First Home Buyers – Banks open for business again
Banks open for business again
When the daily narrative in the media (all forms of social media) is that property prices are decreasing, the clouds of war are on the horizon and inflation and interest rates are on the rise, it may seem like it’s the riskiest time to buy or invest in property. However, anecdotally, this could be the exact time to get on the property ladder – particularly if it’s for the mid-long term (which is generally the intention of first home buyers).
Bank Lending policies coupled with tweaks to Government Policies are once again opening the door wider for Lending to First Home Buyers – with as little as 10% deposit.
The following are some of the key themes that are now allowing predominantly First Home Buyers but also investors (that were locked out) back into the market, which will, in my opinion, lead to more activity in the second half of 2022 (and in the coming months).
Most main banks now open for over 80% applications for existing customers (i.e. 10% deposit is now acceptable) for established properties, as well as new build properties. In some cases, this is limited to live deals (i.e. not preapprovals) but some banks have now opened to generic pre-approvals for their existing customers.
CCCFA policy/law changes will make it easier for borrowers (and significantly for first home buyers) to meet the CCCFA policies and in turn, allow banks more latitude to make sensible decisions based on their own risk and lending policies.
Debt to Income Ratios being relaxed in some cases by some lenders
Stabilising house prices and an increase of available stock – particularly in Auckland
Banks want and need to do business – expect some competition to return
Although interest rates have been, and still are, rising, lending affordability assessments have always, and continue to be, determined by factoring in a higher assumed increase to interest rates. For example, the test rate that has been used over the past 12-18 months or so has been in the range of approx 6-7 % and is only now starting to increase. Given interest rates are currently in the 4-5.5% range for fixed rates, there is still a healthy buffer included when lending affordability assessments are conducted – particularly now that test rates have been increased and are now closer to the 6.5-8% range.
Its easy to read the doomsayers and for people to go to a place where they might worry about paying too much for a house but there are some experiences I have had in the last 20 or so years of buying and selling property in different cycles that may help others with rationalising the current messaging (click-bait):
Paying too much is all relative. Trying to pick the bottom is a fools game – and anyone that does has just been lucky (although often they will tell you about how clever they are on the usual Social Media Groups…)
Buying in a less frenzied market is a golden opportunity – the power is for a short time, back with the buyer. Being able to make offers and negotiate is a luxury but this is the time that is upon us – however, the old saying about not looking a gift horse in the mouth might be relevant - because history tells us that this window in time won’t last.
For those that “need” to find/secure a home (be it rent or buy), if you can afford it and you have job security and a mid- long-term plan to stay there, it’s arguably better than paying rent – even in the mid-term. Use a Mortgage Calculator to do some calculations and budgeting - always ensure you build in a much higher interest rate when doing your figures though.
If we look back as far as the 90’s (we could go back further but that’s a reasonable data set in my view), there have only been a handful of actual declines - around 1992, 1998, 2001, 2008/09 and a tiny negative blip around 2011. Otherwise, it’s always been increasing at various rates (sometimes by not much if any). The largest decline was around 8-9% in 2008. Otherwise, declines have been less than 5% and recovered generally in the very next few months or year thereafter.
So, given the market has already arguably come off the boil and we have already got an easing of lending policy restrictions coupled with considerable inflation, it’s arguable that we are already well into any declines and the market will be flat at worst for a short period of time.
Building costs are at a point whereby, both first home buyers and investors will again potentially be pushed back to existing, established properties as preferred/more affordable options – if this is the case and new builds aren’t affordable, will this put renewed pressure on existing stock?
To the point above, given both National and ACT have stated they will remove Interest Deductibility tax deduction rules for investors – depending on whether you believe there will be a change of government or not – this may just bolster the confidence amongst investors with regards retaining and purchasing existing housing stock and hence, competition will likely increase. It’s worth noting that, recent polling strongly suggests that there is a strong turn to the right and hence a strong chance of a change of government is starting to look likely.
The current saying I hear broadly within the Investor Community is “the opportunity is to be positioned for the opportunities” – so, be ready for competition from investors again in the not to distant future.
Commercial Reality
One of the two banks offering special interest rate terms for new build construction loans has announced this is coming to an end in April – we can only expect the other one to follow soon after. This will drastically remove the incentive and cost benefit of building new and again put pressure on existing stock (or at least keep the values steady).
The reality is that lenders need to lend to make money – they don’t make money having money in the bank and this is already apparent from their release of restrictions to high LVR borrowers again – they deem the risk to be acceptable and they want to lend.
That said, they also don’t take unnecessary risks – they want people to be able to afford the mortgage they approve and in turn, they want the property they buy to retain it’s value (after all, the bank really owns the property until you have paid your mortgage off….)
There is a massive shortage of homes, and the government won’t want to have an ongoing accommodation crisis under their watch – they have around 12 months to ensure they aren’t deemed responsible for any ongoing crisis. If first home buyers can’t get in even as the market stabilises, then we will have an ongoing rental availability crisis (because rentals for sale haven’t sold or landlords won’t sell because the price has dropped) and this will not be what the government want….
People, particularly with families, need to get a house when and where they need one – if they can afford it, they will buy (generally). I have been here – I didn’t analyse the market too much because I needed to buy for family stability reasons - those that can afford it will continue to purchase if they have mid-long term plans/requirements.
Ex-pats are returning and will continue to do so. There are plenty of jobs for them and they all need to live somewhere.
Markets adjust on both the Wage inflation side (to adjust to cost of living) and house price side, a balance will be struck (always sooner than anyone who is a doomsayer thinks).
So, although it’s certainly a time of change in the market, if we refer to history it would suggest that this period won’t last long and that any reductions in values will be limited and will be short term – particularly now that the banks’ doors to low deposit lenders are open again and this government is back pedalling on the policies they have implemented so that they don’t make a bad housing situation worse….
But hey, that’s just an opinion and this time could be different….
