Should NZ first-home buyers purchase now or wait?

There might be merit in first home buyers waiting a little longer before trying to get into the New Zealand property market, according to a leading expert.

Chief Property Economist, CoreLogic NZ, Kelvin Davidson said first home buyers face a tricky situation when weighing up whether to buy now or wait for further price declines.

According to Mr Davidson, rising mortgage rates offset some of the benefits of cheaper home prices.

Currently, the average home price in New Zealand is $1.01 million, Mr Davidson noted, and with a 5.1 per cent interest rate, a home buyer would be required to pay $58,000 per year or 49 per cent of their income.

“In a simple scenario where incomes rise by 5 per cent, property values drop by a further 10 per cent, and mortgage rates increase by 0.5 per cent (to around 5.6 per cent), payments reduce to less than $55,000, or 43 per cent of income,” Mr Davidson said.

“In other words, there might be merit here for a would-be FHB to wait.

“In the event of house prices dropping by 15 per cent (all else being equal), the saving on mortgage payments grows – they go from around $58,000 to less than $52,000. 

“However, in a scenario where prices fall by 10 per cent but mortgage rates rise by another 1 per cent, the annual debt servicing cost barely changes – holding above $57,000.”

A hawkish Reserve Bank of New Zealand has hiked the official cash rate to 2.5 per cent which has contributed to values falling 2.3 per cent from their peak according to CoreLogic.

Mr Davidson said the ultimate scale of house price falls or mortgage rate increases remained uncertain.

“Mortgage rates for some terms have actually been cut recently on the back of strong banking sector competition and lower offshore financing costs,” he said.

“But with inflation not yet under control (here or overseas) and most central banks, including New Zealand’s, clearly intent on further official cash rate increases, it’s probably still too early to conclude emphatically that mortgage rates have peaked.”

According to Mr Davidson, the reversal of the Large Scale Asset Purchase Programme is another potential uncertainty for first home buyers.

“It’s never been done before, and given that it added to downwards pressure on mortgage rates when it was operating, the scaling back could now add to the upwards pressure on rates,” he said.

“In addition, there’s also a large caveat that finances probably shouldn’t be the only determinant of the decision to buy.”

Mr Davidson said at this stage, large price falls would likely help buyers.

“Overall, though, these simple numbers do indicate a tendency for house price falls to outweigh any further mortgage rate increases (if they occur) in terms of the costs faced by would-be FHBs,” he said.

“Ultimately, however, the decision is subjective and up to the individual. 

“It’s also important to recognise that in each of these scenarios the sums involved to service a new mortgage could still be a stretch for many would-be buyers.”

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.