New builds gain traction

New housing policies mean that buying a new build home has never before been so attractive, but are new builds really a better prospect than existing dwellings? Miriam Bell reports.

Many people love the idea of building their own house so they can craft a unique home that meets their specifications and requirements.

Yet since the country’s last building boom in the 1960s and 1970s, Kiwi property buyers have displayed a clear preference for existing dwellings over new builds.

Wariness stemming from the leaky homes crisis, along with reluctance to commit to a lengthy build process which could feature delays and extra costs, are some of the reasons.

That has started to change in recent years, largely thanks to loan to value ratios (LVRs) which allow for much smaller deposits on new builds than on existing homes.

For a new build, first-home buyers can have a deposit of 10 per cent and property investors must have a deposit of 20 per cent.

To buy an existing house, first-home buyers need a deposit of 20 per cent and, from next month, investors need a 40 per cent deposit.

But after the Government’s March 23 announcement of a package of new housing policies, which are intended to increase housing supply and relieve pressure on the market, the lure of new builds is even brighter.

That’s because the investortargeted tax changes in the package, which are the removal of interest deductibility and the extension of the bright line test to 10 years, have exemptions for new builds.

CoreLogic senior property economist Kelvin Davidson says this incentivises investors to buy new properties, and will open up the new build market further.

Assuming new builds are exempt from the tax changes, they will clearly be a better option for investors, property investment coach Andrew Nicol, from Opes Partners, says.

‘‘We’ve modelled the impact of the changes and a $600,000 new build property bought with 100 per cent lending will be $75,000 better off than a comparable existing property over 15 years,’’ Nicol says.

‘‘The new build is expected to make just over $45,000 over this timeframe. Whereas, an existing property would lose $30,000 during the same period.’’

This means that new builds will be higher-yielding than existing properties, which is attractive for investors looking for returns, he says.

‘‘New builds are now less risky in terms of returns, they require lower deposits and they are better protected from interest rate rises,’’ Nicol says.

‘‘So I’d advise investors to go for a new build – unless they could seriously improve an existing house by doing a major, value-adding renovation.’’

However, new builds won’t be a good option for property flippers, investors who focus on significant renovations as a strategy, or anyone expecting a decrease in income over the next 12-18 months or trying to buy at the lowest end of the market, Nicol says.

This increased desirability of new builds for investors could have an unintended negative impact on first-home buyers, who are particularly strong players in the new build market.

First-home buyers are attracted by the combination of the lower deposits required and the Kiwisaver incentives for new builds, which include higher grants (up to $10,000 versus up to $5000 for an existing home) and higher price caps (between $500,000 to $700,000 for a new build, depending on location).

Property accountant Anthony Appleton-Tattersall believes investors don’t buy too much new build stock.

‘‘Now, lots of investors will pile into new builds, and shun existing property,’’ he says.

‘‘It is the logical thing to do when you have two similar investments but one is so drastically tax-disadvantaged. But it will make new-build property harder to buy for home buyers, whether first time or movers.’’

One factor that could temper that will be the Government’s definition of a new build when it legislates the tax changes. Appleton-Tattersall believes the most likely definition scenario for ‘‘new build’’ is being the first owner of a property.

That means when an investor does eventually sell their ‘‘new build’’ property, it will no longer be a new build, and few if any investors will want it, he says.

‘‘Capital gain on these properties will be inherently limited by demand, as most investors would rather buy a brand new property that they can still claim interest on. So a new build property would logically have a lower annualised capital growth than an existing property, all other things equal.’’

Differences in value growth are already a factor which can make existing properties more attractive than new builds.

Mortgage adviser Hamish Patel, from Mortgages Online, says the land component of a property plays a big part in value growth and existing houses often sit on bigger sections of land than new builds.

‘‘If you compare the value growth over 10 years in existing areas like Otara to new build areas like Flatbush, the reality is that those areas with existing houses have seen more.’’

For that reason, along with their potential for improvement and value-adding, he says existing houses are a better option than new builds for many buyers.

‘‘However, in places like Auckland, buyers are running out of options on existing properties but there’s growth in the new build townhouse and apartment market.

‘‘It’s easier to get a loan approved with a lower deposit for a new build, so to get on the property ladder they are the way to go.’’

New builds will inevitably see value increases over the years and, additionally, if a buyer purchases off-the-plan when the market is going up they are likely to see gains on their property by the time they settle, Patel adds.

Now, lots of investors will pile into new builds, and shun existing property. Anthony AppletonTattersall Property accountant