Friday, April 29, 2022

Mike Hosking: We buy houses on emotion, not logic

The most common home loan these days is one that lasts for 30 years.

Think about it, chances are it's longer than you have been alive, given many of them go to first home buyers. If you're later in life, it could be longer than you have left on Earth.

That’s a lot of time owing a lot of money.

57 percent of mortgages this year so far are for 30 years. 66 percent of them in are Auckland, which shoots up to 83 percent if you're a first home buyer.

The trouble with 30-year loans is that you pay a fortune for them. The greatest gift a bank could give you is to print a spreadsheet of all your payments over 30 years and to split them into columns.

Have it with the actual money you pay for your house and the actual money you pay the bank for having their money for three decades. I can tell you which is bigger, and it ain't the house.

You are paying money on top of money, on top of money. Under any normal fiscal arrangement, it borders on a scandal.

It's the price of a product at point of sale versus what you will, in reality, ultimately pay for it.

The counter, and this is why so many do it, is we have decided a house is a home and homes generally go up in value. So you can assuage your worries by telling yourself that although you are paying for the house and then some, it will, of course, be worth a fortune in later years and generally that’s true.

You can also assuage yourself by saying if it's not 30 years I'm never going to be able to afford a house.

We also have an industry of sorts whereby we all have mortgages. Debt is on the never, never. We can't wait to paint our first wall, all our friends have houses, and this is the way we do things.

Also, it's just numbers on paper. You'll sell the place on average every 7 years and refinance anyway. Interest rates might go down, or not. But the reality is by this stage, all common sense has gone out the door.

Borrowing money for three decades is emotional, not sensible. This, of course, is not to poo poo it, if you are happy and you go in eyes wide open.

But these statistics out this week show a huge number of people owe a huge amount of money and will do for most of their lives.

In reality, will it turn out to be 30 years? Or could we more realistically say it's forever?

There is a very good reason banks are so profitable. It's because we buy a house with our heart, not with the numbers.

Mike Hosking is a New Zealand television and radio broadcaster. He currently hosts The Mike Hosking Breakfast show on NewstalkZB on weekday mornings.

1 comment:

Anonymous said...

i for one could never understand the fascination with 'capital gains' accrued by the value of your primary house going up. if you sell it, you see a nice 'profit', but you have to be homeless to enjoy that. if you buy another house, you'll more likely pay more than what you got (initial cost + profit). unless you do this at old age, downsize to a much smaller house at a cheaper place (which people rarely do), the lure of 'capital gains' seems irrelevant.

unless people view primary residence as an 'expense', similar to a personal car and tv/bed, the exuberance will go uncontrolled.