Why tiny homes won't solve NZ's property market problem

Tiny homes are often seen as the way forward. Photo: Getty Images

COMMENT: It’s clear that one of the key problems to the super-heated property market is supply; there just aren’t enough houses for sale to satiate the number of buyers in the market. Inevitably, when this is pointed out in conversation, the topic of Tiny Homes comes up as a potential way to mass-produce homes and calm the market.

Banks don’t make buying a tiny home easy, though, typically requiring 50% deposit for the home as well as 50%-80% for the section that they are on and frustration is mounting with the banks to fix this. I’m here to tell you today to forget this as an option.

Put aside for the moment that tiny homes are typically on wheels and therefore could easily be removed from the section (making them terrible security for the banks). Even if this could be solved —eg; the home secured to the site — banks are still unlikely to increase the amount they will lend on the properties. And the reason is most evident in how they lend on apartments.

You can generally borrow up to 90% on an owner-occupied home but only 80% (with a few small exceptions) on apartments. The main reason for this is that a smaller percentage of society has a lifestyle that can happily live in an apartment. That means less buyers if the mortgage isn’t paid and the apartment must be sold as a mortgagee sale.

Taking this further are the very small apartments — less than 40 square metre units — that you see. These, like Tiny Homes, usually require a 50% deposit and the reason is simple: if only a percentage of homeowners could happily live in an apartment, then an even smaller percentage of apartment owners would ever want to live in a unit that is less than 40sqm. The odds of a bank trying to recover an 80% mortgage under mortgagee sale are therefore small and not worth the risk.

Arguments could be made that at the moment the market is so hot that they would find buyers for any unit but remember that mortgages are for a long time, often over several cycles. The bank has to know that it can sell the property at any point in the future and recover the outstanding money so can’t rely on selling in this hot market.

Think of it this way, if a homeowner listed their 4 bedroom house today but instructed the agent to only accept offers from buyers who’s starsign was Pisces, you’d think they were nuts. They’re clearly not going to get the maximum number of buyers bouncing off each other and are reliant on a very small percentage of the market. That’s what tiny homes are. A very small section of society who can live in a 30 square metre house on wheels. And that’s why the banks are very unlikely to start offering mortgages of over 50% on them.