The big debate: will 2022 be the year aspiring first-home buyers in New Zealand get on the property ladder?

 Viewpoint 1

In previous years, first-home buyers have always faced too many buyers chasing too few homes. This year, that housing shortage could undergo a fundamental shift, with more homes to choose from and substantially lower prices. For first-home buyers, 2022 may be the year their dream of home ownership comes true.

According to ANZ’s latest housing report, a booming construction industry and New Zealand’s continued border closure are reducing the housing shortfall by 6000 homes per quarter.

ANZ’s latest New Zealand Property Focus report forecasts that house prices could fall further this year than previously expected—a decline of 7%, more than double the earlier forecast of around 3%. Higher mortgage rates, affordability constraints, tighter credit conditions and housing policy changes are the main drivers of falling prices. ANZ economists still believe a 7% fall in house prices would represent a soft landing for the housing market,

“A very severe contraction in house prices would likely involve a major shock to household incomes, forcing people to sell their properties. Continued border closures and strong construction activity mean the gap between housing supply and demand in New Zealand is narrowing further. Supply continues to outstrip new demand, limiting the likelihood of homes being put back on the market in the short term. The report also recommends that borrowers considering refixing their mortgages should consider a longer rather than shorter fixed term.”

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Viewpoint 2

Rising interest rates and sky-high deposit requirements will make the dream of home ownership increasingly difficult for first-home buyers on ordinary wages, even as the property market cools in 2022.

According to interest.co.nz’s Home Loan Affordability Report, the national lower-quartile sale price—the price marking the lowest 25% of sales—published by the Real Estate Institute of New Zealand (REINZ) fell by more than NZ$10,000 at the end of last year. In 2021, it fell from NZ$670,000 in November to NZ$659,000 in December. However, this brought little comfort to aspiring first-home buyers, as higher mortgage rates could easily swallow the benefit of lower prices at the bottom of the market.

The average two-year fixed mortgage rate offered by New Zealand’s mainstream banks rose from 4.08% in November to 4.21% in December. This means rates had risen relentlessly for 7 consecutive months since reaching their low of 2.52% in May last year.

If this pattern continues, it will compound the difficulties facing first-home buyers struggling to realise their dream, rather than offer much-needed relief. Although major banks’ economists expect house prices to ease over the coming year, mortgage rates are also expected to keep rising. Any benefit from falling house prices could therefore be swallowed by rising interest rates and higher deposit requirements.

Essentially, first-home buyers will only see a meaningful benefit when house prices start falling much faster than interest rates rise. Although prices at the bottom of the national housing market—the lowest 25% of sale prices—fell at the end of last year, prices actually rose in 8 of the 12 sales regions reported by REINZ. Prices reached record highs in 7 regions: Northland, Waikato, Bay of Plenty, Wellington, Canterbury, Otago and Southland. At the end of last year, affordability worsened for buyers on average incomes across most of the country. This means the affordability problems that have troubled Aucklanders for years have spread throughout New Zealand.

Interest.co.nz’s Home Loan Affordability Report calculates the 10% or 20% deposit needed to buy a home in the lowest 25% of the market in all New Zealand’s main cities and regions, then calculates the resulting mortgage repayments. Researchers compare these with median after-tax wages for couples aged 25–29 in each region, assuming both work full-time. A property is considered unaffordable when mortgage repayments exceed 40% of household income. (The table below shows calculations based on 10% and 20% deposits.)

This shows that in the vast majority of regions, homes in the lowest 25% of the market remain unaffordable on household incomes if young couples have only a 10% deposit. Only in Manawatu/Whanganui, Taranaki, Canterbury, Otago and Southland can couples earning median wages afford mortgage repayments with just a 10% deposit.

The research shows that if first-home buyers can put together a 20% deposit, mortgage repayments as a share of after-tax wages fall substantially in every region except Auckland, bringing those regions within the affordability threshold.

But that raises another question: how easy is it to put together a 20% mortgage deposit?

The 20% deposit needed to buy a property in the lowest 25% of the market ranges from NZ$75,300 in Southland to NZ$193,200 in Auckland. This means a young couple in Auckland would need to live frugally for years to save a deposit. In effect, this almost rules out home ownership for young Aucklanders on average wages. (As shown in the chart.) Young people elsewhere in New Zealand also face difficulties: Southland and Taranaki are the only regions where a 20% deposit is below NZ$100,000.

For most young New Zealanders on average wages, is owning a home becoming an increasingly impossible dream? And are the only ways to secure a sufficient deposit a high income—which is difficult for young people—or relying on parents or winning Lotto?