 a week in principal, which means if they opted to rent only, they would pay just $200 a week. By comparison, the lower quartile rent for a three-bedroom house in Otara is $350 a week.
Here’s the biggie. How much would each such deal cost the government if it ran to 58 years? A sum of $300,000 at 3.5 percent annually for 58 years would compound to a whopping $2.2-million. Therefore, this Green initiative would lose the government $1.3-million on each deal!
The Green Party is offering a government-subsidised home rental scheme dressed up as rent-to-buy, a no-deposit scheme targeting people who cannot afford to buy a house. Selling homes to people who cannot afford to buy them created the sub-prime mortgage crisis in the United States, and the Greens' housing scheme looks like a sub-prime crisis in the making.
I will leave it up to a builder or developer to analyse the feasibility of putting a building on a section for $300,000 – anywhere in New Zealand, let alone Auckland, where a great housing shortage is alleged to exist.
The Greens’ Home for Life scheme consists of three policies. There is the rent-to-buy plan, as explained, warrants of fitness for rentals, and a “secure tenancy” plan which would give tenants a first right of renewal on their tenancy (which assumes tenancies are fixed-term and not of the sort that are ended by the tenant giving 21-days’ notice), and limit rent increases to once every 12 months (which assumes landlords are continually raising the rent) .
Don’t you love it when the Green Party comes up with a plan that has some numbers attached to it? Just think of the chaos if Green Party co-leader Russel Norman ever became finance minister, as he wants to.
at 1:40 PM