First home buyers in Northland, Auckland, Taranaki & Manawatu/Whanganui benefit from a fall in prices

Property / analysis

Rising mortgage rates took the shine off price falls for many first home buyers in September

24th Oct 21, 6:00am by Greg Ninness

Photo: Liz West

It became slightly easier for aspiring first home buyers to be able to afford a home of their own in several parts of the country in September, as prices dipped at the bottom of the market.

According to the Real Estate Institute of New Zealand, the national lower quartile selling price dropped $14,000 from $619,000 in August to $605,000 in September.

The lower quartile price is the price point at which 25% of sales are below and 75% are above, representing the most affordable part of the market.

The biggest lower quartile price decline was in Auckland where it dropped by $30,000, from $880,000 in August to $850,000 in September. This was followed by falls in Taranaki of $23,785, Manawatu/Whanganui of $15,870, a Northland drop of $15,000 and a fall in Wellington of $10,000.

The lower quartile price was unchanged in Otago, while all other regions posted an increase in the lower quartile price in September.

However not all of the benefit of lower prices flowed through to buyers because it was partially offset by an increase in mortgage interest rates. The average of the two year fixed rates offered by the major banks rose from 2.82% in August to 3.02% in September, which was the first time it has been above 3% since April last year.

For buyers with less than a 20% deposit the impact of higher rates was even worse. That's because banks charge higher rates of interest for low equity loans, and the average rates for those loans jumped from 4.02% in August to 4.22% in September.

The rise in interest rates took most of the shine off the drop in prices and the resulting reduction in mortgage payments on a lower quartile-priced home was less than $10 a week.

But outside of Northland, Auckland, Manawatu/Whanganui, Taranaki and Wellington, first home buyers received no relief at all as ongoing rises in lower quartile prices (apart from Otago), combined with higher mortgage rates to push home ownership further out of reach.

The big unknown for first home buyers at the moment is what effect further interest rates rises will have on house prices compared to mortgage payments.

Average mortgage interest rates have risen in every month since June and those rises are about to get steeper.

The country's largest mortgage lender ANZ on Thursday announced a 45 basis points increase to all its fixed-term mortgage rate terms from six-months to five-years. Other banks are likely to follow the hikes, and most economists are expecting rates to keep rising next year.

Higher mortgage rates affect house prices because they increase mortgage payments which in turn, reduces the amount people can borrow to buy a home, unless the increase mortgage payments is matched by an increase in income.

So the latest round of mortgage increases may well put downward pressure on prices.

However, it is the balance between the effect rising rates have on prices and the effect they have on mortgage payments that determines whether first home buyers will be better or worse off.

Either way, the latest rate rises suggest the market could be in for a bit of shake up.

The tables below show the main affordability measures for buying a home at the lower quartile price in all of the country's main urban districts.

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43 Comments

by Carlos67 | 24th Oct 21, 6:24am 1635009866

Basically FHB are now left waiting for some apocalyptic event to be able to afford a house.

by bw | 24th Oct 21, 11:23am 1635027816

That would be their home-owning parents dying, I guess.

by Officebound | 24th Oct 21, 6:37am 1635010623

"Interest rates are like gravity to asset prices"

This is a known-known for a long time right?

by Zachary Smith | 24th Oct 21, 7:35am 1635014116

It's only a theory.

by tothepoint | 24th Oct 21, 8:35am 1635017748

Good to see that first-home buyers and lower income people are getting a bit more of a chance to get into their own homes.

Long may it last.

I suggest prospective home buyers (at all price levels) hold off from buying through the rest of spring and summer - to see whether house prices can be forced down further........

TTP

by fortunr | 24th Oct 21, 10:05am 1635023107

Interest rates are definitely a very important factor in the housing market, possibly the most important factor, but definitely not the only factor.

The relationship is not linear and it is also affected by other elements, including taxation regimes, population flows, demographic changes such as population ageing and family composition, unemployment levels, even cultural factors and subjective perceptions.

by Smudge02 | 24th Oct 21, 10:57am 1635026232

Correct, and as is often the case in 'real life' we sometimes take for granted just how important to us gravity actually is!

by Notgreedykiwi | 24th Oct 21, 8:39am 1635017953

There is no benefit of buying in this crazy market. In NZ we do not fix interest rates for 30 years, only yearly. So when interest rates are very low, prices of assets tend to go higher because everything becomes so affordable not because people have money but banks are ready to lend them more. So more money in the market means people spend more and then comes the inflation. So now interest rates rise, asset prices will come to a reasonable level and if you have saved cash. You buy it. Although you pay high interest but you pay on less amount borrowed and you bought an asset at low price too. Overall you own the asset at a reasonabally low total cost of ownership. And this is good if you plan to keep the asset and not be one of those greedy leeches who want to buy to make money from others misery at a later date.

by Albert2020 | 24th Oct 21, 11:07am 1635026877

People were saying wait for the pullback in 2017 before buying... looked what happened since. Ultimately no one knows what’s going to happen to house prices. For all we know rates could be dropping this time next year. If you have just brought a house and want more certainty then interest rate average your mortgage structure

by Notgreedykiwi | 24th Oct 21, 11:34am 1635028476

Yes true nothing is for sure in this universe.

