While wannabe first home buyers face borrowing eye watering amounts of money just to get into a home, the money they borrow IS at least getting cheaper, thanks to falling interest rates. Is this a trap or an opportunity?

While wannabe first home buyers face borrowing eye watering amounts of money just to get into a home, the money they borrow IS at least getting cheaper, thanks to falling interest rates. Is this a trap or an opportunity?

By David Hargreaves

"Well... Should we or shouldn't we?"

That's the question wannabe first home buyers pose to themselves when faced with having to borrow stress-inducing amounts of money to get a place to call their own.

The question is pretty sharply pitched at the moment because the housing market looks very uncertain and indeed the whole global economic situation is in varying states of turmoil. As ever, I don't offer a view on what people should do because I'm not a financial adviser. And it's fair to say, there's no 'one-size-fits-all' answer and much would depend on how individuals managed their own finances and how they structured things.

As I have recently opined, the FHBs in recent times don't appear to have been put off by the potentially wobbly (particularly Auckland) housing market and are in there in numbers and borrowing some hefty amounts of money.

And these trends are continuing.

The latest month's figures on lending by borrower type show that the FHBs are still borrowing up, while separately, the RBNZ's Sector Credit figures for February showed that overall growth in the the amount of mortgage money outstanding increased to 6.2% for the 12 months to February, up from 6.1% in the year to January.

These figures have remained remarkably robust really. More so than I should imagine most economists expected. 

The annual growth rate in total mortgages outstanding peaked in this housing cycle at 9.3% in November 2016 and then began a rapid decline, falling to under 6% by the end of 2017. Yet while this rate of growth might have been expected to slow, it hasn't. Instead in more recent months it has been creeping up.

And with the RBNZ having loosened the limits on high loan to value ratio (LVR) lending from the start of this year and now with the RBNZ's new 'super-dove' stance that suggests the next Official Cash Rate move is more likely to be down, it will be interesting indeed to see whether the growth in mortgage lending moves up further.

Ah, yes, the crux of the matter. The RBNZ says the next move in the OCR is more likely to be down. That's already been enough to see some of the banks reacting with lower mortgage rate offers. More of that in a moment.

How seriously are we to take the RBNZ at their word that the OCR may be dropped? I think very seriously - otherwise why say something at all? That's particularly so when the comments were made in one of the bank's 'one-pager' OCR decisions rather than in the full Monetary Policy Statement (MPS) in which such comments could be explained more fully. The next OCR decision on May 8 will be released along with a full MPS. If the RBNZ had not considered there to be some urgency in changing its monetary policy stance then the assumption is it would have waited till May before shifting its forecasts.

So, I think we can assume, as many economists have, that the RBNZ will drop the OCR and it will be sooner rather than later. I reckon they will do it in May and follow with another cut in August. If so, that would see the OCR, the underpinning benchmark of our interest rate structure, sitting at just 1.25%. My goodness, that would be low.

As mentioned, there's already been some reaction in the marketplace. Notably Kiwibank launched a 'special' five-year rate on fixed mortgages at just 4.29%. Note though that this is for mortgages where the amount borrowed is 80% or less than the value of the property being bought. That does need to be stressed because obviously a lot of first home buyers have to borrow in excess of 80% of the value of the property.

It's worth having another crunch of some numbers at this point, courtesy of interest.co.nz's mortgage calculator.

Talking big figures

The February lending by borrower type figures recently issued by the RBNZ showed that 16,284 loans* were taken out for a grand total of $4.798 billion in the month. That gives an average mortgage size of $294,645 among all of those taking a mortgage. Of course many mortgages will be much higher than that and many lower. But the average is an interesting start point.

The RBNZ gave 5.77% as the market average floating rate for new mortgages in February. The market average fixed rate for five years was 5.56%. Since we've talked about Kiwibank's five-year 'special' rate, we'll include in our calculations the Kiwibank 'standard' current five-year rate of 5.04%, as well as its new 4.29% special rate. All for illustrative purposes.

Our mortgage term is 30 years.

Okay, based on that $294,645 average-sized mortgage in February, we would be looking at monthly payments of $1723 on a floating mortgage and $1684 for the market average five-year fixed rate. On Kiwibank's 'standard' five-year rate we would be paying 1589 a month and on the new 4.29% 'special' rate it would cost us $1456 a month.

