Have your say: Should the government provide interest free loans for leaky home owners?

The chief adjudicator of the Building Disputes Tribunal, John Green, has called for the government to step in and offer low interest or no interest loans to allow leaky home owners to fix their rotting houses, Radio NZ reported. Green, who has also been a mediator with the Weathertight Homes Resolution Service, told Nine to Noon disputes are expensive and often take years, and settlements are not usually enough to fix the problem. He said the Government should offer low interest or even no interest loans to allow homeowners to fix their rotting houses and argue about liability afterwards. Green said the problem affected about 89,000 homes and is set to cost more than NZ$11 billion, so the state has a responsibility to take a lead role. Prime Minister John Key has previously said cabinet was about to consider a proposal in the next week or two. He has previously argued for an interest free government loan to leaky home owners where payment could be deferred until the house was sold. Key said then that future house price inflation would ensure that home owners were not hurt in the long run. Nine to Noon also spoke to an anonymous North Shore homeowner who had immigrated to NZ and bought a house in 2006. Within 6 months it started leaking through the deck into a bedroom, the British emigrant said. Eventually the leaky home owners decided to demolish and rebuild at a cost of NZ$450,000 to NZ$500,000, which was NZ$70,000 to NZ$100,000 less than the cost of the estimated recladding and rebuilding exercise, she said. This was paid for by breaking into a pension and taking on a second mortgage. She said the following:

"The government need to hold their hands up, especially when you listen to all the news out there at the moment.  It depends on the circumstances. Our builder made big mistakes and lots of other people made big mistakes and maybe everybody who was involved in it needs to hold their hands up and help. I don't see why we should be responsible when we moved in within six months and its our problem. I mean...why should it be our problem."

She was then asked what would be the best solution for her.

"The best possible outcome is that we get our money back. The government needs to step up and support people like us and realise what an impact this has had on people's lives."

Earlier today I spoke with Paul Henry on TVNZ's Breakfast programme about the leaky building issue and argued that taxpayers generally should not be forced to pay en masse for a bailout for leaky home owners. My view I have a few concerns about an interest free government loan to leaky home owners. Firstly, this is real money that is being borrowed and is likely to be borrowed by the government from overseas creditors. These loans to the government will carry interest. Someone will have to pay the interest on that debt and for a long time at current forecasts. That is a real cost to taxpayers at large in a couple of ways. It is likely to force interest rates up for anyone that borrows, given the potential for pressure on our sovereign credit ratings. Secondly, the interest cost on this debt will be hitting taxpayers at a time from 2015 onwards when the extra healthcare and pension costs from retiring baby-boomers are likely to be driving up income and consumption tax rates for everyone. This is a debt that will be lumped on future generations to pay for the recladding and rebuilding of homes mostly lived in or owned by current generations. Secondly, there is a big risk here that many homeowners will be able to game the system to extract low interest government money to invest more in their houses. We have all seen the unintended consequences of interest free student loans. In the end, a lot more debt will be taken on than is necessary. Also, there are many who bought their leaky homes after 2002 when it was clear to anyone who could read a newspaper or could do a google search for "leaky homes" that many homes, particularly those built recently with monolithic cladding, were at risk. Some may have thought they were getting a bargain. Most will not have imagined that a government bailout was in the offing. But there will be some now who buy leaky homes in the full knowledge that a bailout seems likely. They could buy a house cheaply, get an interest free loan, do up the house and flick it on for a juicy capital gain. It's amazing what a no-interest loan will do for investment appetites. Perhaps that's what the government is trying to achieve. If it can spark a fresh round of credit-fueled buying in the market it can aim to keep prices elevated for all home owners (and National voters). Capital gains on land Also, what about those homeowners who are sitting on large capital gains on their land since 2002? For example, Real Estate Institute of New Zealand figures show Auckland median section prices rose around 150% to around NZ$250,000 between 2002 and early 2008, while dwelling medians rose around 75% to NZ$445,000. Do they not have any spare capital gains to help pay for their rebuilds? About NZ$300 billion of capital gains were made from 2002 to 2008. At least two thirds of that was gains on land. A good chunk of that was in Auckland and its surrounds where most of the leaky homes are located. Also, how many of these houses are actually owner-occupied? Should the government be compensating landlords for their decisions to buy townhouses or apartments that are now leaky? How much has already been claimed in tax losses on these properties? Is this fair on the tenants who have lived in these houses? They have endured the leaky buildings but the landlord gets the payout. There will, of course, be those who genuinely had no idea they were buying a sponge when they bought a leaky home to live in during the late 1990s. There are no doubt many trapped in unhealthy houses that do not have the cash available to repair or rebuild their houses. Many of the banks have simply stopped lending on townhouses and apartments. There seems a genuine case for someone to help them, given they received assurances by negligent council inspectors and now-liquidated builders. But how many are in this position? And should all 89,000 leaky home owners be lumped in with the most genuine cases? Remember, we are talking about a problem that is potentially worth NZ$23 billion. This could be like student loans on steroids and human growth hormones. There may be a case for the government to help those genuine owner-occupiers who bought before the scale of the problem emerged. But it seems less than fair that those buildings, architects and building materials manufacturers who were ultimately responsible for the mess should get away with the biggest act of professional negligence in the history of New Zealand. The irony is that the ultimate payee will be those graduating now with those student loans. They will end up having to service and eventually repay these loans for leaky buildings in 10-20 years in the form of higher taxes. The obvious question I get is: so what should be done about it? There is no doubt a problem with the legal process being swamped with cases and the Weathertight Homes Resolution Service seems to have failed. There is also a funding problem in that the banks have stopped lending, creating a logjam of houses that are unsold. But there is a market solution for this. As long as there is no prospect of a bailout, prices can be found. Those who need to move out of their own houses or apartment should sell and crystallise any capital gains they've made on the land. They can then move on with their lives, albeit in a suburb and a house that was less than they planned. Those who buy then take on the risk and cost of recladding and rebuild. Some may have loans that are worth more than their houses. This then becomes an issue for the banks. They are also no doubt hoping the government will use taxpayer money to fire up the housing market again with cheap money. They will then not be forced to take big losses on revalued loans. The counterfactual Would we be talking about a potential government bailout of a large group of unfortunate people if the people were not well-connected mostly National voters? What about all those people who bought dodgy cars in the last decade, particularly Japanese imports? Should the government compensate them for the big losses they incurred in depreciating values? Or what about those people who worked hard for their student qualifications and now can't get jobs? Should the government top their salaries up to compensate them for recession? The unemployment rate for 15-19 year olds is currently 26.5%. They have been very unlucky in graduating into a recession. At some point the culture of bailouts and state support has to stop. Otherwise the 10% of PAYE taxpayers (who aren't on Working for Families or receiving a benefit of some kind) who pay the net 76% of income tax will revolt? Whatever happened to Caveat Emptor? Your view? I welcome your thoughts below.