But it helps to have a brain and make grounded decesions and not run with FOMO. Also buy with intention to keep it not with an intention that will sell in few years when prices go up and dream about becoming a millionaire. If everyone is a millionaire, then it means one chicken costs a million too. (Hyperinflation) and that's not going to be good in anyway.

by Brock Landers | 24th Oct 21, 11:37am 1635028664

This is true. All we can do is estimate probabilities based on the evidence at hand.

Prices could go up, down, sideways, backwards and inside out for all we know.

But the evidence strongly indicates that we now have reached peak bubble.

by Smudge02 | 25th Oct 21, 7:51am 1635101486

Totally agree with 'Notagreedykiwi' on this one. So things have changed a lot in a few generations. The modesty in which our grandparents lived post WW2 has all but vanished and the hardships forgotten. We now live in a world where extreme wealth is the single goal of many, and this comes with a heavy price to communities and families with a more selfish attitude (ie flipping houses to make your fortune).

No we don't know what the future holds but we can all make decisions to set our own path. I choose to live in my one and only (first) home mortgage free, with no interest in participating in the NZ housing investment feeding frenzy so that I can look my kids in the eye in years to come and say I didn't participate in this monumental disaster that is NZ housing.

This world can barely cope with the swarms of humans now let alone if we all become millionaires and consume even more! I feel the future will have to be a more modest one, we just don't know it yet. Greed is our No.1 enemy and may well be our undoing if we aren't careful.

by Poldark | 24th Oct 21, 8:40am 1635018044

All these jargon numbers can't mean house prices go DOWN. Supply & demand

by Officebound | 24th Oct 21, 8:47am 1635018429

Immigration is 0 and we're building at record levels.

Tax changes making property a less attractive investment.

Interest rates going up. Banks tightening up.

Where is this demand coming from?

by Noncents | 24th Oct 21, 8:57am 1635019045

"Where is this demand coming from?"

The monumental backlog of unfulfilled demand
The extra 165k people granted an immediate path to residency, that previously were ineligible to buy.

by Solid_Granite | 24th Oct 21, 9:09am 1635019775

I think he means demand in the financial sense. We won't buy if we can't afford to, or if it doesn't make economic sense to.

by GV 27 | 24th Oct 21, 9:50am 1635022251

If it was this simple, we'd never have gotten to this point - demand would have tapered off long before 11x incomes or whatever the hell we're up to now. It's simply not just a case of 'economics' - you're trying to future-proof years of stability, a place to start a family, etc. House prices haven't made economic since since the mid 2000s.

by Albert2020 | 24th Oct 21, 11:10am 1635027013

I think we are underestimating the role of the bank of Mum and dad. They are drawing down on some of their massive gains over the past year to contribute to a large deposit or even buy the house

by bw | 24th Oct 21, 11:34am 1635028453

I'll take your word for that.

But job insecurity (who wants more debt if the job/income ends?), taxation issues (with M&D taking equity stakes in a purchase) and loan serviceability criteria (3% over carded rate of %?) might make drawing down any free equity a little less attractive than what it was until recently.

But as you imply - it's all about access to debt - one way or another. Demand, by and large, remains Desire without it.

by Brock Landers | 24th Oct 21, 11:38am 1635028726

The bank of mum and dad is sub-prime v2.0 in the making.

by kiwiana02 | 25th Oct 21, 9:49pm 1635151760

Those 165,000 people are here already and mostly renting a home as they are not allowed to purchase. When they do eventually buy a home, that will will free up an existing home. I also understand ability to get residency is some time away - end of 2022 from memory.

by Wiseguy | 24th Oct 21, 9:48am 1635022092

We have been through this before. The immigration has slowed down long time ago and it had little to no effect on the house prices.

The very slight decrease that we see in prices is mainly from Covid, the small increase in the intrest rates has little to do with it.

If you notice the drop is mainly in Auckland and surroundings where covid has been most active. Further more, the cash rate can not be raised significantly as inflation is already at crazy levels.

As I mentioned 5 years ago, buy when you are financially able to, there is a big difference today in property value compared 5 years ago.

by Lapun | 24th Oct 21, 10:10am 1635023431

10,000 new doctors, teachers, engineers each with a partner means demand for houses increases by 10,000. Tax revenue increases.

10,000 extra pump attendants, checkout operators, fast food workers means no increased demand for houses but more living in existing houses. Tax revenue increases modestly but balanced by increased demand for benefits.

by Jesse1 | 24th Oct 21, 3:07pm 1635041252

All of these immigrants you talk about are largely to replace the Kiwis that are going to leave for Australia etc because NZ doesn't make sense anymore with the cost of living vs incomes. High immigration is going to be less acceptable going forward and I expect more to leave than before so on balance we could have a falling population for a while.

I firmly believe that young Kiwis should at least move to Australia for at least 5 years. Even if you go to Sydney you can still save a lot more than here. It's what I did.

by Lapun | 24th Oct 21, 4:51pm 1635047512

Split emigration into two groups - those who cause NZ to lose a skill (our GPs and Nurses) and those who go abroad for experience and who may return with greater skills.

