First home buyers’ rollercoaster ride

First home buyers’ rollercoaster ride

In 2021 Bloomberg ranked the world’s frothiest housing markets based on indicators including price-to-rent ratio, price-to-income ratio, and price and credit growth. On these measures, New Zealand topped the “bubble ranking”.

Conditions pumping air into the country’s property bubble included record low interest rates, a fiscal stimulus, lockdown savings, limited housing stock, and expectations of a robust recovery in the global economy .

How times changed

At the start of the pandemic, central banks pulled out all the stops, cutting the official cash rate to a record low 0.25% in March 2020, printing money, and turning other knobs to stimulate demand. The historic low interest rate remained unchanged for 18 months until October 2021 when the central bank began to raise borrowing costs to take heat out of the market.

Suddenly interest rates rose, lending rules tightened, and buyers stepped back, ultimately driving the biggest first quarter house price fall in over 15 years, when prices nationwide fell by 3.9% in the three months to March 2023.

Back in August 2021, the median national house price was $850,000. In August this year, it was $767,000.

Prices paid by first-home buyers

First-home buyer prices are perhaps uniquely affected by factors such as KiwiSaver, First Home Grants and Loans, and loan-to-value restrictions.

CoreLogic data shows that in August 2021, the median price paid by first-time buyers was $645,888. In August this year, it was $688,000 – though down 9.5% from an early 2022 peak.

Home loan rate rises

Over roughly the same period, the home loan rate pretty much doubled. A special two-year home loan rate in October 2021 was 3.66%. Borrowers who chose to fix for a year locked in 3.16% and at five years, 4.4%.

Earlier this month the main banks were offering between 7.15% and 7.45% for a one-year term, 6.99% to 7.05% for two years, and between 6.5% and 7.09% for five years.

Throw in the cost-of-living crisis and mortgage repayments suddenly looked spooky. For example, a $500,000 loan over 30 years based on a 3.66% interest rate equates to a $2,291 monthly repayment. Based on today’s rate of 7.15% the monthly repayment is $3,378 – a jump of 32%.

Banks get nervous

Banks naturally are wary of lending money to borrowers who may struggle to repay their loans, particularly in a flat or declining market and when the global outlook is uncertain.

When interest rates were at their lowest, some banks dropped their test rates to the mid-5% range. This time two years ago, most applied a 7% rate to test affordability. Today, most banks are checking affordability at 8.75%.

The upshot is that borrowers must either demonstrate a bigger income or front up with a heftier deposit to satisfy lending conditions at the higher interest rate.

Loan restrictions

The Reserve Bank first introduced loan-to-value restrictions (LVR) in 2013, due to concerns about rapidly rising house prices, coupled with an increasing use of low-deposit loans.

In 2020 the bank removed LVR restrictions for 12 months to ensure they did not have an undue impact on borrowers or lenders as part of the mortgage deferral scheme implemented in response to the COVID-19 pandemic.

In 2021 LVR restrictions were reinstated at the same level as before the onset of COVID-19. Banks could lend a maximum of 20% of new lending to owner-occupiers with a deposit of less than 20%. That later dropped to 10% of new lending. Now banks can lend 15% of new lending to owner-occupiers with a deposit of less than 20%. A 20% deposit on $688,000 is $137,600.

In the meantime, the amount of housing stock rocketed. In September 2021, there were 13,407 houses on the market. Currently there are 23,564 properties for sale across New Zealand – down 9.0% over the year, but still almost double the number available in 2021.

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