Lenders are becoming smarter when it comes to credit policy and this is set to benefit investors and first home buyers. Low growth and high margins has kept lenders competitive and looking to win (or at least hold) their share of new business. To date this has been largely price driven, but we are now seeing positive changes to credit policy to grow market share.
The most recent change has been to freehold apartments. It is now possible to borrow up to 90% on any freehold apartment or townhouse, even those as small as 30sqm. This is a massive step forward. Back in 2008 lenders stepped back from lending on apartments and especially small shoebox apartments. Anything under 50sqm was considered non-standard and the universal policy was to restrict lending to 50% of property value. By taking such a conservative approach lenders effectively killed the market for small apartments and prices dropped accordingly. Until recently it had been possible to buy a non-standard apartment for as little as $120,000 with a net yield of 8% to 9%. In reality there has been little or no construction of apartments in Auckland over the past 5 years creating under supply. Further still, and arguably due to lender policy, apartments have been selling below their cost to build. Both of these point to price increases and capital gain in the near term.
Although my observations are based on Auckland the same will be true for Christchurch and to a lesser extent Wellington. With standalone house prices so high, apartments and townhouses are a logical step for first homebuyers. In the past we’ve typically seen developers build hideous crap for the investor and student market in the CBD. I see scope for apartments and medium density developments a bit further out in the city fringe where they can utilize lower land costs so incorporate more outdoor space, and still be close to cafes and public transport. Evidence of this can be seen in the recent sale prices of small brick and tile units. In the inner city suburbs of Auckland these have been selling for mid to high 500s. The standalone house has quickly slipped off the radar for most first home buyers. I think lender policy has been partially responsible for what we are seeing in Auckland. We could easily point the finger at lender’s having no appetite for development, which is true, but also understandable given that most developers are bankrupt or in jail.
The more interesting dynamic is that lenders have preferred houses to units. They have been willing to lend up to 95% on a house but only between 50% and 80% on units. This sends a confused signal to a first homebuyer, who with a $50k deposit could buy a $250,000 unit or a $1,000,000 house! Any wonder why house prices keep climbing in places like Sandringham and Mt Albert? My other observation would be the shear number of poorly constructed developments in the 1990s that have subsequently had water tightness or compliance issues. The new building code more than addresses these issues, and we have a new Unit Titles Act that provides for better body corporate governance. Both of these are significant positive changes, but it will take time to change the poor perception of medium density developments. Auckland council seems committed to more medium density development and my view is that is a good thing. The banks are now starting to line up on credit policy, which will fuel demand. Now we need improved zoning rules to free up the land.