It's good news folks...
If you speak with any first home buyer, they will tell you about the frustrating experience they've had lately trying to buy a house.
Your typical first home buyer has a deposit of around 10-15% of the property’s value. When you have less than 20% deposit, the banks need a Registered Valuation on the property you are intending to buy. This usually costs around $550, sometimes more.
The buyer would also usually want to get the property checked out to ensure they are not buying a major financial headache, so will likely get a builders report ($500+), perhaps a meth test ($199+), seek legal advice from their solicitor ($500+) and check the council file all before finalising ($244+)
Before the first home buyer can comfortably proceed with a house purchase that fits their budget, they’ve already spent nearly $2,000!
With most houses being sold at auction, and therefore any bids are unconditional, this pretty much puts first home buyers out of the process as there is no guarantee they will be successful at auction, and are not wanting to spend $2000 for nothing. Do this a few times on a few properties and you are starting to eat into your deposit, and soon you may not have enough deposit at all and have to start saving again!
So what’s the good news? Read on…..
Reason Number 1: Bank lending restrictions
The Reserve Bank has made changes to the rules that NZ registered banks need to comply with and this will make it more difficult to borrow money to invest in existing residential property.
Banks have to restrict the amount of money they lend out to people with low deposits to 10% of their total lending for Owner Occupied properties.
If you are an investor, you now need to have 40% deposit. Up until recently, about 25% of homes being sold in Tauranga were sold to investors. With the difficulty in getting funding, these investor buyer numbers have dropped significantly.
Less competition for the same property means greater opportunity for the first home buyer.
Reason Number 2: Incentives to Build rather than Buy existing houses
Because one of the large drivers of house price inflation has been a shortage of houses to meet the demand, the government made some changes last year which encouraged people to build rather than buy existing properties. Doing so means more houses are around to meet the demand.
- Lending restrictions mentioned in Reason Number 1 do not apply if you are building a house! Even if you are an investor, you can build with a 20% deposit and rent the new dwelling out. Also there are no limits to how much money a bank can lend to people building houses, so its easier to obtain finance for this.
- Other changes made last year mean a first home buyer can access not only their own savings to purchase a house, but also their employer’s contributions AND the Member Tax Credit. So pretty much everything except the initial $1,000 which the member got when they joined Kiwisaver (joined prior to April 2015)
- The First Home Deposit Subsidy was replaced with the HomeStart Grant, and this gave borrowers $2,000 for every year they had contributed the minimum to Kiwisaver up to a maximum of 5 years. This means that a couple could potentially get a$20,000 grant to build their first home (or buy one that is less than 6 months old), compared to only up to $10,000 for the same couple if they purchase an existing home. This grant is also counted towards a borrower’s deposit as far as most banks are concerned
- The house price and income thresholds for qualifying for the HomeStart grant has increased.
Maximum House & Land value can now be $550,000 if you are building in Tauranga, compared to only $500,000 if you are purchasing an existing property.
Income threshold has increased to $130,000 for joint borrowers and $85,000 for a single borrower.
Reason Number 3: Less investors purchasing
Lending restrictions mean potentially less investors purchasing at auction. The combination of significantly less investors and no first home buyers going to auction, meaning a much smaller audience of potential buyers, will encourage sellers to move away from selling by auction towards more traditional forms of house sales, trying to capture a bigger audience of people to sell their home to.
For first home buyers this will enable them to put conditional offers on properties, if the price is ok with the vendor, then the buyer can work through the pre-purchase conditions, and save money on due diligence compared to auctions.
Also the number of properties actually having a price tag on them as opposed to 'Auction' is increasing. Yay about time!
With the new lending restrictions, the amount of investor demand for existing houses has dropped off significantly since the Reserve Bank implied that it required NZ banks to implement the new restrictions straight away, despite them not officially being put in place until October 2016.
With the decrease of investor demand, and the incentives to build, its likely that the method for selling a house by auction, will probably become less popular as sellers want to capture a bigger buyer audience such as first home buyers.
This will mean that First Home Buyers will now be able to make an offer to purchase existing property with conditions (builders reports, finance and LIM etc) and not have to go through the expense of getting these things for each property they want to put an offer on, unless the seller accepts the offer. This means only one set of $1100-1500 outlay rather than having to do it multiple times as you would need to do if you were going to auction, (assuming nothing bad comes up on any of these reports).