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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67 Comments
My friends went unconditional on their next house before even listing their old one. 2 months later it still hasn't sold. Don't be like my friends.
Tell us more! Hopefully they went unconditional on the basis that they could actually complete the purchase, and the fact their old one hasn't sold is a minor inconvenience by having 2 mortgages?
Otherwise interest rate for late settlement is normally 12% p.a. by default.
The plan is to liquidate other assets plus borrow if it comes to the crunch. But it will be tight, cost fees and will mean their income stream will dry up. They turned down the only offer so far as "too low".
Essential to have a plan-B. Rent the original property out if need be.
If they can… not a certainty either
They'll have heard stories like my friends who did the same thing in Oct-Nov, but in that stupid market managed to get so much for their first house (at auction) that they actually turned a profit on the exchange. Total madness. Even the agent was shocked. TBH I feel bad for the buyers.
Did their lawyer not give them some advise on this?
Far out.
To buy a house, save for a deposit, pay a mortgage(es) for most of your working life. Start early in life is best. When family grows, its really hard.
And pray or hope that nothing happens to health, career .........
Also no leaky home, earthquake reinforcement, landslip, shoddy workmanship.........
A note about interest only mortgages. The time will come when the bank will want you to start paying principal and that principal component may be more than you anticipate because you have to make up for the lost years of not paying principal.
The other day I noticed two deductions in my account and I first thought the bank had made a mistake. A closer look revealed they had started taking the principal. I will likely need to gather tens of thousands of dollars more now to cover the payment.
It would be interesting to see how the bank responds if I ask for an extension. I probably wont as I have prepared for this day but I'd quite like to know if they would as I already extended it once before.
Have any readers been refused interest only after a period of time?
Interest only sounds just like subprime to me
Non-performing loans. "Maximize Cashflow" because the investment doesn't stack up otherwise.
Those people paying interest only over the last couple of years have rocks in their heads. The difference in the interest rates now would be money in your bank account. That difference could end up huge the way rates are trending. IO is all about low interest rates forever and house prices always double every 10 years both of which are hardly guaranteed.
Merely curious - were any of those under hardship provisions?
I know one family who claimed hardship so they could move to IO and drop payments ... then later were shocked when the bank said, no, you can't have a brand new car (aren't you in hardship?).
Agreed. People not using low rates to hammer/eliminate their principle are blinded by their own greed. Interest only should be banned. Are banks still funding on this basis?
It depends what they did with the extra money. Quite easy to imagine someone doing better than the ~4% return required to beat the mortgage interest rate after tax.
If they blew it all on lifestyle, then yes that is definitely questionable.
well i dont consider that i have rocks in my head! i fixed the last 200K at 2.99 interst free for five years at teh start of march last year -- and instead went hard on saving every month - adn i could if i wanted to pay the loan off in full -- but instead i have a lot of cash -- some goign in to term deposits some invested in teh market and a huge chunk sitting waiting for a good home !
I am much happier with this as opposed to having cleared the mortgage but only a very small amount of cash in bank -- especially at the moment!
I also took those rocks in my head to move my kiwisaver from a high growth to NZ cash fund on teh 21st Feb this year -- convinced that Russia would invade after the olympics and that the markets would get hammered in an infaltionary environment -- showing a tiny 1.4% GAIN in this period -- but i will take that against a steadily falling market -- its the only time i have moved my kiwisaver since day 1 -- adn i will go back to growth fund at some point - but personally - i think you have rocks in your head if you did not see higher interest rates, inflation and a property/market crash/correction coming -
And no i am not a professional investor/finance - i run a healthcare company and am a social worker -- i just observe the real world every day!
Interest only rather than "interest free".
All sounds like a good and careful strategy to me although many people think it strange to have cash lying about while also having mortgages. You will undoubtedly waste some money this way but you will feel a whole lot more comfortable which is worth a lot.
Interesting that they didn't notify you they are commencing principal payments. Although ANZ for example can enact their right to set-off if you're no longer on a fix term, there's no specific circumstances noted where this doesn't apply, therefore I assume the bank has full discretion.
For example, if you have money in a bank account with us, this is an amount we owe you. We can take that money and use it to pay amounts you owe us, including under your loan agreement.
https://www.anz.co.nz/content/dam/anzconz/documents/rates-fees-agreemen…
I suspect he had a set period of time for interest only and forgot about when it was going to expire. Likely he'll need to reapply for an extension to interest only and go through income/liabilites/expenses...good luck.
Yes a set period. You can often extend it after the mortgage team analyze things. Fortunately I don't need to do this but was wondering if anyone was having difficulty with this as it is very common for landlords.
