Initial endowments matter. I’m reading House of Debt and enjoy the points made early in the book about how the poorest households lose the most when they take on leverage they can’t afford.
When house prices fall 30% and you have a 20% deposit you are exposed completely to house prices. You are now a mortgagee sale statistic in New Zealand with a disproportionate amount of negative consequences that entails relative to the United States where in most states you can simply hand the keys back to the bank and have the property go into foreclosure.
My main concern with households that use Kiwisaver to top up their house deposit is that they generally stop contributing to Kiwisaver and thus have no diversification outside of New Zealand home equity. In the next recession, this will suck for them because unless they’ve made significant headway in reducing the principal of their mortgage, their household’s balance sheet and income statement will be a sea of red.
Just because almost everyone thinks that something is a good idea, particularly around the holiday season, for young couples to enter into highly leveraged housing services contracts with a high level of spending reset attached (maintenance, lawnmower service, sum insured valuation etcetera) doesn’t mean that it’s a good idea and in fact probably means it is batshit insane!
A lot of young people need to slow down and realise that rushing into major contractual agreements before their household’s balance sheet can take on that risk is extremely risky. If you look at the finance literature, the empirical evidence is quite clear – high capital returns in the recent past are the best predictor of low future capital returns in the near future. Mean reversion isn’t just an academic turn of phrase.