What about the kids.....they need homes too

What about the kids………?

by Gavin Hamilton - real estate commentator

In several discussions with friends and colleagues a theme emerged; if houses continued to rise in price how on earth our young ones would ever afford a home of their own, particularly in Auckland?  The spending habits and capabilities of 25-40 year olds are heavily influenced by what appeared to us to be poor understanding of money and the way it works; most particularly paper money that can be printed to order. (Credit in one form or another.)

The consensus held that home prices would continue to climb, that incomes (particularly after Taxes) would fail to keep up and that our children and grandchildren would have less of the ‘good life’ to enjoy. Education assumes ever greater importance and is increasingly expensive, even more so if private schooling and tertiary education is factored in; if parents don’t pay for the learning either they do not receive it, or they accrue large student debt.

In terms of housing the problem is that with high living costs, mortgage costs, medical etc. etc. few people have much in the way of cash or discretionary income to put toward any homes but their own even if they really did want to help.

Traditionally the elder generation left legacies and properties to their offspring, used to pay off mortgages, buy holiday homes, travel and generally to enjoy. Unfortunately the Baby Boomers have seen their net worth and inheritances compromised if not vaporized by the financial excesses of all sorts of investment vehicles and to make it worse they are trying to defy gravity by refusing to age at all, let alone gracefully. I think you can bank on the Boomers spending the bulk of their worth before they agree to kick any buckets.
The Boomers will also work a lot longer because they need to simply to pay bills or, as a matter of choice to stay engaged. Either way the competition for higher paying jobs is effectively heightened. Quite bleak prospects really; a form of ‘the death by a thousand cuts’ for the kids and grandkids. Particularly if they are prevented from getting on the ladder at all. Take a look at the table below and note the %ages of positions taken up by older employees.


graph
These are American stats used purely as indicators, what comes out to me is the very high %ages of these positions held by older people; I believe a similar situation applies here.

So, the young enjoy a big debt burden as a hangover from their education, increased home costs in $ terms and relative to wages, medical and child care costs increasing, more competition for the better jobs (especially where experiential data is advantageous) and an increasing tax burden for the aged and their care. (Not to mention Govt. debt reduction as an inhibitor) A future to look forward to!

Truly, help is required but how?  We have pondered together to try and find a way to help given excess cash is not freely available.

Huge advantage can be granted by careful use of collateral held and the ability of our kids to pay monthly. Auckland rents of $600 a week will support a mortgage of approx. $450,000 and homes can be bought for that; any savings can be added in the usual way.

If there is an acceptance that a home like Mum and Dads, spacious and with luxury extras, is not possible; the Boomer parents can use held equity to satisfy the bank security issue to effect the purchase of a modest home. Effectively equity in another property guarantees the bank to an amount limited to an appropriate deposit, i.e. in the case of a $500,000 property the guarantee could be limited to $50-100,000. The kids get onto the property roundabout, in time there will inevitably be a sufficient rise in the property value to enable the resultant equity in the kid’s property to secure the loan and for the guarantee to be extinguished. Cost to the parent is minimal, risk can be easily managed and the parent has created a huge benefit for their offspring.

When you are ready to help them make their move it’s as easy as you wish to make it:
• Step 1 – Decide you are prepared to help, to what degree and how to be able to assist all the kids that may need it
• Step 2 – Identify the level of risk you can comfortably accept. If you are prudent the risk of actual loss is small if not non- existent.
• Step 3 – Stick to your guns, i.e. if you are happy to give the kids a head start into a median level house; don’t get talked up into a more expensive property.
• Step 4 – Create a workable budget that can be lived to and establish some control mechanism that monitors repayment compliance.
• Step 5 – Have a clearly identified and agreed exit strategy.

The team I work alongside thought it may be of value to you if we were to offer our time to speak with your children of late teenage/ early twenty years with a view to illustrating to them ways in which money can be put to work for their long term benefit and to highlight the real cost of indulgent credit. In the event you believe we could help simply let me know and we will organise a time for a relaxed discussion and casual presentation.
These are troubled and uncertain times, we have endured and prospered during similar previous episodes and we will be presented with such times again. I do believe that making the best of these days is essential if we are to enjoy the lives we have and to live to our best potential.
As always coffee is on…………….

About Gavin
Gavin Hamilton is a reular contributor to wisanow who talks about current issues facing the real estate market and how they effect the consumer.

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Contact:
Gavin Hamilton
Star Real Estate Ltd – Professionals
Ph: (09) 5345189
Mob. 021 925 888
Email: gavin@starproperty.co.nz
www.starproperty.co.nz