Record house price falls! Is this an opportunity for first-home buyers? A real-life case shows why some still struggle to get a mortgage

Today (15 November), REINZ released its October figures, showing that the national median house price rose 1.9% from September, but fell 7.5% year on year, from NZ$892,000 to NZ$825,000. Auckland recorded an annual decline of 13%, from NZ$1,249,000 to NZ$1,090,000.

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The House Price Index (HPI), which measures changes in residential property values nationwide, recorded an annual decline of 10.9% and was 12.4% below its peak in November 2021.

 

Kiwibank economists said this was the largest decline since the institute began keeping records in the early 1990s. Moreover, 'house prices do not appear to have bottomed out yet'.

 

There are also nearly 75% more properties to choose from than at the same time last year.

 

With more homes on the market and prices continuing to fall, this might seem like a good time for first-home buyers to enter the market. But is that really the case?

 

How hard is it to get a mortgage now?

These applicants face greater difficulties

 

The latest first-home buyer report released last week by property data firm CoreLogic shows that first-home buyers' share of purchases has increased in recent months. Although transaction volumes remain very low, the median price paid by first-home buyers has also fallen in line with house prices across New Zealand, meaning more homes are once again selling within their budgets.

 

In theory, as rental growth steadies while mortgage rates continue to rise, continuing to rent is the most economical option. However, most first-home buyers do not see it that way. For non-financial reasons, they would prefer to own a home sooner.

 

So how difficult is it for first-home buyers to obtain a mortgage in the current market?

 

The answer depends on the applicant's individual circumstances.

 

 

For wage and salary earners, applying for a loan is relatively straightforward: payslips or an employer's confirmation letter can establish their income. Once applicants have completed their 90-day trial period, they are considered to have a stable income.

 

However, if applicants are self-employed, contractors, freelancers or small business owners, banks will want to see financial statements for the past one to two years. If those figures are not particularly strong, a self-employed applicant may have a lower chance of obtaining a mortgage than some full-time employees working for small businesses.

 

 

If applicants are in the process of starting a business, obtaining a mortgage becomes even harder, because many businesses do not necessarily make a profit in their first few years or even pay their owners a market-rate salary.

 

Generally, self-employed applicants whose financial statements are not strong enough to satisfy a bank have to approach non-bank lenders. These lenders typically focus more on asset values than business income, and may only offer higher interest rates with larger deposit requirements.

 

Real-life case: self-employment shatters a couple's home ownership dream

 

A Wellington couple recently encountered significant difficulties obtaining a mortgage.

 

Their home-buying journey had been going smoothly: the price of their preferred property had fallen, and they had secured a government first-home grant. They expected obtaining a mortgage to be the natural next step. But because one of them was self-employed, their dream fell apart before the purchase agreement became unconditional.

 

 

Kayleen and Nick Grimstrup had their eye on a four-bedroom home in Clouston Park, Upper Hutt. With the market in a slump, its asking price had fallen from close to NZ$1,000,000 to NZ$725,000.

 

Earlier this year, Kāinga Ora's First Home Grant scheme raised the price cap for existing homes in the Wellington region from NZ$650,000 to NZ$750,000. As a result, the couple were also approved for a government First Home Grant of NZ$10,000.

 

These favourable developments brought their deposit to 13%. However, because Kayleen's occupation was classified as 'high risk', they could only obtain finance from a second-tier lender at an exceptionally high floating rate of 10%.

 

 

Kayleen said she was self-employed providing childcare in her home. Although her annual income was close to NZ$60,000, banks still classified her occupation as 'high risk'.

 

Faced with the second-tier lender's exceptionally high floating rate of 10%, they ultimately decided to abandon the purchase.

 

Grimstrup said: 'We did the calculations and, honestly, we could have afforded the interest at 10%. But what if they raised it to 12% or 15%? That is not something I want to be worrying about when I go to bed at night. If we were millionaires, perhaps we would have accepted it, but we are just an ordinary middle-class family.'

 

Brock Shute of Mortgage Advice Company was the family's mortgage broker. He explained that home-based childcare businesses often have a substantial gap between gross and net income:

 

For example, a childcare business earning NZ$50,000 a year might have net income of only NZ$20,000 after claiming expenses. One option is not to claim those expenses and treat gross income as net income, but that means paying a substantial tax bill.

 

Mortgage Lab spokesperson Rupert Gough said this situation did not mean there was a problem with banks' assessment systems, because net profit really is what a business has left after costs. This is why he advises borrowers to buy a home before starting a business。

 

Across the Wellington region, 539 households bought their first homes between July and September this year, down from 703 over the same period last year.

 

Although CoreLogic's transaction figures do not show a substantial return of first-home buyers to the market, their share of purchases rose from 31% last year to 32% relative to other buyer groups, indicating that they remain a major group of buyers in the current property market.

 

What do you think of the current market? Share your thoughts in the comments.