By the by, when yours truly purchased his first home in 1991, it was on a high-LVR mortgage of $127,000 for 15 years on a reducing principal. (This was a fairly aggressive approach.) It is etched into my mind that the very first monthly payment was in excess of $2000 for, yes, the interest rate was over 12%. And no, I wasn't trying to do this on my own, as there was a second income stream contributing of similar size to mine!

Change, change, change

But it is interesting to look and see what a change has been wrought by the much lower interest rate structure we've seen in recent years. People can now be borrowing double what I borrowed then and paying far less. And remember, according to the RBNZ's inflation calculator, goods worth $2000 in 1991 would now cost $3400, so, based on that my $2000 mortgage payment then should equate to a $3400 monthly payment today. And lest, people think I'm writing all this with the sound of violins playing in the background, I will mention that of course mortgages with interest rates of over 20% were 'a thing' once upon a time. Wow.

Which brings us back to the FHBs. Some examples. In February there were 1353 first home buyer mortgages taken out worth collectively $485 million for mortgages that were 80% or less than the value of the house. This gave an average-sized mortgage of $358,462. 

So, running the same scenario as above, on the average floating rate we'd pay $2096 a month, on the average five-year fixed we would pay $2049, on Kiwibank's 'standard' five-year we would pay $1933 and on the new 'special' Kiwibank rate we would be up for $1772 a month. That's still less than someone sitting at my computer was paying in 1991 for a mortgage only about a third the size!

And then there's the fully geared up FHBs. In February brave souls designated as FHBs fronted up to borrow $325 million for high LVR mortgages, IE borrowing more than 80% of the value of their property. There were 736 of these mortgages taken out. This works out at a heavy-duty $441,576 average sized mortgage. These guys and gals would not qualify for Kiwibank's 'special' of course, so I won't include that example. On a floating rate they would have been up for $2583 (just under $31,000 a year, which is starting to sound pretty, um, impressive). On the market average five-year fixed rate they would pay $2524 a month, and on Kiwibank's 5.04% five-year rate they would pay $2381.

Losing the plot?

The inclination might be to say that people are testing the bounds of sanity committing to such large mortgages at a time when maybe house prices could start to fall.

But there are a heck of a lot of moving parts to all this.

The interest rates are really the key. And some of these five-year fixed rates are looking pretty good. And with the ever-growing chance that the RBNZ will drop official rates soon, then mortgage rates could even get a touch lower yet. The significant point is they ain't likely to rise any time soon. And if they do, anybody locking in for five years has at least given themselves a bit of breathing space.

The other interesting point about this is what happens on the other side of the equation with interest rates. If you are trying to save for a house, you don't want to be investing your money in higher risk investments, since your time frame is presumably reasonably quite short and you can't risk dips in your principal savings. Therefore, many people are likely to hold their savings in bank interest-bearing deposits. The returns on these are not flash and likely to get less flash in the short term. So, really those saving for deposits are dependent on how much they can save, rather than what sort of returns they might be able to get to boost their nest egg.

Servicing the beast

The key thing always of course is, regardless of what happens to house prices, the ability of the individual to service a mortgage. If you know what you have to pay every month for the next five years, and you can afford it now, then you should be able to keep affording it. The things that might trip you up include disruptions to employment. And that's a serious risk if the economy really does turn down.

Increasingly though we seem to be looking at a game in which the rules have changed. Unless we do somehow see a return to the higher interest rate structures of the past, we are now in an environment in which much bigger mortgages can be tolerated.

I don't think any of this makes the "should we or shouldn't we?" decision any easier. There's just that much more to think about. The reality is, you are only going to know in five or 10 years time whether the decision you made was the right one - and even then it's really all about the individual and how they execute their decision.

To therefore answer, but not really answer, the question in the headline for this article: Whether the current situation is a trap or an opportunity for particularly the FHBs will only be borne out by time and by how each individual handles the decision they've made.

So, plenty to think about. All I would say is: Good luck people and all the best.


*This article was amended slightly after initial publication to make clear that the RBNZ 'borrower' numbers refer to the number of loans taken out. Some borrowers may take out more than one loan.

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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There's a lot of decision making discussion. Although there's a lot more that goes into the decision.

