What I’d do if I was a first home buyer in 2020

Housing Market Written by John Bolton, May 11 2020

There’s a lot of mixed messages out there about property at the moment. A lot of it has personal bias.

Some commentary is from complete pessimists who think the world is coming to an end. Some is from the industry who are far too bullish and whose income is in some way tied to property.

We’re arguably in the latter camp (given we’re mortgage advisers) – but we try to call it as we see it. We want our clients to do well, so we understand the stakes are high when we provide advice. We don’t dish it out lightly!

While I can’t predict the future, I can look to the past for clues and make some calculated judgements.

Here’s what I’d tell myself if I was a first home buyer in 2020.

It’s hard being a first home buyer. Mixed messages and high house prices – it’s a challenging cocktail. I empathise with everyone trying to buy their first home.

With my wife we purchased our current home back in 2003. At the time, I was nervous and thought house prices were grossly overvalued. Since then, its value has gone up 300%.

If I reflect back on my home purchase – sure house prices have tripled since then, but over the same time salaries have doubled and interest rates have dropped by two thirds. In other words, affordability hasn’t changed, and my mortgage repayments would still be a similar proportion of my income. Our first home was a stretch even back then. I recall having to empty the coins in the car ashtray to pay for dinner, and having no savings to replace the laundry sink which crapped out within weeks of moving in.

It’s tough out there, but it’s not impossible. Prices are high, but interest rates are at record lows. The world is a much different place than it was in 2003 – so it’s not comparing apples with apples.

I’d plan for a short-term 10% reduction in house prices

I think house prices are largely cooked, but equally I don’t think the risk of them dropping significantly is that high. I’m in the camp of a small 10% short-term reduction. Most of that headline reduction will come from higher value properties falling 15%-20%. From my perspective entry-level prices won’t noticeably change.

I’d get all my ducks in a row

House prices will fall. Everyone assumes this happens slowly, because that’s the way it’s reported in the media.

In reality, house prices fall fast.

If a vendor needs to sell a property, the price drops until they find a buyer. At first, there are only a few sellers in the market, so the sale price doesn’t materially impact on how the media report market prices.

Over time, more sellers lower their price and the average starts to drop. All along, there were sales at the lower price – it just became more common.

So, deals will be out there now, and next week, and next month. Don’t put off speaking to a mortgage adviser until the media tells you prices have dropped – get all of your ducks in a row early.

I’d plan to make offers

The second-most important rule of house hunting is that you’ll never find a good deal if you don’t look.

But, the most important rule is that you’ll never find a deal if you don’t negotiate or at the very least put in an offer!

Navel gazing and procrastination are not good strategies to get into the housing market, but they are the preferred strategy of nervous home buyers.

My view is that price drops will be short-lived. We still have very low interest rates, immigration will pick up again, and our economy will recover. It’s just a question of timing but resist waiting for the herd.

Don’t rush into the market, but also don’t be a wallflower for too long.

I’d be cautious about low deposit home loans

There’s been a bit of media focus on LVR removals to help first home buyers.

This is pushed by anyone in the property industry who feels the need to talk up the market. But in my view, it’s way too early to be looking for green shoots!

In reality, the changes were made by the Reserve Bank to help banks accommodate mortgage deferrals if house prices fall and their clients end up with less than 20% equity. That’s why it’s only been removed for 12 months.

It may indeed have a small side benefit for first home buyers, however banks are generally getting tighter on credit, not easier. It’s now harder to get approved with no LVR restrictions than before COVID-19 when restrictions still applied.

Lenders are placing much more emphasis on income reliability. How long has a borrower been in their job? If you have less than a 20 percent deposit, then at least a year is becoming normal. They are even questioning the stability of employers. We had a deal ‘deferred’ because the employer had taken the wage subsidy.

The biggest area of focus is on demonstrated ability to service the mortgage. That usually equates to rent and savings being high enough to substitute for mortgage repayments at an interest rate of 6%.

So, for a $600k mortgage, we would need to demonstrate you can afford $3,600 per month. If your rent is $600 per week, we’d still need to show $1,100 of savings or discretionary spend each month that can cover the mortgage. If we can demonstrate genuine affordability without smoke and mirrors this will dramatically improve your chances of a good outcome with lenders.

I’d cut back on unnecessary spending

If you’re getting ready to buy your first home, the best thing you can do is manage your bank accounts better. Cut out discretionary spending and show regular savings, even if it’s just for three months. Demonstrate that you can afford the mortgage repayments.

The other obvious hint is to minimise consumer finance debt. Get rid of any small balances, consolidate debts into one loan, and try to keep overall debt as low as possible. If you have debts then consolidate them with our Squirrel Debt Consolidation loan.

Tidying up or paying off debt has a big positive impact on us showing you can afford a mortgage as does your ability to save and sacrifice spending on discretionary items.

Don’t give up and make a plan

If you can get approved now, you’ll be ahead of the pack. We are getting high levels of first home buyer enquiry but a lot of it is coming from those who have been locked out of the property market.

If you aren’t ready yet, don’t give up. Over the lock-down period we all got used to living on tighter budgets. Try and keep saving. Think about and agree your goals and start making sacrifices to achieve them. You have to put the hard work in. Clear debt and if you can get rid of your student loans. Student loan repayments eat up 10% of your after-tax income which has a big impact on how much you can borrow.

When it comes to a deposit, KiwiSaver is making a large difference for most buyers. Not only do you get your 3%, but you also get your employer putting in 3%. I’d advocate putting your own contribution up to 5%. It’s set and forget saving. KiwiSaver builds up quickly and before you know it you will have a 10% deposit.

Although banks are currently quite tough on low deposit lending, they will gradually relax when house prices stabilise, but most importantly when the risks of losing your job drop away. If I’m right, you won’t have to wait that long.

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