KEY POINTS:
It's an ill wind that blows nobody any good, as the saying goes. Homeowners with big mortgages must have been reflecting on the truth of that dictum in the past few weeks.
The decline in interest rates is not unalloyed good news, since many people - particularly those on fixed incomes - rely on interest income. But declining rates are good news for those wanting to borrow.
Would-be first home buyers were entitled to share in the relief - until last week when the country's largest banking group, ANZ/National, announced that applicants for mortgages would need to come up with a deposit of at least 20 per cent.
Other banks are reported to be instructing staff not to lend more than 80 per cent of the purchase price, although they are considering cases on their individual merits.
For those wanting to get a foot on the residential property ladder in Auckland, where the median house price is $433,000, this has doubled to $86,600 - the amount of money they need to have in hand before they can buy.
On the face of it, this seems like a cruel blow. But it is in tune with the times. The slumping real estate market, which shows no sign of having bottomed out, urges caution on the part of lenders whose imprudence in the so-called "sub-prime" (read "high-risk") US mortgage market created much of the economic vulnerability that made the present crash possible, even inevitable. A mortgagee in the present environment who lends even 80 per cent of a residential property's purchase price is operating at the upper end of exposure to declining value. To go further would be more than simply foolhardy, given the Government guarantees that have been extended to private savings: it would be displaying a recklessness verging on criminal.
The great New Zealand dream of owning a home, particularly in Auckland, had been taking a hammering for years before the mayhem that erupted on US financial markets. Home ownership figures increased from 61.4 per cent to 73.8 per cent between 1951 and 1991 but the march has been relentlessly downward since. The 2006 census showed that 54.5 per cent of houses nationally were owned by their occupants; in Auckland, the figure had dropped to below 51 per cent.
Plainly, spiralling purchase prices have had much to do with that decline. But high interest rates less so. Who can forget the the mid-1980s when would-be borrowers had to qualify, with a savings record, for scarce mortgage finance at more than 15 per cent (and even seek second-mortgage money at 20 per cent or more). In recent years, banks have fallen over themselves to lend on residential property - often at more than 100 per cent of value - and those with healthy equity in their own homes borrowed mightily to invest in the sector.
Successive Governments which declined to intervene, and let the law of the market rule, have much to answer for in the present crisis of low home-ownership levels. If the severe correction now taking place burns many over-leveraged investors it will be a form of poetic justice, but of little comfort to those who remain locked out of the market.
Some of those who now occupy rental accommodation do so from choice rather than the inability to raise a deposit or service the mortgage on a high purchase price. But in these days, renting may make good sense. The city's rental housing market is flooded with properties that vendors cannot sell, giving tenants a huge choice and good bargaining power.
The uncertain economic outlook demands that home buyers exercise care and do not over-commit themselves. The banks' unwillingness to lend money that borrowers can't afford is a blessing in disguise.