Given the 30 year mortgages are common due to the shear size of the mortgages. You may want to calculate the total money paid for your house. There are plenty of loan calculator apps that will calculate this for you.

Given that people tend to buy a house later in life that 30 year term can now easily overlap into your retirement years. How long do you plan working past retirement age? Will you be able to service the payments on your retirement income?

Of course housing is just one third of personal finances (or in my opinion should not exceed that). Besides living costs you need to save for retirement. Remember you still have food, medical costs, regular bills and rates to pay. Is the amount you are saving for retirement going to be enough to maintain your lifestyle, or intended lifestyle? Are you buying too much house and going to have little to live on and enjoy when you retire?

Remember a house isn't an investment, it's a place you live in.

It gets complicated I think, with the strategies that our (potential) mortgage broker presents - I presume these strategies are used by many people out there:
Apply for and start off with calculations based on a 30 year term. Split the mortgage into several pieces, one of which is a flexi/revolving-credit. Pay that flexi down as hard as you want to, and use the space in that to pay the fixed term chunks off each month.
So the spiel goes that by pushing hard on the flexi, you take years off the overall mortgage length every time you renew/refinance.

Makes it easy to tell yourself that its no longer a 30 year term... i.e. I too can be a property investor in 10 years time and support the unsustainable..

In terms of cash flow the fixed payments come out of the flexi so that can result in a higher effective interest rate unless they homeowner has a high savings rate.

Banks now expect each new property to have a mortgage rather than extend the existing mortgage on the original house.

These people are raiding their Kiwisaver to buy houses - so they will have lost all the benefit of that money compounding over time, which is critical to having a decent amount available to retire on in 30 years.
https://www.businessinsider.com.au/amazing-power-of-compound-interest-20...

But which is worse.. having a good amount to retire on but still be paying rent every week.. or own your own home and not be paying rent, but have less cash/investments to retire on?

The answer is to do both - save for your deposit, while also putting away money into super. Renting is far cheaper than owning, so if a person put away the difference into a normal savings account, they will end up with both a house and superannuation in the future.

I thought it would be fairly obvious from the question that it was about the choice of doing one or the other first. Doing both means taking far far longer to save for the deposit for the house. and therefore paying rent for longer.

And a regular savings account? that pays ~0.5% interest, so you are really going backwards against inflation? Even a term deposit at ~3.3% (- RWT) is basically only treading water.

The trick is to do both where possible. The mortgage ends up being secured leverage against the retirement investment.

Ending up with a decent compounded retirement investment that provides enough to live off of or go on holiday (permanently), is still better than owning a house but depending on Super to pay all the bills and having to cut back on buying food.

The way people need to save for buying a house is by putting money aside for a house and not touching Kiwisaver. It's bad for retirement savings but the National Government encouraged this behaviour.

It also shows how unaffordable housing is currently.

The opportunities will come once prices start to come down. Until then it’s definitely a trap. I would not be encouraging my children into the housing market. Watch and wait.

I know a few FHBs who are about to jump in. FOMO still seems to be at play.
Personally, I'd wait another year.

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It’s a trap. See Sydney. This has been a bubble and it will unwind.

When any investment asset is purchased and financed by debt, the price paid is important, as it magnifies the impact on the equity value.

Anyone who purchases a house using debt finance need to consider the risks of a house price fall in light of current house valuations in Auckland.

Those that ignore the lessons of history are doomed to repeat them.

Some housing market lessons where the buyers lost their equity after the purchase price at the peak. In some cases the house price has still not recovered to its peak, so those owners who were able to hold on throughout the economic downturn and bought at the peak are still in negative equity and the value of their initial deposit to purchase the house is now down 100% :

1) Ireland circa 2007- now - https://tradingeconomics.com/ireland/housing-index
2) Spain circa 2008 - to now - https://tradingeconomics.com/spain/housing-index
3) United States circa 2005-2011 - https://tradingeconomics.com/united-states/nahb-housing-market-index

As these owners are still in negative equity, if they sell their house to downsize, they still owe money to the lender.

If you don't think of your house that you live in as an investment asset, then would you still be happy to own your house in 10 years time even if you are still in negative equity and have a 10 year negative return? That is the position of those who bought in Spain and Ireland at the peak and managed to hold on throughout the downturn are in now.

