If you have been putting off buying a house for a little while now – you may want to reconsider. Within this article we highlight why, including how getting a mortgage keeps getting easier as well as touching on interest rates and where prices are in the property cycle and noting that New Zealand is experiencing a post-Covid migration boom.

1. Ease of getting a mortgage has improved and keeps getting simpler.

Due to softening demand for credit, on the 1^st June 2023, the Reserve Bank (RBNZ) reduced the loan-to-value ratio (LVR) limits on lending to owner-occupier borrowers with less than a 20 percent deposit, as well as allowing property investors to purchase with a lower deposit. The maximum capacity of new mortgage lending for the main trading banks for borrowers with less than 20% deposit has increased from 10 per cent to 15 per cent. Investors now require a 35% deposit – down from 40% – of the value of an investment property. Economic and real estate commentators have mentioned that this will increase home buying activity throughout New Zealand.

The First Home Loan program offered by Kāinga Ora, is a home loan initiative requiring a minimum 5% deposit rather than the standard 10 to 20 per cent of the home’s value. From June 1 2023 changes were made to the program to reduce the cost for eligible borrowers. We cover this in depth within this article “How to Buy a House with a 5% Deposit – First Home Loan”.

From May 2023, The Government finalised changes to the Credit Contracts and Consumer Finance Act (CCCFA) and the Responsible Lending Code to improve access to credit. This is the prohibitive legislation that came in force late 2021 which largely halted mortgage lending at the time due to the banks interpretation of the rules and their requirement to scrutinise borrowers’ expenses – even though the legislation was aimed more towards loan sharks and pay-day lenders. “The changes aim to increase ease of access to credit while maintaining a strong level of consumer protection.” MBIE released the final changes below:

• narrowing the expenses considered by lenders to exclude discretionary expenses more explicitly.
• providing more flexibility for lenders about how certain repayments may be calculated.
• extending exceptions from full income and expense assessments for refinancing of existing credit contracts.
• It is now easier and less expensive to buy a home with a deposit of only 5%.

The main banks and lenders swiftly updated their product guidelines distributed to Advisers in keeping with the amended legislation. It is pleasing to note that more loans are being passed through Adviser expertise outlining suitable mitigants and explanation of extenuating circumstances which may have resulted in a customer’s ‘one-off’ expenditure or regular expenses being higher than normal. No more explaining that a $450 BBQ from Mitre 10 will be an ‘ongoing expense’.

Bank competition is intense at the moment. Incentives on offer come and go very quickly. Often these are only communicated to Adviser’s though the Broker channel*. Interest rates of 4.99% fixed for 12 months were offered. Other deals were cashbacks offered to customers at 1% of the loan value. All this is because the banks need to lend money to make money – the same as a dairy farmer needs to sell milk, or a supermarket needs to sell groceries. As less people are buying houses (borrowing money) banks are noticing their loan volumes (sales) drop and are competing strongly for business to keep their doors open. If you go through a Broker, then you’ll be able to access these deals. We are told what is currently on offer, often at short notice – and only valid for a week or two. The best advice here is to note that whatever “best deal” is available at the time, we can all but guarantee access to it when you have found a home. With any of the banks.

*Only accessible if you apply for a home loan through a Mortgage Broker / Adviser.

2. New Zealand is in a Post-COVID Migration Boom.

As a small island nation – bordered by oceans on all sides, we rely on migration and immigrant workers, long-term visitors, and international students to fill the gaps in our labour supply. New Zealand re-opened its borders in 2022 after abruptly closing them to new arrivals in 2020 due to the covid pandemic. Additionally, Immigration NZ has made several changes to eligibility rules for people seeking to relocate to New Zealand. These have contributed to the post-Covid migration boom. Net migration (total people arriving minus total people leaving) was 65,400 during the year to March 31^st 2023 as reported by Stats NZ. This is above the pre-Covid long-term averages from 2002-2019. It is reasonable to assume that more people are deciding to come to New Zealand to live than ever before – and they all need somewhere to live. Most immigrants go to Auckland because this is our biggest city, therefore the biggest impact on the housing market will be seen here. what will the impact be? More new-New Zealander’s looking for housing, including to rent, which will lead to less demand and upward pressure on prices.

In our experience, the majority of families that we have helped into a home in New Zealand do not buy immediately. Generally, they will establish themselves in an area through renting a home, secure employment for the partner of the main visa holder and settle their children into schooling and extra-curricular activities to build a support network. Very often we are discussing buying a home in a nearby suburb, once they have secured visa eligibility and they have sold property/s, transferred superannuation or savings from their country of origin. We find that when they are ready to buy, they move quickly. New immigrants will be less concerned about the current interest rates or house prices, and more focused on securing a home for the long-term benefits of ownership and the stability this provides.

3. Interest Rates Appear to Have Peaked.

The 12^th consecutive hike to OCR on 24 May (2023) resulted in the 12-month mortgage interest rate increasing from an average of 2.1% in July 2021 to 6.75% in June 2023. The RBNZ and Economic commentators are saying that we appear to have reached the peak of this ‘tightening cycle’. Paul Conway, chief Economist at the Reserve Bank announced in his video update that they expect the OCR remain at 5.5% “well into next year (2024)”. It was announced that the OCR is on hold, and they expect this current “restrictive level” will bring inflation down. This will flow through to increased confidence for homebuyers, as they can now budget for their next property purchase with more certainty on what their repayments will be.

