Worst time for first-time home buyers in 65 years – FBC News
Home building boom. [Source: NZ Herald]
A combination of record house prices and limited further growth potential makes this the worst year for first-time homebuyers since 1957, according to new research from economic consultancy Infometrics.
A new report Housing Update: A New Lens on Affordability, Infometrics compares the total payments made by homeowners over the life of their mortgage to the value of the property when the loan was paid off.
“The resulting net financial gain reveals which years have been the best and worst years for being a first-time homebuyer since the late 1940s,” said Gareth Kiernan, chief forecaster at Infometrics and author of the report.
“This approach takes better account of total housing affordability than simple comparisons of income to housing prices or income to service costs in the first year of borrowing.”
There are two key factors contributing to 2022 being a bad time to buy a home, he said.
The first was related to the average proportion of a household’s income needed to service the loan over the life of the mortgage.
“People who take out mortgages are now committing that an average of 33% of their income will be tied up in mortgage payments over the next 25 years or more,” Kiernan said.
This figure is considerably higher than the 21% that prevailed in the 2000s and 2010s.
At 49% of revenue, the initial debt service charges are similar to those of 1987, but without the likelihood of very strong revenue growth that rapidly reduced the debt burden during the 1980s.
The second factor relates to the expected increase in the value of the property over the term of the loan.
“The opportunity for real estate prices to rise rapidly from here and provide buyers today
large capital gains, seems heavily limited,” Kiernan said.
“First-time home buyers who buy after a prolonged period of strong house price growth are likely to buy at the peak of the market and enjoy lower capital appreciation than buyers after a period of stable or falling house prices.”
Judging when the market is at its peak requires considerable foresight, he acknowledged.
“But the reversal in house prices in the first half of 2022 suggests that the boom that has persisted since the global financial crisis has finally run out of steam.”
The research resolved the longstanding debate between baby boomers and millennials over who had the hardest time buying their first home, Kiernan said.
“Our analysis shows that even with mortgage rates below 5%, the average home price of $1 million means that today’s first-time homebuyers face far less financial outcomes. favorable than a buyer in 1987 with 20% interest rates.
Young people are effectively committing to lifelong debt if they want to enter the housing market, with far less money for discretionary spending than previous generations.
The results highlight several “good” and “bad” years over the past seven decades as the strength of the housing market has varied.
“Some of the best years to have been a first-time home buyer were 1949 and 1996 – when interest rates remained relatively low throughout the life of the mortgage and there were also increases house prices,” Kiernan said.
By contrast, the worst years were 1955 and 1975, with the next 25 years including periods of severe house price weakness.
Realistic house price projections for the next 25 years mean buying in 2022 is almost as bad, financially, as it was in 1955, he said.
For many young people, the only realistic route to home ownership now was through help from “mom and dad’s bank”.
This risked reinforcing the divide between landlord and non-landlord families, and strikes at the heart of New Zealand’s egalitarian foundations.
“People enjoy a range of benefits from owning their own home versus renting,” Kiernan said.
“Our analysis highlights the generational issues caused by New Zealand’s housing affordability crisis. There is a social responsibility for greater political action to ensure that home ownership does not continue to be out of reach for more and more Kiwis.
Owen Vaughan, editor of NZME-owned property listings site OneRoof, said: “What should be a dream time for first-time home buyers – more inventory on the market, falling prices and sellers now willing to accept conditional offers – was hampered by a triple whammy of events beyond their control: rising interest rates, credit crunch due to LVRs and CCCFA, and a property boom post-Covid which added another 40% to New Zealand property prices.
“Those with credit and the paycheck to handle what can be a large mortgage will be in a good position, but that pool of buyers will likely shrink over the next few months,” he said.
“For first-time home buyers, unfortunately, now is a great time for cashed-in buyers – investors.”