The problem becomes even more acute in the event of a divorce. An American friend of mine had to pay her spouse $40k to KEEP the house (and the mortgage debt). Negative equity will soon be the biggest STD (sexually transmitted debt) around. I'd be very careful about who you move in with, as instead of getting to share in half their house you will now get a half share in their mortgage debt.

Then there are the first home buyers who bought what they could afford near the peak and then decided to have a family and are unable to upsize due to their current home being in negative equity.

Refer - https://www.independent.ie/business/personal-finance/property-mortgages/...

... yes ... it's a classic bear trap ... the NZ Reverse Bank are sending out signals that despite a strong Kiwi economy , they feel the need to cut the OCR sometime soon ... ... thereby underpinning the house market bubble ...

And thereby allowing folk to pay extremely high prices for a home which would be impossible if interest rates were anywhere near the long-term average ...

... Sydney is the leading indicator of our future house prices ...

Hi David, appreciate your help so I can get my head around this one.
16,284 borrowers took on mortgages in February of approx $4.8 billion, there were circa 5954 *REINZ but appreciate may be revised) transactions in February and some of those would have been mortgage free purchases. That would suggest that there is still quite a lot of equity stripping going on as a share of the overall market. APRA has recently raised a concern about how mortgage amounts are being reported over the ditch, so the question I have is how is the data recorded where people have split mortgages, which seem to be quite popular, i.e part of the loan on a fix at 1 year, part on a fix at 3 years. Are they aggregated as one mortgage (for that household) for the RBNZ purposes or are they 2 separate mortgages in the figures that are reported? I only ask because over the last couple of years we have seen increasing loan amounts that don't seem to correlate with the drop off in the volume of annual transactions. Any information would be greatly appreciated.

My understanding is that the figures are aggregated here but confirmation would be good. Especially in the light of APRA in Australia treating each fragment of a mortgage as an individual mortgage for the purpose of calculating the average mortgage value.

I had exactly the same question! In Australia the "average" amount of a mortgage was impossibly low, considering that first home buyers rarely had more than 10-20% deposit, and the median house price was $800-$900k. I would hazard a guess that if the average mortgage amount in NZ combined with a 10-20% deposit doesnt add up to what it costs to buy a house, then the RBA is committing the same error.

Sorry to be a bother David. One further question to add. The RBNZ data seems to have stripped out the proportions of interest only lending which they were showing up until recently and it's not considered in the article. These aggregates were up at around 30% of all mortgage lending in the year to November 2018 but it doesn't seem to be referenced in this current series. Any idea where I could find it? The reason I ask is that from investigations I have come across a good number of people who have both a repayment part of their mortgage as well as an interest only segment.

https://www.rbnz.govt.nz/statistics/c32

Ignore previous comment in moderation. Stumbled across the data, so 28% of February loans (1.7 billion) of the 4.8 billion are on interest only.

What is not commonly reported in the mainstream media is the impact of the responsible lending on bank lending and more stringent application on debt servicing calculations, has resulted in tightened credit environment.

Here are some experiences on that and how that has resulted in reduced borrowing capacity by borrowers, as well as how IO loans have now reverted to P&I loans.

1) https://www.squirrel.co.nz/blogs/housing-market/how-responsible-lending-...
2) https://www.squirrel.co.nz/blogs/financial-planning/property-investment-...

Given that the big 4 banks in NZ are owned by parent banks in Australia and subject to APRA. The Australian parent banks may apply this to their NZ bank subsidiaries. Here are the serviceability assessment guidelines.

From APRA's APG223 "Residential Mortgage Lending" - issued February 2017.

32. Good practice would apply a buffer over the loan’s interest rate to assess the serviceability of the borrower (interest rate buffer). This approach would seek to ensure that potential increases in interest rates do not adversely impact on a borrower’s capacity to repay a loan. The buffer would reflect the potential for interest rates to change over several years. APRA expects that ADI serviceability policies should incorporate an interest rate buffer of at least two percentage points. A prudent ADI would use a buffer comfortably above this level.