Everyone with a mortgage, or looking to buy, can breathe a sigh of relief after reading this headline. Just not too soon, as we did state “appear to have peaked”, and interest rates will likely not start falling for a little while yet. The RBNZ does not want mortgage interest rate decreases to occur until “inflationary pressure” drops further. This is so we don’t see a rapid increase in house prices. Why is now a good time to buy if inflation is not yet under control and the OCR and mortgage rates have not yet started to decrease? We say this comes down to one word. Certainty. With the confidence around an increase to your repayments being less probable, you have more facts and evidence to decide to buy – the outcome is known. You have more certainty around making an offer. The risk of signing a contract to purchase a home, then having bank affordability criteria or your repayments dramatically increase, meant previously a lot of buyers were sitting on the side-lines. This will decrease. Buyers will return and prices will increase (see next section).

What will happen to residential mortgage interest rates as a result? As the below chart show us, longer-term rates; those on a 3, 4 or 5 year term have already started to decrease – it is likely that the shorter term rates (6-month, 12-month & 24-month) will follow.

4. House Prices May be attheir Lowest in the Property Cycle.

The New Zealand housing market is cyclical, and like most markets, there are often four distinct phases. These periods between high and low prices against long-term averages, are influenced by a number of factors, including interest rates, economic conditions, and consumer confidence, which can create a shortage or surplus in housing. If you are buying a property as a home for more than a few years, then you shouldn’t be as concerned about buying at (whatever) phase of the market cycle we are in; here’s why:

• You only lose money on property if you have to sell. If you are buying a property as a home to live in, then it doesn’t matter if the price “on paper” drop. As the average length of time we remain in a house is about 7.4 years, most New Zealander’s are generally going to sell for more than they purchase for.
• We ‘test’ your affordability 2-3% above the (generally the 12-month rate) interest rate you will actually pay when the mortgage is drawn down. This means it is unlikely you will be approved for a mortgage at current interest rates and not be able to afford the repayments – even if interest rates went up by 2-3%.
• If you did buy at the market peak – then 7 years later prices will have likely recovered and in fact increased past what you purchased originally for.
• It can be almost impossible to identify what phase of the cycle we are currently in, or when we will move from the ‘bottom’ of the market cycle to the ‘recovery’ phase. If you have found a home you love, then perhaps now is a great time to make an offer with prices discounted by around 20% nationwide.
• It is possible that if you buy now, you might miss out on a better deal if prices fell another 5 or 10%. But there is little evidence for prices to decline any further.
  • The only concern about a drop in the home’s value would be if you relied on the home’s value for business lending secured against your home for example. Should the bank check via Valocity or Core-Logic, and note your total lending is above their maximum limit due to a decrease in your home’s value – they will likely not extend you anymore credit until you pay down debt or values recover.

Tony Alexander, independent economics speaker and writer, notes that “many tens of thousands of people have been holding off making a (property) purchase since early-2021” and how quickly they re-enter the market will determine the speed of the house price recovery in New Zealand. We will enter the recovery phase of the property cycle. And prices will increase. We don’t exactly know when though. It is hard (impossible) to pick the bottom of any market, so you could end up missing out if you are waiting for a bargain. The Reserve Bank states that house price declines to date have done what was needed to get prices into a more sustainable space.

5. Lower House Prices & Increased Supply Mean we are in a ‘Buyer’s Market’.

New Zealand is currently in a buyer’s market. Seller’s market? Buyer’s market? What does this all mean? A seller’s market occurs when there’s more people looking to buy a home except there is not enough available for sale or being built to meet demand. There is a shortage of housing supply. A buyer’s market occurs when there are plenty of homes available to purchase, but not many buyers. There is a surplus in housing. This also could occur if construction companies overestimate the number of buyers looking for a new home and increase construction accordingly. Once these new homes are complete and ready to move in to, buyer numbers are not as high as forecasted and they remain empty for a period of time.

Why is it a good time to buy in a buyer’s market? Here’s the main couple of points at a glance:

• Homes are taking much longer to sell, meaning a Vendor (seller) who needs to move into their next home has to take a lower offer to move forward than what they might have had there been multiple buyers interested. The REINZ Monthly Property Report for April 2023 notes the current days to sell is 73 days – well above the 10-year average of 52 days.

• • How does this affect you? You can ask the listing agent how long the property has been on the market and whether they (the Vendor) have committed to their next purchase or not. You may find your offer below the property’s value is more readily accepted in a buyer’s market.
• Because of the increased supply of homes for sale, prices tend to be lower in a buyer’s market. This is particularly true in Auckland at present with many newly completed new build homes available for buyers to choose from. It only takes a quick drive through most suburbs to see multiple terrace housing developments with dozens of ‘For Sale’ signs out the front. Supply of existing homes for sale is at record lows; with the REINZ noting a decrease of 18.9% from April 2022. Even less homes for sale should increase demand, right? In this case less listings, means less people who think about buying because they cannot find a property they would like to move to once theirs is sold.
  • • • How does this affect you? With plenty of new builds to choose from, and less competition from other buyers, we first advise to get your finance arranged. You will then have more time to decide whether the house you are interested in ticks all the boxes, or not – without the fear of another buyer swooping in and taking it off the market.

Buying your home in the current market, if you can afford the repayments, is not a bad decision. Using our Financial Modelling software and the mortgage repayment calculator on our website, we show you how this is achievable. Lending and LVR rules have been eased by the Reserve Bank. Prices probably won’t decrease anymore, and interest rates probably won’t increase any more. In fact, short-term interest rates are forecast to start falling in late 2023 or early 2024. The Government has turned the immigration tap on again, and there are less new homes being built due to the difficulty for Developer’s securing finance and pre-sales. It won’t be a buyer’s market for too much longer. Demand will start to come back. People will be back on the hunt to buy. I think we’re going to see the housing market gradually pick up more and more from the second half of 2023 in line with New Zealand coming out of the winter months.