Monday, 29 October 2012

divorce and the housing crisis

I tried to come up with a snappy title for this post - but sorry folks this is all you get....

This morning on talkback radio (yeah I know, I confess ok!!!), there was discussion about the continuing pressure on the housing market and dire shortage of rental properties.  The announcer suggested that part of the issue was the growing number of relationship breakups and how therefore a family  once needing one house, now needed two.  Made sense to me.  But I think it's more complex than that, and so this is my take:

A couple buy a house.  Those who bought say, 10 or 15 years ago, were probably not lucky enough to make a whole heap out of the boom but probably got some ''easy equity''.  Their relationship starts to founder.  As a ever-hopeful panacea, they refinance - using the money to upgrade the car, have a holiday, perhaps have another child.  Possibly they are living the dream and do these things as part of the ''good'' part of their marriage.  Going by the stats, its likely that this couple is a single, or at least a 1 and a half income family, and the children are still school age when they separate.

Much of the equity gone, and with little hope of either being able to buy out the other, the house is put up for sale.  In a now depressed market, the house takes a long time to sell, and this gobbles up even more income, time and equity.  At settlement, the main breadwinner (usually the man), discovers that his $500k house is actually now only a bank deposit of twenty, thirty, maybe forty thousand dollars.  Barely enough for a deposit on a house half as good as what he had.  And by the time he gets a new vehicle, upgrades the TV, buys a few of the others things he wanted but could never afford when married, there's not much left.  He still has the kids quite often, so a one bedroom apartment won't suffice (which is about all he can afford to buy, even with a good income).  So a few thousand is left in the bank and he goes and finds a house to rent.

The second breadwinner (in this case most likely the woman, and also most likely the primary caregiver post split) looks at her settlement cheque and realises it is barely a deposit on a house. And then it won't be in a great area for schools, AND because they had such a gigantic mortgage before, the car badly needs upgrading (she is after all going to be doing most of the running around).  So she too, rather than buying a very cheap house in an average area, and being over committed to a mortgage, ends up renting a slightly better house, in the same neighbourhood as the family home.

By the time one or the other is in a position to be able to afford to buy a house, the children are grown and looking for rentals of their own.

Its a dire predicament, and whilst I have taken the liberty of generalising (and I can...cos it's my blog....), I have heard this story so many times.

This is a bigger problem than there being not enough rental stock in the marketplace. This is also the outcome of people under relationship pressure getting ''easy money'' from a lender to try and help fix what is often a non-financial problem.   Its about housing becoming unaffordable for more and more people.  And its a really good lesson in getting sound financial advice the minute that settlement cheque hits your bank account.

Your thoughts?