Why it's not all doom & gloom for first home buyers who bought at 2021's market peak

This article is for those first home buyers who had only just got a foot on the property ladder when the market started to turn late last year.

I’ve no doubt you’re feeling pretty stressed and beaten up by the way things have gone in recent months. Buying for a premium, only to watch house prices start to fall away. Signing onto a mortgage at 2.5 per cent interest, only for rates to start heading up.

Everything feels pretty damn scary at the moment, but it doesn’t need to.

Whilst things will continue to be pretty unnerving in the immediate term (there’s no sugarcoating that unfortunately), the longer-term outlook isn’t as bleak as the news headlines would have you believe.

And here’s why.

1. Entry level houses are generally pretty well insulated against major price falls.

There are still some doomsayers out there touting this idea that the drop in the market is going to end up somewhere between 30 and 40 per cent. In my opinion, they’ve got it wrong and there’s no way that’s happening.

For those who bought at entry-level around last year’s market peak, I’m anticipating a 10 per cent drop in absolute prices, nothing more. That is about half of last year’s gain.

(Although across the overall market, the drop may be more in the realm of 15 per cent.)

That’s because, if we look at that first home buyer price point, there are a couple of factors in the mix which are going to protect against any bigger falls.

When it comes to entry level housing, demand often outstrips supply.

Right now, sure, that’s probably not the case. Everything that’s going on in the market has people so freaked out that everyone is sitting on the fence – but things won’t stay that way forever.

For a while now, I’ve been of the view that interest rates increases have largely done their dash – and are likely to settle in the low to mid 5.00% range. And with the economy slowing down so much faster than expected, my sense is that we’ll see a less aggressive stance on OCR increases too.

If I’m right, and interest rates continue to settle, that’ll encourage first home buyers back into the market again, and the supply and demand equation will start to swing back the other way.

Buyers don’t go away. They camp out on the fence, en masse, and when they do rush back in it can happen all very fast. The longer you wait, the bigger the backlog of buyers.

And with the level of building activity slowing rapidly, the lag period before that picks up again will only intensify demand even further.

So, that’s one thing protecting against a drop in entry-level house prices.

And these days, the typical property for first home buyers is a new terraced townhouse. For new properties, prices are always going to be largely dictated and underpinned by build costs.

Unless build costs are dropping (which just isn’t going to happen any time soon) the only other thing that could drop is land value. That should happen but it won’t translate to massive falls in house prices.

For terrace housing, a 30% reduction in land price will typically result in a 10% drop in absolute prices.

All of that said, there will be parts of the market that fall quite a bit. When you get further up the property ladder, the supply and demand equation is vastly different – which means there’s not that same protection against bigger falls.

Development property in particular is really vulnerable right now, after the frenzy last year which saw developers willing to pay through the nose for 1000m2 plots of land.

That’s not great news for Mums and Dads who’ve owned their property for 20 years and were maybe thinking of selling to a developer 12 months back but held off. Where they might’ve gotten $1.5 million then, they may only be able to get more like $1.2million now or even less if they have to sell quickly.  

But given they’ll be sitting on a much smaller mortgage, and years of capital gains, they’ll still be in really good shape.

2. Inflation is good news for affordability and house price recovery.

That statement won’t make much sense against the backdrop of our current cost of living crisis.

While inflation tends to cause short term pain, one of it's very few up-sides is that, over time, it’ll mean we see wage and salary increases come through to compensate for the higher cost of living.

And with the skill shortage many industries are facing right now, between record low unemployment and a lack of immigration, some employers will be going above and beyond that to try and hold onto their best talent.

All that means lots of Kiwis are in for a healthy pay bump or two in the coming while – and that’s good news on a few different fronts.

For homeowners, any income boost is going to help ease some of the stress and financial burden that’s been created by recent interest rate hikes.

For prospective first home buyers, it’s going to help improve affordability – meaning they’ll be in a position to pay a little bit more (giving them more choice) when it does come time to buy.

And growth in household income is the one of the major factors that drives growth in house prices.

We know that Kiwi household incomes have gone up about 4.5 per cent each year over the last decade, and as a general rule, house prices have followed suit. We might be in a period of correction right now, but once things start to settle down and buyers start returning to the market, I’d expect to see us revert to trend.

That would mean, if entry-level house prices are set to fall about 10 per cent overall, we should see those losses clawed back within the next three to four years as inflation drives high incomes, building activity stops and interest rates stabilise.

Not everything is created equal, of course, and other parts of the market that are harder hit will take longer to bounce back – but for entry-level homeowners who bought at last year’s peak, that’s the sort of timeframe I’d have in mind.

3. As long as you weren’t out to make a quick buck, you’ll be fine.

With the way the housing market’s gone in recent years, people had developed this unshakeable belief that investing in property was a sure-fire way to make good returns. And for a long time, it was.

But in reality, I’d encourage people to look at housing and property more like KiwiSaver. We accept that it’ll go up and down to some degree, but we also know that in the long-term, it will always perform.

For buyers who bought at the peak of last year, either speculating or as a short-term thing, then yeah, I’m afraid the news isn’t good.

But for those who bought planning to make that property their home for the next five or 10 years, then you’ve got nothing to worry about.

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The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Squirrel shall not be liable or responsible for any information, omissions, or errors present. Any commentary provided are the personal views of the author and are not necessarily representative of the views and opinions of Squirrel. We recommend seeking professional investment and/or mortgage advice before taking any action.

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