A do-up or a new build: which is the best choice for first-home buyers?

A recent survey of mortgage advisers conducted in September by independent economist Tony Alexander and mortgages.co.nz suggests first-home buyers have firmly returned to the property market. In the latest survey, 47% of mortgage advisers reported seeing more first-home buyers seeking help with borrowing, compared with just 8% in August last year. Tony Alexander said this was the highest reading since he began the survey in June 2020, clearly showing that first-home buyers were returning to property markets throughout New Zealand.

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Choices for first-home buyers

 

First-home buyers entering the market have very limited funds and often ask: “What kind of property can I buy within my budget?” Data shows that enthusiasm for new builds among first-home buyers has surged since the New Zealand Government introduced its homebuying assistance measures in May this year. This means that relaxed eligibility rules for government assistance towards new builds have enabled more first-home buyers to qualify. The Government’s First Home Grant and shared ownership schemes allow first-home buyers to purchase their first property with a smaller deposit. Meanwhile, an existing home needing renovation could be another good choice for first-home buyers who enjoy DIY. Within the same area, properties needing renovation are cheaper and more affordable than those in good condition.

 

So, which is the best choice for first-home buyers: a do-up or a new build? Let us take a closer look at the fundamental differences between these types of property.

 

Features of buying a new build

 

Price advantages:

 

In a market with unstable house prices, a fixed sale price can be more appealing to many buyers. It removes the risk of having to bid against others for an existing home, or missing out on a favourite property because the price exceeds the budget by a few tens of thousands of dollars.

 

Borrowing advantages:

 

Compared with buying an existing home, first-home buyers purchasing a new build can receive additional support through government homebuying assistance schemes. Many property developers also work actively with mortgage lenders to offer low-deposit purchase options.

 

More scope for personalisation:

 

Many new-build developers offer personalised choices of home specifications to suit different households and owners’ tastes.

 

Saving time and money:

 

Once a new build is completed and has received its Code Compliance Certificate (CCC), buyers can move straight in. There is no need to spend extra time and money renovating after moving in, saving both time and effort.

 

Lower ongoing maintenance and running costs:

 

Many new-build developers now provide long-term cover for construction quality, such as the Master Build 10 Year Guarantee and Stamford Building Warranty Insurance. Because new builds use the latest building materials and construction standards available, they also offer greater energy efficiency and improved comfort.

 

Of course, choosing a new build does not guarantee first-home buyers a smooth journey. They need to remain alert and research the market thoroughly. There are always developers ready to walk away. If a project proves unprofitable or sufficient construction finance cannot be secured, it can easily stall. By contrast, capable developers will also have a good market reputation. They will look beyond the gains or losses of individual projects and consistently honour the promises made to buyers when contracts were signed, to preserve their reputation. First-home buyers can also assess a developer’s overall capability through project plans and the design, style and quality of showrooms. Careful observation can reveal which projects have investment potential, helping buyers choose developments backed by stronger developers and avoid circumstances that work against them.

 

Features of buying an existing home needing renovation

 

 

In the current subdued property market, many buyers believe it is relatively easy to find a bargain. Most properties can be sold by negotiation rather than competitive bidding at auction, ultimately arriving at a price that satisfies both owner and buyer. Buyers also have enough time to obtain various property condition reports. Ensuring a home has no major defects is a crucial part of buying an existing property. Naturally, what draws so many buyers is the prospect that purchasing and renovating a home with do-up potential could substantially increase its value.

 

Although do-ups offer considerable potential for future capital gains, banks’ continuing tightening of lending policies may be the greatest obstacle for many first-home buyers purchasing existing homes. For lending purposes, banks divide homes needing renovation into three broad categories and offer different lending proportions for each.

 

In the first and worst-case category, banks refuse to lend on properties that do not comply with council building requirements. Buyers need to bring the entire house up to current council building standards before renovation and bank lending become possible. This presents major challenges in both time and money for first-home buyers.

 

The second category covers homes needing renovation that are derelict and uninhabitable. Buyers may only be able to secure a mortgage of around 80% of the land’s value, leaving them to fund renovations from their own savings. Under banks’ current lending criteria, buyers need sufficient income to cover both the mortgage on the land and rent elsewhere. Even if these run-down homes are attractively priced, they may therefore be a poor choice for first-home buyers, who need substantial savings to cover renovations, mortgage payments and rent.

 

The third category comprises homes needing some non-structural renovation that remain habitable while being upgraded. Buyers can, of course, live in them for a few years and save enough money before undertaking renovations. Provided other lending criteria are met, lenders can offer mortgages of up to 90% for these properties.

 

Generally, first-home buyers purchasing properties in the third category may face fierce competition from investors, driving up the final purchase price. The good news is that rising mortgage interest rates and increasing market uncertainty have prompted many property investors to leave the market, significantly reducing competition.