Comeback Begins for Entry Level Buyers

Comeback Begins for Entry Level Buyers

Joseph Darby

5 reasons why affordability has improved for first home buyers

Everyone loves a comeback story. It doesn’t matter whether it’s in a sporting arena, on the big screen, in a book, in our own or our friend’s or family’s personal lives, or something else – witnessing or experiencing a comeback somehow always makes us feel good inside.

So, most of us will probably be happy that the first positive signs are there for entry level home buyers.

They are returning to the property market, shown by an increasing number of real estate agents reporting more activity from entry level buyers. In a March real estate survey carried out by the Real Estate Institute of New Zealand, the highest number of respondents since September last year reported seeing more first-home buyers.

The increase in first-home buyer activity was likely due to a combination of:

  1. Strong employment
  2. Wages growth
  3. Rising rental prices
  4. Increasing inventory
  5. Reduced house prices

Let’s take a closer look at each of these areas.

1. Employment Levels

Unemployment is still near record lows of 3.4%. It’s been around this historically low level for a year or more, and more Kiwis also report feeling safe in their job.

Low unemployment means that there are more job opportunities available, which can increase job security. When there are more jobs available, it is less likely that a person will lose their job, which can give first home buyers more confidence to take on a mortgage.

2. Wages

Low unemployment also leads to wage growth. Current StatsNZ figures show total salary and wage rates grew by 4.1% in the year to end of December 2022.

More regular cash - in the form of wages, salaries, commissions, bonuses, or something else - is a double-win for those striving to get on the property ladder:

  • It means more income to repay a mortgage. Banks love to see this when they’re assessing a mortgage application
  • Greater savings to contribute toward a deposit

3. Rising Rents

Over recent months, assorted sources have suggested New Zealand rental prices have returned to record highs.

Trade Me property sales director Gavin Lloyd recently said the rental price increases were partly caused by increasing costs faced by landlords. Costs facing landlords, including higher interest rates, were being passed on to tenants. Trade Me's data showed every region had rent increases, except for Wellington.

Rising rents may motivate first home buyers to purchase a home of their own because they feel they are spending money on rent without building any equity (i.e., repaying the principle portion of a mortgage). This can push them to start considering purchasing their own property to build equity and stop "wasting" money on rent. On the flipside, rising rents can also make it more difficult for first home buyers to save for a down payment and afford a mortgage payment.

4. Increasing Inventory

Add to that, there is now more choice for buyers, with around 28,000 properties listed for sale (compared to fewer than 14,000 in mid-2021), independent economist Tony Alexander said.

One source suggested there are now more homes for sale than at any point in the last 15 years. That’s the highest level since the Global Financial Crisis.

More properties means more choice, and the laws of “supply and demand” also means that more inventory of housing stock will of course lead to…

5. Reduced House Prices

According to the latest CoreLogic House Price Index, property values fell 1% in February, and were 8.9% below the same time last year.

If you’re a first home buyer this is great news: you can get more house for your buck!

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Lending Conditions

The most appealing features of 2022's housing market for buyers - lower prices and increased inventory - were largely caused by a new obstacle: higher mortgage rates. That is to say, up until recently most of the savings in mortgage payments that would have been derived from a smaller mortgage were eaten up by higher interest rates.

But now, after 4.5% worth of increases to interest rates over the last 16 months, borrowers are becoming less concerned that interest rates will go through the roof. There seems to be a growing sense that we’re “nearly there” with interest rates, which most commentators expect to start tracking down by the end of 2023.

Better yet, banks are showing increased willingness to advance credit, some special deals have started to flow through the banking system to mortgage brokers (including here at Become Wealth) as banks compete for a smaller share of buyers.

According to Tony Alexander:

“It comes down to the fact that house prices have come down, incomes have gone up and [first-home buyers] are deciding ‘the numbers are starting to stack up, I’m not going to wait for the bottom of the market'.”

When Should a First-Timer Buy?

If you are buying because you want a place to settle, and plan to stay at least a few years, it’s nearly always a good time to buy.

Even if a buyer were to purchase today and housing prices slipped a little, that has no impact on the buyer – unless they were to sell immediately. Buying a first house is usually as much a lifestyle decision as a true investment. Even then, whatever the next few years deliver, over the long run houses tend to increase in value faster than the rate of inflation.

The Bottom Line: Comeback for Entry Level Buyers

To recap, the scales might now be tilted in favour of first home buyers, and there are signs they’re taking notice and returning to the marketplace. Whatever the case, if you can afford to do so, there’s probably never a bad time for a first home buyer to get on the property ladder, and for most people it’s a smart move to do it sooner-rather-than later.

If you’d like to arrange a discussion with one of our lending team to discuss anything above, or to start the process of buying your first home, it’d be our pleasure to assist, so get in touch.

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