Why new builds dropped off radar for first homes
No matter how many houses we build, the housing crisis won’t ease if first home buyers can’t afford to buy them, writes Colleen Hawkes.
Just a few months ago, the bigger Auckland developers were selling dozens of less-expensive new homes off the plans each week – a majority to first home buyers. Many of the vendors didn’t need to advertise; the units were signed up as soon as they were available.
Today, due to hesitancy and funding issues for first home buyers, that situation has turned on its ear. Just last month CoreLogic noted first home buyers’ market share continued to decline, and is now at 21%.
Excluding the lockdownaffected April 2020, this is the lowest monthly share since the second half of 2017. In contrast, in the third quarter of 2021, the group hit a record market share of 26.4%. Meanwhile, prices for new builds are not going down.
Andrew Crosby of Universal Homes is blunt: ‘‘We are busy with multiple KiwiBuild projects, that, given the recent cost increases and price increases, will provide instant and substantial equity to all those buyers.
‘‘For everyone else, unfortunately, costs to build new are a one-way rocket ship to the moon. Lockdown-induced inflation, lack of skilled resource due to no immigration, rules around lending, foreverincreasing red tape (like insulation standards, development contribution and Vector rises) mean the cost of building is never going to be cheaper than today.’’
But the reality is this: No matter how many houses we build, and that includes KiwiBuild projects, we cannot solve the housing crisis if first home buyers cannot afford to buy them.
Without a watertight fixedprice agreement (rare), many first home buyers don’t want to take the risk that prices will escalate over the period of a build. Even a few thousand dollars extra could mean they won’t be able to fund the difference, and could lose their deposit.
And with inflation on the rise, those same buyers are wondering what will happen if their mortgage rate increases to the point where it is unaffordable.
Lesley Harris, a director of the
First Home Buyers’ Club, who worked in the banking sector for 20 years and now works with those at the ‘‘grassroots’’, is frustrated no-one in government appears to be listening. ‘‘Theoretically, new builds have the advantage of not needing a 20% deposit. You can get one with 10%, but the problem, is, since Covid arrived (with supply problems), contracts have changed. What was once a turnkey contract with a fixed price is now looking quite different. There are no cost guarantees.
‘‘And what was once a very attractive option is now looking risky. If costs blow out, the build could go over the price cap (for a KiwiSaver HomeStart grant). And if prices go up, even just by $25,000, you may not be able to get the lending from the bank. If the timeframe expires and the build takes longer, which is very common, there is no guarantee you will get the finance promised earlier.
‘‘I don’t want to annihilate first home buyers’ confidence. It can be done, but it is terrifically hard.’’
Harris says the flow-on effect is developers not getting the presales numbers their banks require, so the developer’s funding can be withdrawn. We are already seeing developers in trouble.
‘‘The whole thing needs to be looked at – we need to address the policies and remove the barriers that are in place. Why is the KiwiSaver HomeStart cap in Auckland only $700,000? What can
‘‘What was once a very attractive option is now looking risky... I don’t want to annihilate first home buyers’ confidence. It can be done, but it is terrifically hard.’’ Lesley Harris Co-director of First Home Buyers Club
you buy for under $700,000? And the income gap ($150,000) is far too low. It is not possible for first home buyers to save the required deposit on that income. The deposit required for a home today is around four times greater than what would have been needed to buy the same house even just six years ago.’’
Harris says first home buyers are treated no differently from anyone else looking for a mortgage. ‘‘There needs to be a little more ‘wrestle room’ for them. The government needs to work with lenders to negotiate some carve-outs for first home buyers.
‘‘Nobody wants to see a first home buyer put at risk, or put themselves under too much pressure, but there are blanket barriers to lending that simply don’t make sense.
‘‘Lending should be on a caseby-case basis.
‘‘We haven’t seen a spike in defaults, and we are not seeing negative equity. And we know that once buyers get that mortgage, they are fully committed to meeting payments.
‘‘The situation has become worse since the Reserve Bank dropped the percentage of low-deposit lending by banks from 20% to 10%. It would make more sense to reassess that on a regular basis, in line with the OCR.’’
Harris believes the $10,000 HomeStart grant is too restrictive, and a grant should be available to all first home buyers, with no earning cap, and without the need to have spent three years in KiwiSaver.
‘‘We are not seeing a serious attempt to address the stumbling blocks. We might see new KiwiBuild houses for first home buyers, but who is actually going to lend to these people?’’
The group would like to see the government engage a task force of experts, who fully understand the challenges and who can come up with a strategy that addresses deposits, finance and home availability.
Harris says the most common way people get into a first home today is either with an extremely high income, or they acquire a house through ‘‘the bank of mum and dad’’. Parents now loan more to first home buyers than Kiwibank, and are the fifth largest loan provider.
‘‘Parents loan, on average, $108,000,’’ Harris says.
‘‘That’s going to impact on their retirement, and that’s another problem looming.’’
She also says the removal of tax deductibility for an investment property does not appear to have had any positive benefit for first home buyers. ‘‘It is early days yet, but we are seeing a jump in rental prices.’’
Harris says most banks require a savings history from first home buyers, even when the bank of mum and dad helps out.
‘‘If your parents give you the deposit, but you can’t demonstrate you have saved yourself, you probably won’t get the lending. Yet the bank has security, and there is invariably a record that you have paid rent regularly.
‘‘We need banks to consider this differently.’’
The CCCFA (Credit Contracts and Consumer Finance Act 2003 reform), which came into effect on December 1, 2021, has contributed to the credit crunch. Amendments are expected shortly. These will remove some demands, including the need to provide evidence of current spending via bank statements.
Harris says this will make the loan application process more like the way it was before the reform. ‘‘It won’t fix the problem, but it will make things feel a little more pleasant – the application process will be less painful and invasive. And, hopefully, first home buyers won’t have to reapply three months down the track with a new spending history.’’
Harris says the First Home Buyers’ Club has found many young people don’t realise that a credit card limit is treated as a debt. ‘‘If you have a limit of $10,000 on your card, it will be assumed you owe that much, even if you haven’t actually used the card.
‘‘The average debt we find with first home buyers is $9000. Even if you have savings elsewhere, that $9000 on a credit card could potentially translate to $75,000 less in lending the bank will give you.’’
Group co-director Dustin Lindale of The Mortgage Lab says the slump in sales of new builds off the plans does give buyers time to do their due diligence on a contractor or developer. Questions to ask include: ‘‘What’s their resource consent status; what do their sales targets look like?
‘‘Some building companies have grown quickly and have not necessarily had experience to manage their risk, and are getting burnt by price escalation.’’
Buyers, now, should be able to buy through negotiation, rather than auction, which is a bonus. The auction process has many drawbacks for first home buyers with limited resources.
‘‘You want to make that contract as bulletproof as you can,’’ Lindale says. ‘‘It is true that building costs are not going down, and we don’t think land costs are falling that much. But you want to get some kind of confirmation re potential cost escalation. And be sure to get good input from a lawyer.’’
Lindale also says it may be better for some first home buyers to not factor in a HomeStart grant, because the current rules around the grants are too limiting.