Housing: Economist on why first home buyers should take a 'summer break' before diving back in next year

A leading independent economist has explained why first home buyers may be smart to take a summer break from looking to buy a property.

A report from economist Tony Alexander and the Real Estate Institute of New Zealand (REINZ) last week found that real estate agents were noticing first home buyer activity falling significantly in November. 

There's been a flurry of changes in recent months which are impacting Kiwis' ability to get a mortgage. That includes higher interest rates and changes to loan-to-value restrictions meaning fewer buyers will be able to secure a mortgage with less than a 20 percent deposit.

Dissecting the report and what it may mean for Kiwis going forward, Alexander told The AM Show on Tuesday that there is "quite a combination" of factors at the moment affecting first-home buyers.

"They can't get the money out of the bank," he said. "The banks are applying tighter loans to value restrictions, debt to income ratios as well and also counting expenses that were never previously counted as they look to meet the credit contracts and Consumer Finance Act. So there's a credit crunch hitting first time buyers."

"It's really the biggest tightening I think we've ever seen, quite frankly, and it has come at the same time as we've seen the fastest increase in fixed interest rates since they appeared in the early 1990s."

The Reserve Bank increased the official cash rate (OCR) by 25 basis points to 0.75 percent in November, following another 25 basis point increase a month earlier. As a result, banks moved to increase rates from the record lows we saw last year and earlier in 2021.

So where to from here? Alexander told The AM Show that vendors are likely to soon notice a shift in the market and become more realistic about what they want.

"We've had vendors see silly prices be achieved. So you know, if you're selling, you hang out for that. Now, when they get a bit more data showing the markets pulling back, they're going to get more realistic," the economist said.

"We can already start to see the listings going up. So this is the good part of the story I guess for first home buyers. Eventually the banks will get a bit more relaxed, the listings are going to be rising I think quite a bit over the next three to six months.

"My comment to first-home buyers would be maybe take a summer break but certainly stay in the market after that."

Data from CoreLogic's House Price Index found property values rose 1.8 percent in November, slightly less than October's 2.1 percent. However, over the year, values have increased 28.4 percent, with the average property now valued at $987,401.

ASB and BNZ are among the banks forecasting small house price falls in 2022. ASB forecasts show a cumulative fall of 4 percent over the year. A Markets Outlook report released by BNZ on November 22 said there were signs rising interest rates and tightened lending conditions had started to affect the housing market. 

The Government earlier this year focused its effort to increase affordability by trying to rein in investors. It did that by extending the bright-line test from five to 10 years and making changes and interest deductibility. 

Alexander's report last week found a net 54 percent of real estate agents were noticing fewer investors in the market. That's lower than the 40 percent net in October, though not quite as low as the more than 60 percent net recorded after the Government's housing announcement in March.

"Their main pullback was after March 23 with the tax changes, and pretty much they stayed back from the market ever since then," Alexander told The AM Show.

"But also if you have a look at say, 51 percent of the money lent to investors in the past six months, it involved a debt to income ratio above six. They're the group most affected by the bank starting to voluntarily apply the DTI (debt-to-income).

"That's definitely kicking in there and as they see the housing market flatten out, some of them, they're going to decide maybe I'll sell now because I'm not going to get another 20 percent in the coming year. Again, listings going up."

With investors pulling back, Alexander said data shows about 26 percent of dwellings are being purchased by first home buyers.

"So they're making purchases. They're just going to take on a lot of debt in order to do it."

Finance Minister Grant Roberston on Monday told the Financial Services Council that while he was confident most people will be able to cope with the increasing interest rates, "unfortunately with the very large amount of money people have borrowed there will be one or two who might struggle".