33. In addition, a prudent ADI would use the interest rate buffer in conjunction with an interest rate floor, to ensure that the interest rate buffer used is adequate when the ADI is operating in a low interest rate environment. Prudent serviceability policies should incorporate a minimum floor assessment interest rate of at least seven per cent. Again, a prudent ADI would implement a minimum floor rate comfortably above this level.

34. APRA expects ADIs to fully apply interest rate buffers and floor rates to both a borrower’s new and existing debt commitments. APRA expects ADIs to make sufficient enquiries on existing debt commitments, including consideration of the current interest rate, remaining term, outstanding balance and amount available for redraw of the existing loan facility, as well as any evidence of delinquency. ADIs using a proxy to estimate the application of interest rate buffers and floor rates to the servicing cost of existing debt commitments would, to be prudent, ensure that such a proxy is sufficiently conservative in a range of situations, updating the methodology to reflect prevailing interest rates.

In NZ, there is currently NZ$66bn of loans secured by residential real estate that is interest only or revolving credit. That could be subject to payment shock by borrowers - refer https://www.rbnz.govt.nz/statistics/s32-banks-assets-loans-by-product.

The payment shock of an interest only loan to a P&I loan could result in financial stress for borrowers as mortgage payments could increase by 30-40%. If there are a sufficient number of financially stressed borrowers who own multiple investment properties, they could list their property on the market, thereby impacting the balance between effective supply and effective demand in their respective geographical property market.

One number that stands out is the amount borrowed by owner occupiers on revolving credit - approximately NZ$9.6bn. Why would owner occupiers borrow on revolving credit basis? We have heard that many property investors borrow on revolving credit on their homes to use as a deposit to purchase an investment property - it may be used to finance a buy and hold strategy, other times it is used to finance property trading strategies, such as buy renovate / develop / add value, then to either hold or sell.

Look at the example out of the US in 2005 of payment shocks - https://money.cnn.com/2005/09/15/real_estate/financing/crazy_loans_0510/...

When I had a mortgage, mine was on a revolving credit basis. I was an owner occupier. I commend them to anyone who has financial discipline and wants to pay off their loan as quickly as possible and with as little interest cost as possible. Yes, the interest rate is higher, and some (mine) come with a monthly fee ($12.50 at the time), but by applying all your income flows directly against the loan balance, and ensuring your expenses are as low as practical, the amount you owe the bank is always at its minimum possible level, day-in and day-out. I saved large interest dollars even if the rate was higher. And my loan was paid off far faster than the equivalent table mortgage term. I can see why you would think these are a 'best option'. I can't see why more people don't use them.

Thank you David. Certainly a lot of financial discipline is required. For those interested readers, here is David's article on using a revolving credit to finance the purchase of a house for an owner occupier

https://www.interest.co.nz/opinion/69320/why-revolving-credit-might-be-s...

This is like a replay of the Australian housing market, only we are about 12 months behind! FHB were sucked into the market over there as well, thanks to the state govts cutting stamp duty for FHBs. Fast forward to now, and FHB are frozen over too - that's what happens when you bring forward demand into a market where prices are falling faster than rates can be cut. Most of those FHB that purchased in the last 2 years are now in zero or negative equity. Its appalling that here in NZ the banks are encouraging everyone to squander what measly superannuation they have on buying a house knowing that prices are falling and that money will soon be gone. Even the Australian Govt hasn't got that desperate in trying to prop up the property ponzi. Shame NZ!

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I am a 'soon' to be FHB with a sizeable deposit and job that any bank would lend to. I understand your servicing argument and that payments are reduced compared to yesteryear but the SHEER amount of debt is massive. Do your calculations not take into effect the opportunity cost of servicing that large pile of debt over 30 years compared to investing for retirement / investing for cashflow?

My current deposit is $160k and I have averaged $16k per year return from investments in the last 2 years. I would give up this and then pay more for longer on a larger mortgage. I understand debt servicing is going down but their is a huge opportunity cost to holding this sheer amount of debt that is unproductive.

I'm in a similar boat, similar deposit ready to go but the only investment I get decent returns on is my cat which gives me some sense of responsibility and comfort in my overpriced rental. Sadly kids are out of the question for a lot of my generation when it comes to making smart financial decisions.

