Why Debt Is Bad

The reason that debt is bad is because we have no way of knowing whether we’ll be able to repay it on schedule. It’s arrogant to assume that your situation will improve or stay the same for the duration of your mortgage or loan repayment schedule.

The only people in New Zealand today who can budget with reasonable certainty are public servants and corporate executives who receive regular pay rises and bonuses. Many Kiwis face stagnating incomes and increased levels of casualisation and part-time work.

In this environment, taking on debt is extremely risky. Why would you enter into a long term debt slavery arrangement with an Australian bank in order to pay a premium for a depreciating combination of dirt, wood, glass and carpet? It’s insane to enter into mortgage obligations as high as 8-10 times your household income!

Some of the proponents of mortgage debt slavery are funny people. They frown when people from lower income groups drop $100 through the pokies or at the local TAB counter. But they’re engaging in a bet that after deducting the opportunity cost of capital, rates that increase exponentially, insurance that won’t pay out when you need it and maintenance to prevent the pile from collapsing – almost never pays off.

The reason that peopleĀ think that their housing “investment” has paid off in the past is because we are victims of our own minds. We rationalise our bad decisions and our own contribution to our success. No baby boomer will admit willingly that they’ve simply been the beneficiaries of asset-price inflation due to massive increases in money supply and credit availability alongside restrictions on new housing stock by way of zoning laws and ineffective building regulation.

In a way, people who say that housing is a fantastic investment and you should do anything to get on the “property ladder” (I’d call it a chain), are suffering fromĀ attribution error. They attribute the increase in the price of their crappy villa from $200,000 to $2 million over a couple of decades to something they did. To their good decision making or efforts at paying down their mortgage early.

Of course, this is complete nonsense. They did nothing except have the good fortune to be in the right place at the wrong time. Which is why young couples today need to break themselves out of the “debt is good and mortgage debt is the best debt” mindset.

Affordable family formation will be the saviour of our demographic disaster. Immigration can’t save us, because New Zealand is an expensive destination and for some a migration stepping stone to Australia once they’ve obtained their NZ passports.

This means that young couples who want to have kids need to avoid debt at all costs. There is nothing wrong with renting! I can’t overstate that enough. Buying a house is not only very risky, it’s gambling with literally everything you have in the world.

The retarded attitudes of most Kiwis in relation to housing highlight how we are a nation of drongos incapable of thinking clearly. The only time you should purchase a house is when you can write a cheque for one or put down at least a 30-40% deposit. No 30 year mortgages! That’s insane!

When the housing boom started to peter out in 2007, I thought that we might start seeing some reform. But the reliance on new debt being issued is the sand our national house of cards is built on.

The big banks simply can’t stop mortgage lending. They have massive external liabilities, they have increased capital requirements and stupid reliance on risk management models that should have never left academia.

This means that debt in New Zealand is extremely risky. It is a bet that the fresh credit creation will never end. It is a bet that house prices will continue to increase to Hong Kong prices. While this is definitely a possibility, it sure as hell isn’t something we should be celebrating.

A housing expense is a housing expense. There are these things called “furnished apartments” and “furnished houses” available for rent in nicer areas that you could afford to buy. Why bail out a baby boomer or cashed up immigrant by participating in the housing ponzi scheme?

I disagree with Matt Nolan that middle class incomes have done pretty well. I’d argue that the massive increase in housing loans, credit card balances and personal loans is actually papering over the pathetic increases in real incomes over the past 20 years.

We have substituted productivity growth for credit growth. When we should have had a clearing of the deadwood, banks have returned to pre-2008 lending policies. Some financial institutions are bowing out of the home loans market because they can’t offer the same incentives big banks do.

This is completely stupid. Debt is bad because when things go wrong, the lenders want their pound of flesh. Which would be completely acceptable if it was possible for people to have a brief break from the workforce and get another similar paying job.

But that’s not what is happening. There are over 175,000 people currently unemployed in New Zealand. The number of beneficiaries is in excess of 300,000. When you add in superannuitant beneficiaries, it’s even worse.

The implications are that there is a massive supply of excess labour in New Zealand. Unless you have a high skill that is in high demand, your market wage is very low. You can’t make mortgage repayments on $13.50 an hour. That’s if you got 40 hours a week on the minimum wage.

My generation has to lower its ambitions when it comes to housing. I have no desire whatsoever to buy a house unless I can write a cheque for one. This means choosing cheaper suburbs, cheaper inner city apartments or even telecommuting from cheaper towns with rail access to Wellington or Auckland.

Nothing disturbs me more than arguments made by some that debt can accelerate your path to wealth and the like. Most of the time the only people who end up getting wealthy from your debt are mortgage brokers, real estate agents, banksters and interior decorators.

I think student loans are bad too. I deeply regret my decision to attend university. I will now have to earn large amounts of pre-tax income to repay the cost of a worthless economics degree.

My attitude towards debt these days is similar to many who lived through the Great Depression. All debt is bad, all bankers are scum, the mantra to live by is if you don’t have the cash you can’t afford it.

That’s why I was really disturbed to hear a friend had maxed his credit card by spending ~$2,000 on a couple of nights at R&V. He’ll make a great mortgage customer for his bank in a couple of years. I’ll just keep renting.