Buying a house in a downturn housing market has its advantages. Falling prices means not only are houses less expensive, the barrier to entry is lower, with the amount buyers need for a deposit also lower.
But the recent surge in interest rates has pushed up the cost of borrowing, in turn putting limits on what buyers can afford to pay.
And while mortgage repayments and saving for a deposit are often the biggest financial challenges buyers will face, there are other post-transaction costs they need to think about in their first year of home ownership.
According to the latest OneRoof house price report, the nationwide average property value has fallen 11.5% in the last 12 months to $971,000. The $69,000 value drop has big implications for those saving for a 20% deposit.
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Last year, first-home buyers would have needed a deposit of $208,000. Now, the deposit hurdle is $15,000 lower. In the country’s more expensive housing markets the savings are more substantial.
In Auckland, a 20% deposit last year, based on the city’s average property value at the time, would have been a high $312,000. Now, a 20% deposit in the city would sit at $266,000.
In Wellington, the deposit hurdle has dropped from $265,000 to $200,000 over the same 12-month period, while in Christchurch, where house prices are lower, and the downturn has been less severe, the deposit hurdle has dropped by just $9000.
The rise in interest rates may wipe out some of those advantages, with the one-year fixed rate jumping from a low of 2.21% in June 2021 to well above 7% now.
“Interest rates wobble around a bit depending on the competition on the day,” says mortgage adviser Campbell Hastie, of Hastie Mortgages, but the fixed two-year rate for most buyers is sitting around 6.5%.
Using the current nationwide average property value of $971,000, buyers with a 20% deposit would, on a 6.5% rate, be facing fortnightly repayments of $2266. In Auckland the fortnightly repayment would be $3103 and in Wellington and Christchurch $2333 and $1734 respectively.
(Hastie warns that low deposit buyers – those with a 10% deposit instead of the standard 20% - will face higher repayments, with banks adding low equity margins into their mortgage rate, which would bump up a 6.5% rate to 7.25%. Using the above scenario, that would equate to fortnightly repayments of $2751.)
How do 2023 repayments compare to repayments a year ago, when the two-year fixed rate was 5.04%? Nationwide, the fortnightly repayment in March 2022 would have been $2070, and in Auckland $3110, Wellington $2638, and in Christchurch $1563.
So savings for some, but not for others. However, big differences become apparent when the total cost of a purchase – the deposit and repayments – are taken into account. Nationwide, first-home buyers in March 2023 would be $8704 better off at the end of their first year of home-ownership than those who bought in March 2022.
In Auckland, March 2023 buyers would be $46,582 better off than their March 2022 counterparts, mostly because of the drop in the amount needed for a deposit. In Wellington, 2023 buyers would be $60,554 better off and in Christchurch, 2023 buyers would be $16,530 better off.
The numbers can sound daunting, however mortgages must be affordable under the Credit Contracts and Consumer Finance Act [CCCFA] and buyers are all assessed using strict criteria. So barring any drastic changes in income and cash flow, buyers should be able to make repayments comfortably, says Hastie.
“We give people a ring about a month after they’ve settled to see that everything’s [okay] and then when they come up for the first refix. We get a feeling for how they’re going from those phone calls. Unless there has been a significant event, like a job loss, people seem to be able to cope [with repayments].”
Hastie says when clients come in looking for a mortgage his advisers work line by line through the client’s bank statements to ensure they really can afford the loan, before submitting it to the bank. Categorising their spending is often an eye-opener for the client. “By doing that you open the door to things that can be changed to get them to where they need to be. It’s your budgeting conversation, your responsible conversation.”
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Mortgage repayments aren’t the only costs faced by home buyers. In order to buy, they will need to cover building inspection fees, Land Information Memorandum (LIM) costs and legal charges. Hastie says he tells buyers to “put a ring around $2500” for lawyer fees, although some are lucky enough to pay less. “If you've had to go through 10 different properties and put your lawyer through the wringer it could cost more. But two and a half grand is usually where it’s at.”
Moving in costs money as well thanks to removal costs and setting up utilities accounts. Many first-home buyers need to buy furniture, whitegoods/appliances, and window treatments. If the home needs renovation, that’s another cost, although it can usually be delayed until finances ease up.
Ongoing costs include insurance, council rates, maintenance, and for buyers in multi-owned complexes there are body corporate fees, all of which can add up.
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