I still have more questions than answers.. to rent at $550 p/w or take out $450k of debt at a similar weekly mortgage repayment?
Should the market tank, I couldn't imagine my landlord decreasing my rent, but perhaps house values could decrease? Should I hold out then?
If I buy, do I buy a turn key 2br townhouse for $600k? Considering migration stats, the price of well located townhouses can only go up right?

...Will a natural disaster hit and take $200k back off the market price in the next 10 years?

rent at $550 p/w or take out $450k of debt at a similar weekly mortgage repayment

Interest on 450k would be about $350 a week currently so you would be $200 a week better off. I know, rates, insurance, maintenance costs as well but one could reasonably assume at least 2% capital gain on the house which would cover that.

I wouldn't buy new though. Maybe brick and tile unit or two/three bedroom do-up standalone cottage.

The worry for any savers must be that there is so much debt out there that it can't be repaid.
So will we see more money printing by the US in an attempt to rid the debt via inflation? Is this what we are seeing via a rise in US stocks...people want their money in anything apart from cash. The transfer of your hard efforts across to those that borrowed without fear?

Continue to do that and stay in the poverty cycle as you watch over the next ten years or so as house prices continue to escalate.
You assume that us baby boomers weren't scared taking on SHEER amounts of debt when buying our first homes - ask your parents and grandparents what it was like for them. You probably won't want to provide ammunition for their stories of woe by mentioning the fluctuating high interest rates.
As Roosevelt said - The “Only Thing We Have to Fear Is Fear Itself”

"stay in the poverty cycle"? So the only way out is to buy a house and that's because houses will only continue to price higher every year? You sir need to sit back and look at the bubble we are in.

This comment says a lot about your perspective. Failing some sort of epiphany on your part, sounds like hell will freeze over before you part with your 160k for a deposit.

He has more power with it in the current circumstances not using it. He now has, along with many like him, the opportunity to force house prices back to where they should be. Good job and about time after the stupidity of the past decade or so.

Not at all, but the transaction must make economic sense to my future well being and prosperity. Remembering that debt is a burden that I will carry for a very long time and I must make sure that the timing is right. I am 30, I have time to wait, invest and grow. My deposit is making a sizeable return for little work on my part and I am modelling the numbers on the buy/rent equation to calculate future prosperity.

I understand house prices continue to inflate in the long run but there are dips to every cycle and if i can buy in the next recessionary dip for say 10-15% less then i will. With China slowing, European powers entering recessions, the stock market fluctuations and now the yield curve inversion, I have nothing but time on my side even though the sheer peer pressure of everyone around me screams house house house now.

All I can say is that if you are in it for the long run, and acknowledge as you have above that house prices rise in the long run, then it is always a good enough time to buy. It is very difficult to time the market perfectly. Right now we know it is a buyer’s market. Remember that once you buy a house you are getting the capital gain on $500k, not $160k. Also keep in mind that inflation eats away at debt, and rents rise on average 3% - 5% per year like clockwork. I’ve just turned 32, and I purchased my first rental when I was 22 or 23 - I rented it out while I flatted to get on the ladder - something to consider. Ask anyone if they regret buying their first house when they did - the only one I’ve ever come across that does in Pragmatist (but I’m sure he regrets selling it more).

Nope, wrong.

How long is long run? Is 10 years long enough?

Take a look at these households, where after 10 years of house ownership, even though they were able to keep paying the mortgage for that whole 10 years, they are still in negative equity. If they had waited when property valuations were much cheaper, they could have bought at much cheaper prices and be in a better financial position than they are in now.

As a result of that one decision to buy a house at peak prices and finance the purchase with debt, after 10 years, their financial position in their house is worse off than when they started. Given that most households downsize for retirement, this means that their financial security in retirement is also at risk. All because of one financial decision - buying their largest asset (house) using debt financing at high valuations. The essential point is not to overpay for the house.

https://www.zillow.com/research/q1-2017-negative-equity-15888/

"Also keep in mind that inflation eats away at debt, and rents rise on average 3% - 5% per year like clockwork"

Here is a market where inflation eroded the value of the debt in real terms (i.e inflation adjusted and not nominal price) - https://tradingeconomics.com/australia/inflation-cpi.

So the buyer of a house in the last 2 years who financed their purchase with mortgage debt has seen their debt fall in real terms (i.e inflation adjusted).

