Would-be first home buyers should not agonise over trying to second-guess the direction of the housing market

Would-be first home buyers should not agonise over trying to second-guess the direction of the housing market

By David Hargreaves

Well it didn't take long.

A month or two of soft looking house sales figures and already the voices are being heard suggesting now is a great time for first home buyers to be clambering on that tricky first rung of the ladder.

I'm personally as uncomfortable with such advice as I am with the 'hold off' advice that you sometimes hear as well.

I can recall penning articles for this website back in 2013 and talking about the astronomical rises in Auckland house prices amid a backdrop of some people suggesting that it was time to hold off as a correction may looming.

I'm not a financial adviser, so don't advise. But the interesting thing was that if I had been asked privately at that time by a potential first home buyer for my personal opinion I would have said that in my view the market was over-hyped and was in a bubble - but, equally, I wouldn't advise anybody NOT to buy.

The trouble with bubbles

People get very worked up about the suggestion of 'bubbles' in asset prices because in people's minds the word bubble always somehow gets stretched and becomes 'burst'. In other words, say something's in a bubble and you are in effect saying it's about to burst. Well, no, absolutely not true.

The fact is, bubbles can exist for a very long time and just keep growing. It's not an automatic given that a bubble will burst. But equally it is fair to say that if a bubble does burst, the damage it causes is in direct proportion to how long it was growing for, and how big it got, before it was punctured.

I suppose I learned my big lesson about bubbles while following the sharemarket in the 1980s when for a period between 1984 and 1987 share prices in this country pretty much only ever went up. When they came down they came down with a bump. But the point was, I remember viewing the market with gritted teeth from about 1986 onward because it was clear the thing had become a gigantic bubble. It carried on that way for far longer than I expected. And yes, the mess was quite extensive when it burst.

So, anyway, to go back to 2013, yes, I thought Auckland was over-hyped, but I also thought there was nothing to stop prices rising.

Up, up and away

For the record the median price for Auckland houses according to REINZ in October 2013 (remember this was the month the Reserve Bank introduced its first round of loan-to-value-ratio restrictions) was $582,000. In October 2016 the median was $868,000.

That's a 49% rise. Any would-be first home buyers who were spooked by the talk of the overheated market and the onset of the LVRs and who therefore held off buying would now need a deposit (assuming a minimum 20%) of $173,600 versus $116,400 then. So, they would have (assuming they nearly had the money for a deposit back in 2013) had to save an extra $19,000 a year. Well, they might have been able to do that. They might not as well.

I personally think trying to pick the very top of a market, or the very bottom for that matter, is a mug's game.

While people will always claim that they have accurately picked the top or the bottom of a market and have therefore either sold or bought at that time, the reality is that if you do pick the peak or trough of a market you've done so by accident.

Yes, you can be guided by instincts in terms of thinking a market is looking 'top heavy' or it's looking cheap and therefore buy or sell accordingly. But sitting back and trying to pick THE moment, well, you're likely to be disappointed.

So, is it a good  time for first home buyers to buy a house now?

Investors back off

Figures released by the Reserve Bank indicate that since the latest iteration of the LVR restrictions, the 40% deposit requirement for investors, was announced in July (and effectively applied from then by the banks), investors have backed off.

Perhaps the most graphic representation of this was provided by the October sales figures for Auckland's biggest real estate firm Barfoot & Thompson. The figures showed a big drop-off of sales in the under $500,000 bracket - just the sort of rental-ready properties that the baby-boomer mom and dad investors would have been looking at for an income and a retirement nest egg.

The good news is that the withdrawal of such people from the market does suddenly broaden the scope for the would-be first home buyers who are now, just for a while, seeing less competition (and let's face it, less well-financially-armed competition) for properties that could be a good first rung on that ladder.

And indeed, those Reserve Bank figures outlining new mortgage lending by type of buyer do show that the first home buyers have remained at fairly constant levels since the new LVR restrictions came in. If parts of the market are slowing, it's not first home buyers backing off that's causing it.

I would have thought the real question for a first home buyer now should be, not: 'what will prices do?' No, better surely to look at your individual position and see whether you can afford to buy a house, whether you want to buy a house, whether you need to buy a house. And I would say if you have to completely mortgage yourself up to the eyeballs and can JUST afford the interest payments, maybe now is not the time for you. If you can afford it, why not? 

Sensitivity analysis

The one bit of advice I would be prepared to offer is that people should do 'sensitivity analysis' on their potential mortgage repayments. It's never been easier to work out how much difference hypothetical movements in interest rates might make to your mortgage payments. If you think you might JUST manage now, how about adding a percentage point, or even two percentage points, on to the current rate and see what damage that might do to your finances. It is frightening to look at what potentially small movements in interest rates can actually do to the size of payments.