I'm having extreme difficulty securing an IO loan at the moment. I am looking to upsize my family home due to kids growing up and needing more space as they reach their teens. I have our current family home on the market - its 5 years old, in a good area close to town, great schools etc and looking at lifestyle properties a bit further from the city. A bit of a price jump though have no current debt, about 70% deposit, decent secure regular income but have had to jump through hoops for the last two weeks to secure interest only/bridging finance until my family home sells. Once the family home sells, there will be enough to repay the IO loan with extra banked.
Are the banks simply not interested because they see they won't be making enough money from me to bother or are banks being that tight at the moment? If that's the case, it's quite concerning.. how does one even qualify for any loan these days?
I did I/O for years, used the cash to develop and build up equity and cashflow. Then rebooked the loans to restart the clock and go 25 years P&I with the first 5 years locked in on a fixed rate. You can use I/O in a strategic way if you choose to. Just be careful because the banks might not let you rebook the loan so have contingency.
Interest only is just another investment/financial tool. As with all financial options the owness is on the borrower to use it wisely.
When we were young and had time to work and pay off interest we used interest only to overpay the principal on a largeish house whenever we had spare cash/bonuses etc .. then when we had a young family and wanted to spend time with them whilst they grew up.. we chose to earn less and paid almost nothing off the principal for several years and spent the money and time on enjoying experiences with the family on eduction and so on (Dont forget life is all about enjoying the journey not the destination).
Once older and the family has grown and left then it is time to revisit things and check the retirement plan and adapt it.. but also dont forget that leavibg a portion on an affotdbale interest only plan doesnt matter.. as by downsizing prior to retirement large potion of the mortgage disappears.. so there is no principal left to pay.
Other people may use intetest only wisely to build a property portfolio on the start of a boom and then balance it later. Its higher risk but many smart people will use it well and manage risk.
My point is that it is a great tool.. and like credit cards and fast food. It just depends on discipline and planning by the borrower / user . It shouldnt be for the powers that be to protect us from our own character failings by stopping us from accessing it
That said if the 'powers that be' perceive a national economic risk due to the size of interest only mortgages and lack of principal reductions over time. Then there may be a case to find a way to refuse them for certain people to avoid the state havinh to bail them out later or a economic shock.
It shouldn't be for the powers that be to protect us from our own character failings
Very true. That includes via monetary policy and other bailouts in hard times. If it's a free market, it shouldn't be protected from downward price discovery and it shouldn't be directly or indirectly subsidised.
You maybe able to move up to the second rung. But is there anyone willing and able to buy the first rung from you?
That is what we encountered moving up the rung in December. We only had 1 offer on our property which was at our BEO amount. Other properties on the market nearby ended up delisting due to lack of interest.
That is precisely the question we are pondering right now. That, and if the rungs might be appreciably closer together next year.
"But is there anyone willing and able to buy the first rung from you?"
Didn't they pull the ladder up?
It's a fine tradition, these days.
The trouble with "second rung buyers" is they rely on first home buyers to buy their existing home from them. But as you said, first home buyers are being denied loans by the banks.... Oh then suddenly the whole "ladder" freezes up when the bottom falls out. Who would have thought?
and they expect to make a decent profit as they've done it up.
This analysis is interesting but flawed. The assumption that a person on the ladder for 10 years would take out a 30 year mortgage assumes:
- That they want to start over with their mortgage and not want to get the monkey off their back
- The bank will lend a 35 year old couple (assuming they bought at age 25, which is a courageous assumption) a mortgage ending when they're 65
Reworking the sums, assuming a 20 year mortgage, same numbers, the weekly repayments are $618 per week, or 31% of their take home pay.
- The bank will lend a 35 year old couple (assuming they bought at age 25, which is a courageous assumption) a mortgage ending when they're 65
As long as you have decent equity and strong earnings, banks have no issues with granting 30 year mortgages to people in their 30s and 40s. Even 50s can ok if there's a good plan and investments with passive income.
I'm 35, took out our new mortgage for 30 years in December, but we have a Household DTI of 4, equity of 40%. I also make an additional lump sum payment each year.
But did you, in line with the article, triple your mortgage and sign yourself up for paying an extra $143,000 in interest compared with the 20 year term? From the sound of it, no.
Yes I did. I went from a $160k mortgage to a $530k mortgage.
Nzdan, why an additional lump sum rather than regular larger payments? Is it the security of having a cash stash?
That and I receive an annual performance bonus at work. So once a year I put the bonus and a portion of my savings towards a lump sum.
Not as good as larger regular payments for reducing the balance, but works for me.
Which brings us back to the first assumption - do people actually do this?
Yeah 30-40% of investors
Ha! they don't count, because the people in servitude aren't them - they're the tenants paying the mortgage.
