First-home buyers 'psyching themselves out of the market'

First-home buyers may be psyching themselves out of the market, according to new research by OneRoof.co.nz and property analysts Valocity.

Although first-home buyers made up the largest share of all new mortgage registrations in 2018, OneRoof found that there is still the perception among Kiwis that it is impossible to buy a house.

OneRoof editor Owen Vaughan said: “The rapid growth in house prices in the last five years, especially in Auckland, has put groups who have yet to enter the market at a disadvantage.

“Would-be home-owners hear the talk about the lack of new homes and the large sums of money required for deposits and feel locked out, even give up.”

There are hurdles: deposits that the current generation are required to save are significantly higher than previous generations needed, both in dollar sums and proportion of house value.

James Wilson, director of valuation at Valocity says the narrative that it’s impossible to buy a first home can stop potential buyers in their tracks before they even start, making it a self-fulfilling prophecy.

But, he says, mortgage statistics show 26 per cent of buyers taking out mortgages in Auckland are first time buyers, a little lower than the nationwide share of 28 per cent.

"So first home buyers remain active within the residential property,” he says. “But when we take a look at what they are buying, to build a profile of the ‘typical’ property the first home buyer is acquiring there are changes.

Valocity and OneRoof research shows that in the past year (to October 2018) apartments have grown a whopping 62 percent, flats by 13% (and that’s off the back of a 30 percent surge from 2014/5 to 2017).

The analysis found average apartment prices of $631,000 for a floor area that still sits around 65 square metres, compared to an average property price across the whole Auckland market of $915,000.

Around the country is a different story. In Dunedin, for example, average apartment prices of $295,000 are not that far below total market average of $310,000. In Hamilton, Christchurch and Tauranga too, the spread is under $100,000, it is only Wellington where first home average of $660,000 is $200,000 more than apartments.

Wilson says across all main urban centres there are property types that can be afforded by first home buyers. He says the narrative that “it’s impossible” is dangerous and can become self-fulfilling.

But still. Research by Massey University Financial Education Centre research in 2014 found that 21.8 per cent of the 2,287 respondents aged 18 to 45 were not buying because of a lack of self-belief.

“The statistics don’t bear out the narrative,” says Wilson. “More than a quarter of new mortgage registrations are for first home buyers. So people who don’t buy into that narrative (of it being impossible) are able to acquire a house. In fact, first home buyers are one of the dominant participants in many markets across the country.”

A secondary narrative that leads to buyers being psyched out before they save is that only those with family help can buy. The Massey research found that 71 percent bought without financial assistance from family.

Vaughan says buyers are also psyched out because a six figure deposit sounds daunting, even though salaries are much higher than those their parents and grandparents earned.

Behavioural economist Ananish Chaudhuri, head of the Department of Economics at the University of Auckland says that it is not surprising that negative narratives make first time home buyers more reluctant.

Chaudhuri and colleague Ryan Greenaway-McGrevy, a senior lecturer in the department, point out that it’s “bloody hard” for first time buyers to get on the property ladder. But the negative narrative in the mix made things worse.

“For almost all of us, buying a house is the biggest investment of our lives involving significant uncertainty regarding current and future mortgage rates as well as current and future incomes,” says Chaudhuri.

“It is well known that most of us struggle with the trade-off between smaller rewards that are available soon compared to larger rewards available at a point in the future.

“Saving up to buy a house presents this trade-off between smaller-sooner versus larger-later rewards in it starkest form. When you add a significant amount of uncertainty and a negative framing to the mix, the choices become even more challenging, which may well prompt people in walking away,” Chaudhuri says.

He also points out that, many people, when making this decision, often tend to look at their current situation and make forecasts based on that without taking into account that for most people circumstances change. Salaries might increase, for example, making mortgage repayments easier.

He says a behavioural economics concept of “loss aversion” may be at play. Because they can’t calculate what their future earnings will be, the repayments appear larger than they may be in the future when they are earning more. “This often leads to an underestimation of one’s ability to pay over the twenty-five to thirty-year life of a home loan,” he says.

Chaudhuri suggests that anyone looking to buy their first home should avoid erring either on the too positive or too negative side. He suggests sitting down with an objective person and do a realistic assessment of future mortgage payments and future income potential. This gives a better picture of whether home ownership is affordable or not.

Psychology is not the only reason people are not saving. It’s one of a host of factors. Simply saying: “I’m going to buy a house,” won’t suddenly magic up a deposit. Saving is contextual and depends on a whole lot more than just psychology. Skills, knowledge, connections and privilege all come into the mix.

Some people from lower socio economic groups do defy the odds despite intergenerational inequity and other roadblocks.

“I’d advise first home buyers to look internationally, to shift away from the Kiwi quarter acre dream,” says Wilson. “First home buyers should embrace more intensive housing options and reap the lifestyle rewards of these properties being more centrally located than freestanding alternatives."

Wilson also says buyers shouldn’t expect to live in a first home like the one they were raised in (“They don’t call it the property ladder for nothing!”), and think long term, not speculative or quick buck re-selling.

Saying it’s impossible, however could turn out to be a self-fulfilling prophecy.

“Most importantly, don’t give up hope,” says Wilson. “This ‘I will never be able to afford a home’ mindset quickly becomes self-fulfilling and can quickly drive behaviour away from even trying to buy.

“Stay focussed, keep saving, use your Kiwisaver fund wisely and focus on property which is realistic to your current lifecycle. You will find a way to enter the market.”