I make this point strongly, because I believe that a rise in interest rates is now closer than most people, including the Reserve Bank, are currently predicting. I don't think inflation is dead. It's just sleeping. And the awakening might ultimately be a bit faster and more energetic than people currently think. I would not be surprised to see the RBNZ raising the official interest rates in this country next year - though the RBNZ's own forecast is for no movement at all, either up or down.

In so far as the direction of house prices is pickable at all, I still think the current LVR-induced slow down is likely to prove a short-run thing. I would expect to see, come February and March that things will be bubbling along again. 

However, I reckon there's bigger question marks over the second half of next year, bearing in mind that there is an election looming. That will cause uncertainty and is likely to get people backing off the market. Indeed there was a big slow down in sales ahead of the 2014 election and the result in that one seemed to me to be always more clear cut than perhaps next year's election battle will be.

Given that housing is sure to be at the centre of the election campaign then various of the statements made by various of the parties about restrictions, spending etc to do with houses, may have considerable impact on the market.

Rate rises?

And then there's the possibility of interest rate rises.

Already we are seeing some rates being tweaked upwards as a result of funding pressure on banks. But there may be more to come in 'official' rises too.

As I've said before the Reserve Bank tends to very much play up the impact the first round of LVRs had in 2013-14 and play down the effect that a one percentage point rise in official interest rates made, mistakenly, by the bank in 2014 had.

The reality is that this current bull housing market has been fuelled by falling and very low interest rates. An upturn in interest rates would be likely to have the reverse impact for two reasons: A/ it makes mortgages more expensive and B/ it makes interest rates on deposits more attractive so that those currently driven to property by the poor returns available on cash deposits might just reconsider and park the money in the bank instead of buying a second home.

So, if interest rates were to rise next year that could make all the difference to the housing market.

And I think the final variable in all this is the banks themselves and the way they've started rationing credit. If that trend persists or indeed strengthens then this is bound to have an impact too.

Whatever happens, young people looking to raise families need somewhere to live. Most would prefer to have their own home. The best thing they would be advised to do then is ignore the advice about the state of the market or the direction of prices; just look in isolation at what they need to do for their own best benefit and see what they can afford and base their decision purely on that.

After all, whatever the valuation of the property at any given time, once you have the keys and you are in then you are in for a long as you want to be - providing you can pay the mortgage.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Good advice but I would add a caveat - only buy if you can see yourself living there for 10 years. Fear of missing out has pushed some homeowners into buying anything just to get a foot in the market. While as you point out that would have worked in 2013, it is not guaranteed to do so. So don't buy a one bedroom place if you're planning kids in the next few years - what if the market goes down, you won't be able to sell and you'll be stuck in an unsuitable place. That is a very real risk in this market.

We know house prices are about 11 times the average wage in NZ now. Wages have hardly moved in the last 3 years.
If house prices continue their upward spiral, then next year they maybe 12 times the average wage and then 13 times the average wage and maybe in 5 years house prices will be 20 times the average wage. Wages are not going to increase much while the Government pursues an "open door" immigration policy. This scenario is just not going to happen as it is unsustainable.
The only direction house prices are going to average over the next 5 years or so is down.

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The NZ Herald is an unabashed property spruiking publication - hardly a coincidence when a large portion of their revenue is from real estate advertising.

To be running these "now is your chance" articles reeks of desperation.

Keep up the good work interest.co.nz team - best finance, property and insurance reporting website in NZ by a country mile.

Good commentary. As for uncertianty...have things ever been more uncertain? The Trump effect is hitting and brexit has yet to. For a local exmaple, look at the F & P Healthcare share price today. One woud think it would be throough the roof after the perfomance results...but not so, down over 5%. The reason...Trump and the manufacturing location in Mexico. An uncertain time to invest for sure... sideline time?

Good article, the best time to buy is always "now". Just look at a graph of house values in NZ, in the last 30 years the biggest "crash" was -10% in 2008. There is a big psychological aspect to "taking the plunge" and buying. If you are a FHB and you can afford it, buy now and don't let others talk you out of it, especially if said others, don't own a house

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What does the last 30 years have to do with the next 30? It's like saying "look at that massive run of red on the roulette table, it has to keep going, I can't lose!". I tend to be more of the view that we're due for a black...

My gut tells me to back winners. I used to play a lot of Baccarat and I developed this system where I always bet on who won the hand before the last one. This way I won when it flip flopped and also won on long runs of bank or player wins. That and playing perfect basic strategy BJ enabled me to play several times a week ending up $500 in credit at the end of the year. Money management was key as well.