You are right - our housing costs push our talent overseas but does not deter immigrants used to very high density living.

by alittle | 24th Oct 21, 9:47am 1635022052

https://www.stuff.co.nz/national/126761590/covid19-blamed-for-aucklands…

Wrong Analysis oor why half truth is twisting the facts.

Covid19 reason for population deckine in Auckland but fir two reason

1: High PHouse Price Growth (1.3 milliin - how many people can affird a loan of one millin after managing to pay deposit if say $300000 as million dollar fir FHB is still the same as ore panademic and if anything with inflation has become more hard)

2: Missing Internatiinal student and people on work permit as most people come to Auckland than any other city.

So....

by taimaiakka0 | 24th Oct 21, 10:10am 1635023410

Agree House price and immigration is the biggest factor contributing to population fall in Auckland.

Covid19 has been used by RBNZ and Government to boost the ponzi so for house orice rise cannit blame covid19 as was the excuse used to boost but yes for immigration covid19 is responsible otherwise no government could afford to cut immigrant be it Winston Peter (though for voges can play to the galledy) as NZ is based on immigration.

by Lapun | 24th Oct 21, 10:14am 1635023681

Rental prices for my North shore house has gone up but the apartment in the city has taken an over 20% decline and I'm happy to have a tenant. So it is not house prices that contribute to population fall in Auckland. Prices do go up but the buyers expect them to remain high in the future. A property purchase is a hedge against inflation.

by bw | 24th Oct 21, 11:42am 1635028943

"Property purchase is a hedge against inflation."

Could be. But isn't that what many purchasers in China were told, though?

Besides. If China does get into some sort of economic and social strife, they'll lower the value of the Yuan - a lot (you can do that when you control your exchange rate and control money issuance - the opposite of what we do); to keep their exports workers at it, and flood the World with cheaper goods.

So, relying on Inflation is not a given.

by Lapun | 24th Oct 21, 1:31pm 1635035515

"Property purchase is a hedge against inflation." - of course it depends on the property. Cycling the Otago railway you pass many adequate but empty houses. If property prices halve in Auckland not every house would decline by the same percentage. A pleasant detached house in a suburb not too far from the city will retain more value than most. My apartment in the city was bought for $180k in 2009; it had been uninhabited for two years since built and originally advertised at $340k. I worry about the FHB buying the >$1m apartments in North Shore - a decline in the market might cripple them.

by Brock Landers | 24th Oct 21, 11:42am 1635028954

This strategy is only profitable if the nominal house prices increase faster than CPI inflation.

In this brave new world where central banks are aggressively raising interest rates to suppress CPI inflation all bets are off.

by Cobolt24 | 24th Oct 21, 12:05pm 1635030354

Yvil's prediction looks to be correct. I feel the market has more or less levelled off for the time being.

by Nifty1 | 24th Oct 21, 2:28pm 1635038920

It had to slow down sometime...alot of people have been predicting this.

by Yvil | 24th Oct 21, 2:43pm 1635039792

Difference is many people who have been predicting a slow down, have been saying so for 10 years plus

by Brock Landers | 24th Oct 21, 2:48pm 1635040113

It has slowed down many times in the last ten years.

Or are you saying this time it's the big one?

by Nifty1 | 24th Oct 21, 3:46pm 1635043566

I've seen many people predicting this months ago, including media commentators such as Tony Alexander. Nothing ground breaking here...

by Jay Lim | 26th Oct 21, 9:00am 1635192013

They are always right. price will slow down and fall.

Just like Indian rain ritual always lead to a good rain.

by Neil21 | 24th Oct 21, 3:14pm 1635041683

If you want to reduce house prices, increase land supply, reduce development contributions, remove bureaucracy.

Make rentals more profitable for landlords - that way more will enter the market.

Supply / demand equation always works.

by Albert2020 | 24th Oct 21, 3:51pm 1635043878

Reduce credit growth...done, house prices fall

by Solve_it | 24th Oct 21, 5:44pm 1635050647

I can't imagine a single reason why more private landlords in the market could be a good thing.

by Zen20 | 24th Oct 21, 5:45pm 1635050745

I find Oneroof's constant spotlighting of houses that are selling for millions above CV etc after only 3 days marketing and bought sight unseen (for example) so tone deaf in todays environment, People are losing their livelihoods and no doubt houses soon too but you have these obscene celebrations of greed being flagged day after day by the Oneroof hype merchants. It seems like a total anachronism and time for it to end.

by J.C. | 24th Oct 21, 6:41pm 1635054079

OneRoof is Granny Herald's crown jewel. If that clickbait goes, who knows what will happen.

by HouseMouse | 24th Oct 21, 9:27pm 1635064050

Was just looking at some interesting historic charts, and there's a pretty strong correlation (as one would expect) between significant movement in the OCR and both house price growth and construction of new houses.

Given this, a lift in the OCR to say 1.25% in the next 6 months is likely to significantly slow both house price growth and new house construction.

And these trends tend to follow each other quite quickly, there's not typically big lags.