50-year mortgages and avocado toast
Sometimes society or government faces a problem where not enough money is being spent on something. Kiwis on average aren’t allocating enough money to retirement, or councils aren’t investing enough money on water infrastructure. In that scenario, you want to spend more money. Kiwisaver was supposed to get people to save more. Making people save more was the initial effort of the “nudge” industry. No-one seems to really know how to make councils plan for water infrastructure, but it would be nice if we could.
The housing industry is not like that. The problem with housing prices is not that we are spending too little on houses. We (collectively) are spending too much on houses. That’s why avocado toast is not a housing issue* — if abolishing avocado toast would increase total expenditure on housing, we’d be worse off, not better off.
This week, in the US, 50-year fixed mortgages have been proposed. A 50-year mortage would increase the amount you could spend on a house for a given level of savings and income (at the cost of dramatically reducing its value as an investment). If the problem with housing were insufficient money being spent this might help, but that’s not the problem. A change in financing that lets people bid more for houses doesn’t help. Like abolishing avocado toast, extending mortgage terms is trying to solve the wrong problem. Unlike abolishing avocado toast, it might have a real effect on the market.
* and because the basic arithmetic doesn’t make sense, but that’s a different post
Thomas Lumley (@tslumley) is Professor of Biostatistics at the University of Auckland. His research interests include semiparametric models, survey sampling, statistical computing, foundations of statistics, and whatever methodological problems his medical collaborators come up with. He also blogs at Biased and Inefficient See all posts by Thomas Lumley »