I took a 30 year mortgage out at the age of 39. I don't intend to take 30 years to repay it, but I wanted to ensure that I could afford minimum payments if interest rates go up (to, say, 10 percent). I'm paying as if it is a 15 year mortgage.
feels like a veiled attempt to reframe and prop up the market -- if i had read it first without looking at the authors name i would have been expecting it to be from a RE.
Unless you absolutely have too -- hard to see why anyone would want to buy in this market -- even to move up the ladder - which in reality means a larger mortgage and a likely bigger loss of equity over the next 18 months +
Why would you bother ? Unless you find endless debt enslavement attractive.
A disappointing article.
"Mortgage interest rates aren’t high, they are just heading back to long term norms after a sustained period of being unusually low."
Exactly right. And current interest rates are still not a normal level, but highly stimulatory in the current circumstances. They have still to go substantially higher before they can reach close to normal, neutral setting levels.
The last few years of stupidly reckless ultra-loose monetary policies have been just a mad one-off event, and even if the main Central Banks manage to control rampant inflation within the next couple of years (and this is not guaranteed), they will be extremely wary of ever repeating the same mistakes of the recent past.
The fool's paradise of ultra-cheap money is gone. Time to pay the piper, and time for the housing Ponzi to finally correct itself.
I am just hopeful that the government stops trying to bail everyone out during the downturn/crash.
The system works best when everyone realises that they are accountable for their own actions and their consequences.
The wealthy helped themselves to cheap money in the boom, and in the downturn it cannot be for the poor to bail them out.. when they need the money more.
Exactly.
Looking forward to life after the crash, when we no longer talk about the "property ladder".
Lots of people have complacently jumped on to what they thought was a ladder, when it was really a snake.
Yes global property markets have been more like snakes and ladders....occasionally you catch a slide down so that it doesn't become a ponzi scheme where it requires ever increasing debt/price/entrants in order to climb higher and higher and prevents new players for getting a shot at joining in.
People trade up or down all the time. Simple option is make the sale of your existing house a condition of the next purchase when trading up. It used to be a very normal practice before the low cost of debt lolly scramble started. Agents don't like it because it creates a chain of conditional sales where any one falling over could put their commission at risk. Well "bleep them", as the commission payer they work for you, not the other way around.
That said if you have low/no debt and then continue to save save save. There will be better buying in the near future as the cost of debt continues to increase. The language on TM already shows the pressure at today's still very low interest rates. Search for Urgent Sale, Must Sell, Present All Offers, Owner has Bought etc etc.
639 "Motivated Vendor"s today..
762 now .. 123 added in the 30 minutes since I posted that.. though I'm guessing some will age out tonight and the numbers will drop down again (sometimes relisting happens before the aged listing drops off).
Our selling agent last year was caught up in a 7 chain conditional sale of Owner Occupiers, all waiting for the FHB at the beginning to obtain their finance.
That sounds really stressful.
Sounds to me like an almost tangible instance of our ponzi-like system.
6 home owners in a stack waiting for the tick of approval for the bottom to inject new funds into the ponzi, so that everyone can feel a little wealthier.
6 real estate agents and 6 banks all extracting their profits from the scheme.
The joys of Masterton, small enough that all housing transactions at that point in time are fairly intertwined.
I’m in this category. There is a house I like the look of as a second rung house. The issue is there is no certainty as to the price I would get for my house. I’m pretty sure house prices have fallen a lot more than official figures suggest. So I’ll probably just stay put.
I’ll also say, it’s great to say your mortgage on your new house will be ‘affordable’, but you have less time to pay down the debt and you need to be saving for retirement in parallel.
You are right Hardley Our QV est. has gone from 1.250000 to 970000 a decent drop.
Why worry? It'll be fantastic.
House prices double every 10 years.
By tripling their mortgage for their dream/ forever home, they'll get a greater payout for a comfortable retirement.
The FHB buying wins too. In 10 years they'll have $1.2M less principal, say $800,000 equity to climb the ladder.
Here we are talking about investors / speculators = Current/ established Home Owners
Our thinking is it’s a great time to move up. Less competition on a higher priced place.
Buying and selling in the same market.
We’re early / mid career so we’ll make the move to a second rung once our earnings jump a bit- and rationally they will.
Our mortgage needs refixing mid 2024 so will consider a move then.
Moving up the property ladder?
What happened to having a home, where you brought your family up, made memories, decorated it in more than just white to preserve resale value, grew veges, buried pets in the garden, and had a stake in your community.
Oh yes, that's right, you have to keep moving to keep the real estate agents in commissions
Exactly
Unfortunately a 'starter home' is now a two bedroom townhouse as opposed to a basic three bedder with a yard. We can't all move into $1.5m executive four bedders on the first hop, sadly.
Inflation.
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