A Mortgage Is Fragile

Most people will never have read anything by Nassim Taleb.

He’s the guy who wrote about the idea of the “black swan”, how we know nothing about the future and how having skin in the game is an obvious risk reduction idea.

In his latest book Antifragile he talks about the difference between fragile systems and antifragile systems.

An example of a fragile system would be a household with lots of debts.

An example of an antifragile system would be a household with no debt and a substantial pool of liquid assets with which to cover the costs of any emergencies that arise.

A mortgage is inherently fragile.

You are essentially representing to the bank that for the life of the mortgage, nothing in your life will go wrong.

You are also exchanging the utility of “owning your own home” for the obligation to pay more than the home is worth in interest.

What all of these silly buggers trying to jump on the home buying wagon do not comprehend is that their incomes are fragile.

Just look at how Christchurch homeowners who “did everything by the book” have had their lives ruined in the aftermath of the earthquakes.

If you cannot look at the evidence of how homeowners are treated by banks, insurers, local councils and central government, and conclude that there is an awful lot of risk involved in homeownership, there is something wrong with you.

Owning a home is a luxury good as a result of the enormous level of regulation foisted onto homeowners by elitist types seeking to protect the only “capital” they have. Affordable housing will impose capital losses on a lot of Kiwis and put financial stability at risk.

This means that for all of the bleating about how we need to increase land supply and make it easier for developers to build new subdivisions, nothing will ever happen.

Look at the Unitary Plan. A complete and utter pipe dream. Even council planners hit a limit of ratepayer tolerance every once in a while.

If you’ve thought about all of this and judge that you can handle the risk involved, understand that you will face ever-rising rental in the form of rates you have no control over, by all means it’s your life.

But the core reason why this home ownership obsession frustrates me is that if the music stops, there are going to be a lot of households who owe more than their house is worth.

It is myopic to think that this cannot happen in New Zealand. It has happened before, and will happen again. There are no guarantees with any capital outlay.

And what will happen then? Well, because most New Zealanders have no cash flow because they throw it all at their mortgage, they will come crying for their bailout.

And that is simply unconscionable. The level of bailouts in New Zealand since the onset of the GFC has ruined the idea that losses should be internalised.

A mortgage is fragile, debt is fragile, and most people will have miserable lives when mortgage rates rise and they didn’t have an Excel model of how they’ll cope with higher monthly mortgage payments growing faster than their ability to earn a pay rise.

The flip side of all of this is rent prices haven’t boomed as much as property spruikers would like – rents have to be affordable relative to incomes or there will be no tenants for landlords to pay their mortgages and outgoings with.

Listening to the rationalisations that some people come up with for property is hilarious. Ask them about opportunity cost, transaction costs and watch their eyes glaze over. I actually feel sorry for people who think it is a good idea (I’ve heard this several times in the past few weeks) to borrow at 22% to get the deposit up or going to a second-tier lender is a good idea.

New Zealand has a very long way to go when it comes to financial literacy. It is even more disturbing that no one is talking about the real reason why so many people have signed up to Kiwisaver – because it will help the little dears get their first home. How precious. Wake up and smell the tulips.