However, these property owners have also seen their equity erode in the last 2 years as the property price fell in the last 2 years in both nominal price terms and even more in real price terms (and the real (inflation adjusted) returns were negative). In some cases, the equity may have eroded by more than 100% in nominal price terms (and even higher in inflation adjusted real terms) and the owner is now in negative equity

https://www.news.com.au/finance/real-estate/sydney-nsw/the-sydney-suburb...

"stay in the poverty cycle"

For a first home buyer in Auckland, buying at current property valuation levels, financing with a high LVR mortgage and taking on a high level of debt relative to their household income, they are more likely to put themselves at risk of going into the poverty cycle ....

That's true, but there's been an enormous bull market for stocks over the last 10 years so you can't necessarily expect to maintain 10% annual returns going forward.

That is a doozie. It depends on what is important to you.

That’s a nice deposit. I was an FHB just under 2 years ago and your deposit would settle my mortgage completely. It’s scary when you think about how much debt our peers are taking on, while also paying a 12% education tax.

Its a TRAP ............... we cannot live our lives on debt , debt , debt and more debt .

We cant live our lives in debt at any level , be it personal or public , its always ends badly and for countries it sometimes goes on seemingly forever , look at Greece , Argentina , etc

FTB's don't fall in to the 'Negative Equity Trap'. If you don't know what that is look it up before you buy. I think most people now have realised that house prices are now falling especially in Auckland.

Why are they falling: 1) New Anti Money Laundering rules for NZ, 2) Foreign Buyers Ban and 3) Market changes as a result of Trump's Trade War.

I would advise any FTB to hold off a little bit longer whist prices bottom out which may happen sooner than you think.

A balanced article considering the economic implications.
As mentioned: "The key thing always of course is, regardless of what happens to house prices, the ability of the individual to service a mortgage."
The purchase of one's first home is a long-term investment (although one may move from one home to another) and that in 30 years time any fluctuations in the short term will seem insignifcant.
In the early eighties, there was a "correction" in the Auckland market I saw the RV of my first home drop by 15% soon after my purchase of it. This was a fall of a whole $7,500 but 30 odd years later that house is now has a RV of over $750,000. And don't laugh and say it was then and it wont happen again - Devonport waterfront bungalows had not long passed the $100,000 and to think that one day they would be worth $2m, was at the time, inconceivable.
There are considerable intrinsic values in owning a home such as security of tenure, pride, and even getting to choose the wallpaper or colour of one's walls.
Buying any home is a challenge - finding something that fits your wants and price - and compromises will most likely need to be made. There are also lots of fears in buying one's first home - what is going to happen to mortgage rates, will I be able to service the mortgage, is the property going to need unknown major work such as leaky home syndrome, how secure is my/our jobs.
One has been hearing for the past three or four years of a significant correction or housing price bubble burst. That so far hasn't happened and there are enough positive drivers still there - low and likely falling interest rates for the medium term and continuing historically high levels of immigration - to suggest that while some correction may occur (such as a seasonal winter downturn) it takes a giant leap to suggest that it there appears likely to be a significant bubble burst. Such a burst in not in the interest of the wider economy and RBNZ's OCR signal supports that they do not want such an event. The RBNZ also have LVRs to counter any undesired corrections in the housing market.
Bottom line is that your bank - with all their expertise, knowledge and wisdom and a keen desire for self-protection - are not going to lend to you if there is any degree of real uncertainity in you being adversely affected in the foreseeable future,

The only thing that your bank will do is make sure that the LVR is low enough so that if and when prices fall it is you that lose the equity, not them.

A lowering LVR is a clear sign that banks are building in the increasing risk of a pricing correction.

It took 26 years for property prices to recover back to peak levels in Japan. There are parts of Europe and the US that are still waiting to see 2006 prices. You'd better really like the house you buy, as you might be living in it a long time.
https://www.businessinsider.com/home-price-recovery-since-financial-cris...

Yes David Hargreaves, there are a lot of moving parts in this one. House prices might go up or down and there are plenty of enraged common taters on this site who dispute what will happen next. Lets not go there.
Yes. Ten years from now one might just know for sure what one does was a better deal or not.
On balance I think - buy. Underneath all the fine calculations which might or might work out, you will have had ten years of living in a house you own, care for and control. And I can't think of anything worse that renting where it's always just a sort of temporary half life.