Ever heard of the gamblers fallacy? I happen to know that even playing a perfect strategy at blackjack gives you an expected loss rate of 0.3-0.5% depending on the rules, the only ways to swing the odds in your favor are frowned on e.g. card counting. However, people do routinely underestimate just how far luck can take you from your expected return.

What I'm saying is, please don't think that you ending up in profit was due to your skill (unless you were card counting).

It was more skill at money management. Never chase a loss which is when the gambler's fallacy is applied where you double your bet after a loss and keep doubling until you win. Actually you were following the gambler's fallacy by betting on black because red had won many times.I tried this on the $5 BJ table but chickened out when it got to the maximum of $500, I would I have won though..sob. My money management in brief was always have a bankroll and leave when it was gone, if you doubled your bank roll put aside the bank roll plus 50% and keep playing with a half bankroll. If you lost most of your bankroll but managed to claw it back leave the Casino at that point. My main strategy was to endure and survive mainly playing for fun and to not lose much. Good times.

* Tables have maximums. Why is that? To stop rich people doubling until they win. In the end though you are gambling 10k or more to win $5...
** Absolutely worst strategy at the Casino: Go in intending to play until your bankroll is all gone.

Your money management might have helped put a cap on your losing sessions, but did nothing to swing the fundamental odds in your favour. Your Baccarat strategy is a classic example of the gamblers fallacy as you're basing a future bet on a past, unrelated, event. The events aren't linked and therefore your strategy adds nothing over selecting your bet at random.

Completely agree that doubling until you win (Martingale strategy) is a disaster waiting to happen, even if you don't hit a table limit you'll hit your bankroll limit eventually.

It's certainly possible to bring the odds in your favour, I had a few years where my 'gambling' profits were larger than my salary in the good old days, but that was more by taking advantage of sloppy or generous bookie behaviour.

Yes I agree. If you play carefully and manage your money I believe you can win in the sense that you are getting a really good deal on the "entertainment value". The Casino may even take a loss on characters who do this as they rely on fools and need to cover costs. Auckland should have had two Casinos that competed for patrons by offering decent freebies. It was wrong to give it to just one player.

*My Baccarat strategy minimized a disastrous string of losses as you would only lose if there was a sequence of banker,banker,player,player,banker,banker which was not common...but did sometimes happen. No doubt a fallacy but many good times having endless discussions about these things. Never split tens!...unless you are on winning streak.

Auckland might have only dropped 10% in 2008 but Northland and other regions dropped 30%.
Whangarei district only recovered back to 2007 prices recently and I think far North is yet to get there.
Population Growth is pushing Auckland market and now the regions.
Beware the election, foreign ownership and immigration are going to be the hot topics. If working class kiwi's can't support the property market and foreign money is removed, there will be a correction.

I would point out that that is a 30% gain in 6 years or so. Lies, damn lies, .....

Indeed. 30% gain in 6 years to get back to the 2007 position, so effect is zero growth in the years 2007-2016. But 30% sounds good eh?

Could not agree more, prices have only gone in one direction since we arrived in 1974. As any other investment you need to look at the long term so thats 10-15 years. Prices have NEVER fallen over that timeframe.

I agree with the analysis, but not the advice. For most people, purchasing a house constitutes the largest and most consequential investment decision of their lives. We, as a society, need to stop viewing residential property ownership as anything other than an investment, just as we would a share portfolio or bank deposit. If a person sees real utility in owning versus renting, this can be quantified and included in the decision-making process, but it shouldn't resolve the decision in and of itself. Making a wise choice - whether or not to buy, and when to buy - has a material impact on the probability weightings of one's projected future wealth, so I think there needs to be more to it than simply "will I likely be able to continue to service the homeloan?".

wow you are psychic rjn1...we were writing almost the same thing at same time, my comment below...couldn't agree more with what you say

You spelled psychotic wrong... oh, right.

I think David is quite right to caution against taking taking a strong position either way - either you definitely should buy now, or you definitely shouldn't. It always has to come down to the individual who is looking at putting their money up, but what I'm saying is that just because it's not possible to predict price direction with any certainty, that shouldn't stop you from trying to quantify the risks in either direction and make an informed investment (rather than going on an emotionally-charged residential property therapy spree). As you've pointed out below, it's likely that many people would come to the conclusion that right now the potential rewards do not justify the apparent risks.

...the point in common that surprised me was what you said "For most people, purchasing a house constitutes the largest and most consequential investment decision of their lives".

