OPINION: Over the past twenty years it’s been my great privilege to talk to many young people about buying their first home. Sometimes that advice is proffered in person, sometimes by email, sometimes as a speaker at an event, and sometimes through published articles. Of course, in most of these cases, I don’t get to hear how that advice was used, but every so often I’ll meet somebody who is anxious to tell me how I’ve impacted on them. In a few cases, I’ve remained friends with people who have had their lives positively changed by taking my advice many years ago.
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Sadly, however, for every success story there are many stories of young people who chose not to act. Sometimes this is for legitimate reasons or circumstances, but more often than not it’s because these people have allowed themselves to be influenced by negative headlines, the opinion of a friend or neighbour, or a comment they saw on social media about how some impending Government initiative was going to bring house prices down, or how the market was about to crash.
This last view has been particularly widespread in the wake of Covid 19. Three months ago people were telling me that they were waiting for prices to drop before they bought a home. And who could blame them?
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Despite the more considered approach taken by people like Tony Alexander and I, who were suggesting, based on the evidence, that house prices would be largely unaffected by Covid, most bank economists were telling us that house prices would drop by as much as 15 per cent. Instead, house prices have taken off in virtually all parts of the country and anyone who was in a position to buy three months ago is now almost certainly worse off as a result of the delay.
So it’s against that background that I’m now suggesting that anyone thinking about buying their first home should do so as soon as possible. There’s an old real estate maxim that ‘it’s always a good time to buy’ and that’s largely true, but there are some particular factors at play, right now, that make the need to get into the market even more pressing than usual for first home buyers:
1. House prices are rising
No matter where you are in New Zealand, house prices in your area are probably going up, and quickly. Against most predictions, house prices are actually rising due to an unusual mix of factors which are partly related to Covid 19. In my view these increases mark the early start of the next property boom, in Auckland, which means that prices will continue to increase, in that city, for the next five to six years.
I’m less confident that that price growth is sustainable in other parts of the country, but it could be with us for at least a year, by which time house prices in those areas could have increased by 10 per cent or more. If you wait, houses are going to cost more.
2. A whole lot more money is about to hit the market
Interest rates have never been cheaper and are likely to go even lower and stay there for a long time. That’s great news for first home buyers – but don’t fall into the trap of waiting for rates to drop further before buying a home. Here’s why: Over the coming year $203 billion of existing mortgage lending will be up for review and repricing. $41 billion of that is on floating rates and the rest - $162 billion - is fixed. If we conservatively assume that most of that is refixed at an interest rate which is just half a percent lower, we’ll see almost $1 billion in extra cash being retained by Kiwi households. Of course, not all of that will go back into housing, but some will, which means more competition for first home buyers.
3. The LVRs might soon be back
Right now, the Loan to Value Ratio restrictions, which created an obstacle for first home buyers by requiring a mandatory deposit of up to 20 percent for those wanting a mortgage, have been dropped by the Reserve Bank. However, over the past couple of weeks Reserve Bank Governor Adrian Orr has started to make noises about reimposing them in the wake of investor activity and the sharp increases in house prices. Currently, the Banks have discretion over the deposit, but if the LVRs come back that discretion will almost certainly be gone.
For all of these reasons, waiting to buy your first home probably isn’t the smartest move you could make. Don’t wait. Act now.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