I see your point and in many cases you'd be right. However, when there is a reasonable prospect that prices could drop another 5-10% in the coming year, why buy now when you could buy in a year at a lower price and with a bigger deposit?
Sure prices may not drop 5-10%. But they are unlikely to increase, so waiting a year seems rational.

Because we're so far past normal economic cycles that the supposed 'correction' could just turn into negative rate easing again, and then you're another year older, another year past when you wanted to start a family and you still don't have a roof over your head and haven't made any headway on your mortgage?

I mean in purely $$$ terms, you are absolutely right. But the problem millennials have now is that the oldest ones are in their mid-30s and you can only put off some stuff waiting for a 'correction' for so long before you're at risk of not being able to do it at all.

Was just looking at homes.co.nz for Gisborne. I can imagine upside potential for houses below 400K, especially with the prospect of lower interest rates, halving every 10 years or so it seems. Good location, amenities, coffee shops and baby boomers is what you're looking for. Auckland with it's 2 million suburbs is a different story though. I just don't see how lowering interest rates and raising LVR's can prop up those prices which were predicated on foreign money.

Two people working for 30 years is what a Mortgage is. Mort-Gage means Death Grip....in the good old days.
Forcing down interest rates to create inflation is a stop gap, created to make people feel rich.
Rentals were bought in their thousands, for Landlords to take advantage of Inflation, paid for by someone else.. (Even our MP's caught on to that...hence why no Capital Gains Taxes....maybe never, in their lifetimes).
Leverage is a two way tilt. When your tenant disappears over to France, Spain, wherever houses are cheap as chips, to live in a dropping market....keep abreast of this or you will go Bust.
Because Immigration is a two way street too...It can cause inflation or go tits-up.
I am an immi-grant. ...some learn it costs. Some never learn.
Hyper-inflation is what some hope for. Deflation is what Government and Banks and Orr cannot abide.
Abide with me, is a Hymn.
Live with relatives., like people used to do...it is relatively cheap.
Family's divorced from reality, is a double edged sword, Twice debt and twice the Houses.

I could go on...but no one in Government and Banking cares.....Keep paying....their way.

When your tenant disappears over to France..

I know right? If I had a penny for every tenant that disappeared over to France...Sometimes I see them, on the news, in their yellow vests, hurling spent tear gas canisters.

Of course it's a trap. That was evident and communicated when the private banking system/fractional reserve was first designed.

It begs the questions, how long does our belief in the value of money hold up given its continuous decline in value which isn't even intrinsic to start with? If the goal is to grow the economy it needs real money flowing not increasing amounts of debt. Tying everyone into debt, especially younger generations must only limit the flow of money, hence one reason why economies are slowing everywhere. Then there's the existential issue which is a highly personal challenge of mine but must haunt a few others out there; one short life and we spend most of it paying off a mortgage and saving for retirement and heaven forbid any complication should arise along the way. If having a home is so important and we know it is, why have we made it such an expensive and stressful experience?

Lessons out of Sydney for first home buyers in Auckland - given that property prices have fallen to 2014 levels in some suburbs of Sydney, it is likely that some first home buyers in the last 3-4 years have lost a large proportion of their initial equity deposit. Some who bought at the peak on low deposits and high LVR loans are likely to be in negative equity now. These people may not have viewed their house purchase an an investment asset but that is the financial position that some owners are in now with very large mortgages. They could have rented and avoided this situation altogether and be in a much better financial position to buy when house prices fell.

Those first home buyers who waited in the meantime, built up their initial deposits to even larger amounts, and can wait for the attractive prices to buy. They might now be able to afford those properties in neighbourhoods that were previously unaffordable, and given their larger deposits saved can take on less debt than those who bought at the peak.

https://www.news.com.au/finance/real-estate/sydney-nsw/the-sydney-suburb...

FYI, 10 years on, those owner occupiers who got caught in the credit bubble in the United States, overpaid for their house, and took on too much debt to finance their house purchase. It only takes one large financial decision to go bad to really set back your financial security for the rest of your life.

The American Nightmare: 10 Years After the Financial Crisis - documentary
https://www.youtube.com/watch?v=9F_sxkSHmCo