The current Government is squarely looking to address issues of inequity in the housing market, particularly for those who want to get into it for the first time. People say the system is broken and the dream of owning a home is something that an increasingly small number of people can aspire to.

I don’t want to consider whether or not that last statement is correct or otherwise, but the fact remains that home ownership is something some people are finding bloody hard to do.

From a mortgage broker perspective the challenge boils down to one of two things (and often it’s both) –
• Income isn’t high enough to sustain current living costs and repayments on a mortgage big enough to buy a property, especially a high-priced Auckland one
• Deposit can’t be saved quickly enough to keep up with house price increases or it just takes far too long (One client of ours spent 10 years saving a deposit. What an effort! Who has that kind of stamina!)

So the idea of shared equity has popped up.

It’s a model that operates overseas and it’s basically like you and friend buying a property together, except it’s you and the government (or local government authority) rather than you and a friend, per se. You both combine your resources, get a loan from the bank and then buy a house. Schemes are usually targeted at those on modest incomes. Our government seems to have talked about their input being by way of an interest free loan – sounds juicy! You’d own say 70% of the house and the Government would own 30%.

The idea is that by putting a roof over your head in which you have an ownership stake, you get security and certainty – both super important in terms of strengthening the fabric of society. It’s the kind of situation that gives people the comfort and confidence to raise families. In turn communities are more likely to thrive. I like that philosophy and it’d be a stony-hearted person who would argue against that.

But there’s some serious challenges to overcome and I’m not sure the government had really thought this through (enough) before they opened their mouths about it.

For one there’s the issue of how it is funded en masse. This is not the kind of scheme where 1 or 2 people get help. No, it needs to benefit hundreds, if not thousands. What if the equity input from the government was $100,000 per household. Multiply that by 1000 households. My calculator says that that’s a $100 million dollar spend. Now run the scheme for 10 years. Where the hell does that money come from? Or more to the point, which budget gets hammered – health, education? Dare I say it – KiwiBuild?

Naturally, a shared equity scheme will have the effect of increasing the demand for housing because it’ll mean that those who are currently out of the market will become eligible to enter. And that’s likely to occur ‘all of a sudden’ too.

In a perverse kind of way it’ll exacerbate the problem that the government is trying to solve because more demand means prices rise further out of reach of those who want them! It also sounds like the purchase price threshold for eligibility to the scheme could be set at $650,000 which is already a bit low in the City of Sails. It’d be much better to have a starting threshold at say $750,000, but don’t lose sight of the comment in the previous sentence – more demand means prices could rise and the number of people to benefit from the scheme will diminish over time.

Welcome Home Loans and Home Start Grants are already suffering from this predicament.

If the main problem with the housing market is actually a supply one (ie. not enough houses for everyone who wants one), then a demand side initiative (which is what a shared equity scheme is) doesn’t do much to alleviate things. The government should probably focus on punching out those 10,000 KiwiBuild houses instead…

The banks have a significant role to play here too because they’ll still be lending money to the ‘homeowner’. But, I can foresee things getting tricky because you’ll probably have two competing security interests. Let me explain that one:

The bank will want to secure their loan over the house in the usual way. For that, the banks always require a ‘first mortgage’. It means they get first dibs if the proverbial hits the fan and you fail to make loan payments. Fair enough, right? But the Government will be putting in a chunky sum of money too, so it’ll want to secure its interest as well. Also, fair enough.

In the same way that you can’t have two gold medallists, you can’t have two ‘first mortgagee’s’ either, so someone will have to give way. My pick is that the Government will have to give way because typically their loan will be smaller than the bank’s one. Whatever the case, if you can’t resolve this issue then the scheme is a dead duck, because no bank lending means no house.

Notwithstanding all the above, there are issues to work through in terms of what happens once the house is purchased. Who pays the rates and insurance? How does the Government get its money back? How do you split any value increase? What if the house falls in value? Can the homeowner buy out the Government’s share, and if so at what price? And so on.

Looks like a can of worms, dunnit?

At the present time this is a just an idea and frankly the PM sounds like she and the Housing Minister haven’t really got their heads together on it. Besides, it’s budget week so they’re keen to leak good news wherever they can.

Watch this space.

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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