Rising interest rates and falling house prices aren’t just affecting first home buyers, they are also affecting people who already own their home and are thinking of moving up the property ladder, according to interest.co.nz’s Home Loan Affordablity Report.
The report is well known for tracking the main affordability measures for first home buyers, but it also tracks the financial viability of so-called second rung buyers, the people who bought their first home several years ago and are now looking to make the next move.
It does that by looking at the main financial measures for people who purchased a home at the Real Estate Institute of New Zealand’s lower quartile selling price 10 years ago. And how well placed they would be to sell that and move up to a median-priced home today.
What this shows is that they would have built up substantial levels of equity in their first home over the last decade, giving them a strong financial base from which to contemplate their next move.
But recent falls in house prices are starting to erode their equity, while rising interest rates are pushing up the mortgage payments on the loan they would need to move into a more expensive home.
This is how those numbers stack up.
Ten years ago (June 2012) the REINZ’s national lower quartile selling price was $257,000.
By June 2022 that had risen to $628,000, giving them a paper gain of $371,000.
Interest.co.nz estimates that if they had purchased that home with a 20% deposit 10 years ago and resold it at the current lower quartile price, they would have $437,226 in equity to put towards their new home, after paying off the mortgage and allowing for selling expenses.
That’s a decent chunk of cash and would provide a 52% deposit on a home at the June 2022 national median price of $840,000.
Of course they would need to fund the rest of the purchase price by taking on a new mortgage of $402,774.
The mortgage payments on that would be around $504 a week, assuming a 30 year term at 5.1% interest.
Interest.co.nz estimates that the combined, median after-tax pay for couples working full time at the median rates of pay for people aged 35-39 would be about $2001 a week, which would mean the mortgage payments outlined above would eat up just over 25% of their take home pay each week.
By that measure, a couple who bought a modest home 10 years ago and are earning average wages should be well placed to keep moving up the property ladder into a more desirable home.
They should also have no trouble securing a bank mortgage to make the move, because of the high level of equity they would have in their new home, which means a low loan-to-value ratio, and the affordable level of repayments.
These are exactly the type of customers banks are chasing. They may be more cautious about lending to first home buyers, mainly because of the difficulty they are likely to face in raising a sufficient deposit and the high level of their income that would be eaten up by the mortgage payments, making them a much riskier proposition.
However the current low level of housing sales each month suggests it’s not just first home buyers and investors who are holding back from making a purchase.
It’s likely that many second rung buyers who would like to move up the property ladder at some stage are also sitting on the sidelines, for the time being at least.
Although they may be well placed financially to make the move, there could be several aspects of the current market that are weighing on their minds, causing them to stay put.
Falling house prices are probably at the top of the list.
Since prices peaked in November last year, the REINZ’s national lower quartile price has declined from $670,000 to $628,000 (-$42,000), while the national median has dropped from $920,143 to $840,000 (-$80,143).
That should have worked in second rung buyers’ favour, because the drop in value of the home they are buying is likely to be greater than the drop in value of the home they are selling.
However people are not always rational beings.
No one likes the thought that the home they are thinking of buying could be worth less than the price they paid for it after a few months, even though they could be looking at staying in that house for 10 years or more.
FOOP, or fear of over-paying, is a powerful motivator in the current market.
Going hand in hand with falling prices is the lack of capital gains.
Capital gains were a huge motivator for people to keep moving up the property ladder when prices were rising strongly, because they felt they could just sit back and watch their equity grow.
That aspect of the market has all but disappeared for now.
Then there’s rising interest rates.
Many people seem to believe that mortgage interest rates are high, but that’s not the case.
The average of the two year fixed rates offered by the major banks in June this year was 5.1%.
Ten years ago in June 2012 it was 5.6% and 15 years ago in June 2007 it was 9.18%.
Mortgage interest rates aren’t high, they are just heading back to long term norms after a sustained period of being unusually low.
However the rise in mortgage rates is increasing the amount of money second rung buyers would need to put aside for mortgage payments to make the move into their next home.
Over the 12 months from June 2021 to June 2022 that would have increased from $376 a week to $504 a week based on the example above, an increase of $128 a week.
While the mortgage payments would still be well within what most people would regard as affordable limits for people on average wages, no one likes the idea of rising mortgage payments and the effect this could have on their discretionary spending, especially during uncertain economic times.
So although moving up to their next home would still be a viable financial proposition for most people who are already well established in their own home, provided they have kept their debt levels under control, it Is perhaps not surprising that many are deciding to stay put unless their need to move is pressing.
If there were three words that could sum up the prevailing mood of the residential property market at the moment they would probably be “wait and see.”
The latest Home Loan Affordability Report for first home buyers is available here.
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