Housing swings and roundabouts
Ibought my first house in 2007. It cost $330,000 and the mortgage was about $2000 a month to service on a combined household income of about $90,000.
That same house sold last year for $595,000, according to Homes.co.nz. Someone buying it today with a 20 per cent deposit would have to pay $1271 a fortnight to service the debt.
According to Statistics NZ, Auckland’s average household income is now more than $120,000.
So has it really got that much harder to buy a first home?
‘‘The challenge for young buyers now will be not making the same mistake so many made between 2008–2012 of holding off buying, waiting for a crash in prices – which never came.’’
BNZ chief economist Tony Alexander
Prices
No one could argue that prices have not risen sharply over the past 10 years. In many places, you now pay basically double what you might have a decade ago.
BNZ chief economist Tony Alexander said that regardless of what it cost in repayments, that extra level of debt added risk for buyers, because they were taking on a lot more debt relative to their incomes. If the market changed, they ended up out of work, or interest rates rose, they were a lot more exposed.
Deposits
We had it easier in one obvious respect. Back in 2007, it was possible to get a mortgage for 105 per cent of the value of a house.
You did not even have to have saved enough to cover the legal costs of the sale.
We had a deposit provided by family and a bit of our own saving but no one ever questioned whether we met a loan-to-value restriction or had enough equity in the deal.
Now, buyers of that same house would probably have to have $120,000 deposit between them if they were to have the 20 per cent that the LVR rules mean banks generally require.
ASB chief economist Nick Tuffley said some things made that a little easier now, though. Buyers have access to KiwiSaver and there is the HomeStart subsidy, which provides up to $5000 per buyer for people using their KiwiSaver for a first home – or $10,000 per buyer for new builds.
If the buyers of my house were mid-range income earners and had been contributing to KiwiSaver for the past 10 years, they might have about $40,000 each in their accounts.
If they met the income cap for a HomeStart grant, they might qualify for $5000 each on top of that – this house is within the Auckland price cap. That would take them almost to the $110,000 required.
Interest rates
Interest rates have dramatically lowered the cost of borrowing money.
‘‘Every dollar you’re borrowing – it’s costing a lot less to service that debt than it used to. The purchase price is higher and you need to borrow more to buy but the debt servicing cost is less so there’s a netting off of those effects,’’ Tuffley said.
‘‘If you look back to the 1980s, house prices used to be three times or three-and-a-half times income. It appears more affordable but interest rates were incredibly high.’’
In September 2007, the Real Estate Institute’s median house price was $351,500 across the country. If someone borrowed 80 per cent of that, they would have been paying $1001 a fortnight based on the average two-year fixed rate at the time of 8 per cent.
Now, the median is $525,000, or $1131 a fortnight on an 80 per cent mortgage at 4.99 per cent. Although the median price has increased a lot, the cost of servicing the mortgage has not.
Over that time, average household income has risen 40 per cent.
But Infometrics chief forecaster Gareth Kiernan pointed out that higher interest rates also indicated higher inflation.
Now, buyers cannot count on inflation to erode the value of their debt. ‘‘If you have a $600,000 mortgage now and service that it’ll still be worth $600,000 in five years’ time.’’
Alexander said sentiment about the housing market could change now that some of the frenzy had died away.
‘‘Fear has been a big factor behind commentary these past few years – fear by young people that price rises will outpace their ability to build a deposit, fear that they will miss out on capital gain,’’ he said.
‘‘Fear of missing out has been a key driver of aggrieved sentiment and commentary. Now that prices are flattening some of that fear will dissipate.
‘‘But the challenge for young buyers now will be not making the same mistake so many made between 2008–2012 of holding off buying, waiting for a crash in prices – which never came. Some may now be thinking prices will decline firmly because of changing housing policies. They won’t.’’