Also "Making a wise choice - whether or not to buy, and when to buy - has a material impact on the probability weightings of one's projected future wealth"

And yes you are right, the individual has to make the decision...But I personally would not recommend young people buy a house in a huge bubble market, as the risk is much higher of a loss that could hurt them in future

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I think the best advice for young people without a house is to leave Auckland. If you look at Stats NZ household spending surveys, always at the top is accommodation. Housing is peoples' biggest cost in their life. If you dramatically overpay for it in a bubble, its likely to make you poor much of your life if the bubble bursts. By any rational measure Auckland is in a massive massive bubble.

NZ Herald advice for young people to buy now - to serve their real estate advertising clients - is digusting. Any young person who believes it and acts on it could be financially crippled. NZ Herald editors need to think about the impact of their actions on other people, not just think about their bottom line.

It really depends on your aspirations. The better jobs are in Auckland. As the city grows there will be more arts,culture etc as happens in larger cities. There are pro's and con's wherever you live.There is no rule for all.

best jobs are overseas, NZ has low pay...could say the same for social, arts, culture etc

This city doesn't grow, that is its underlying problem. Auckland's urban planning is geared towards generating high land costs, which places it at a disadvantage compared to everywhere. Construction rates are too low to sustain Auckland as a competitive rental market, which means that the well paying corporate jobs that are here aren't likely to stay very long.

I definitely agree with the part about leaving Auckland (and not to Hamilton or Tauranga preferably). I'd be looking at somewhere like New Plymouth.

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Well, the Herald is utter trash, and has been for a long time. There is little good journalism in it, most of it is populist garbage.
After time living in different countries overseas, the lack of at least one good quality newspaper in NZ is one of my biggest frustrations with NZ.

Agreed! The NZ Herald is parroted by everyone at work as though what is written is gospel. If everyone had no initiative and just followed those things which are suggested in it, they would never be able to "beat the market".

Yes well many kiwis are very unsophisticated

Contrary to other comments buying a house to live in is buying a dwelling which is a lifestyle choice and not an investment. Buying a rental is an investment as it generates income not a debt obligation.

People can choose to rent or buy. Either are reasonable choices and rent eliminates obligations such as insurance to rebuild and maintenance/repairs. Renting is a great method of risk mitigation.

People should buy if they have a stable work environment and are likely to be living there for 5+ years. It's stupid to buy if you are going to move cities in the next year. People should buy if they have 20% deposit saved to access lower interest rates. People should buy if the payments on a 30 year mortgage do not exceed 25% of their net income.

Maintenance and on-going costs never seem to be discussed. Moving and selling every year is a bad idea but doesn't seem to get discussed. Also I'm sure some people are buying too much house. There's no reason to buy a house larger than what you need, and that ties into limiting housing costs to 25% of net income so you aren't stretched, miserable from having no spare cash or have no capacity to absorb interest rate increases.

People need to stop feeling compelled to buy just because. The typical rotting piece of shit house in New Zealand is a depreciating asset that has never been maintained by the previous jerk who owned it. More of a liability than an investment. There are upsides to owning a house no one discusses the downsides.

"Contrary to other comments buying a house to live in is buying a dwelling which is a lifestyle choice and not an investment. Buying a rental is an investment as it generates income not a debt obligation."

It's a capital allocation decision which is likely to have a material affect on future wealth - therefore it's an investment. If something has the opportunity cost of tying up funds that could otherwise be invested, in my view it's an investment decision. At the very least, it's a lifestyle choice with wealth-related consequences - which was my point.

All lifestyle choices have wealth-related consequences, even the ones that don't directly involve money if you're going to bring 'opportunity cost' into it.
Advocating home-ownership as an investment is dangerous given the degree of financial illiteracy in New Zealand. New Zealanders already seem to struggle with the idea that investments should normally put net cash into your pocket given how accepted negative gearing seems to be in some circles, to then associate investing with activities that generate no revenue is not a forward step...

well, who knows what is going to happen. Some of us paid too much attention to Mr Hickey's predictions of significant drops back in the day...
It's a mugs' game, predicting property, as David wisely says.
I'd be very cautious against overstretching, but generally I'd think if you like a place and you can service the mortgage, then you'd probably do it at the moment.
It's hard to see prices falling back much, given the govt isn't looking at any serious policy options to stem demand.
Of course, though, there could be a 'black swan' event...but by their very nature they are unpredictable...

Sage advice on property from Ron Hoy Yong on property via the Herald:

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1175...

Yet another Hoy Fong public service announcement this week. Can he cure Earthquakes as well? could he teach me how at his seminar ?

For those who only pay interest, I would say add way more than 2% to see if you can still afford it. Because you have no buffer to be able to drop back to an interest-only mortgage. Plus the money you owe will be the same whenever the rates do go up!

Do not want.