The first home buyer’s conundrum
There has been a lot of talk about the ever increasing cost of residential property and the barriers it has been creating for first home buyers. Much of the conversation is largely around Auckland ( for an interesting article and comments see Sunday–Star Times columnist Michael Wilson’s article and the comments that followed) but Wellington and the rest of the country to greater or lesser extent are facing the same issue. This blog focuses on the Wellington situation.
To get a clearer picture on the growing differences in affordability between Auckland and Wellington see a comparison prepared by the Herald. If you select Wellington alone you will see the ratio of median house price to median income is actually declining in Wellington.
Wellington House Affordability for First Home Buyers
We are at the coal face. We are dealing with house sales and purchases every day. What has been missing from the discussion is the differences in affordability between first homebuyers and its effect on rising prices.
Although it is not true for everyone, and particularly not so for low income families, for many prospective purchasers affordability is not the issue. The global recession has seen a reduction in the levels of personal credit card debt but not a reduction in incomes for people in the civil service or employed in the City in well paid secure jobs. Coupled with all-time low interest rates, growth in personal savings, access to Kiwisaver funds and the ability to divert the high inner city rentals they have been paying to mortgage outgoings, desirable properties are quite affordable.
At the same time, many people who would have otherwise been vendors are seeing their equity eroded by a decline in static house prices. This has seen them hunker down, work on modest house improvements and wait it out until prices go back up as they expect it will. In some cases, reduced equity is a barrier to upgrading where in the past increased equity enabled them to gear up to a higher level price property. Others looking to downsize would rather wait it out particularly when they have been relying on their equity surplus on repurchase for retirement funds.
On a rising market there are buyers who look to resell and upgrade. On the more static market we have had until relatively recently that pattern was less pronounced. So for those and a variety of other reasons the available stock appears to be less than it usually would be. What there is, is subject to intense competition from those who can afford it. That drives prices up.
As Conveyancers in Wellington, We Understand The Issues Buyers Face
This is not conjecture. As solicitors for purchasers we regularly see their disappointment as they miss out on property after property often offering more than CV and over the asking price. Conversely, vendors now expect there to be brisk competition and are in no hurry to grab the first offer that comes along.
Adding to the debate is the reluctance, perhaps generational, of many to purchase in areas that they can afford. Expectations of some would be first homebuyers are often unrealistically high having regard to their resources and what they can afford. We all want the best for our children, to be in the best school zones and to avoid socially less desirable suburbs.
This is perhaps more the case now than it was say 20 years ago when people were happy to have a house anywhere. As an example, our senior Partners at Gillespie Young Watson all had their first homes in suburbs that don’t cut it with many first home buyers today. For those with such unattainable purchase expectations they often prefer to rent at high rentals in “better areas” than buy. As prices go up and thier savings don’t keep pace the gap to first home ownership gets bigger.
Bridging The Gap For Wellington’s First Home Buyers
How you change those fundamental dynamics is of course the question government is grappling with. Creating low cost housing is an obvious enough solution – but who is going to do it? We act for a number residential property developers. None of them show any enthusiasm for providing a social service. Like everyone else they want to run their businesses profitably and prefer to target the same more “cashed up” buyers that are driving existing house prices up.
What we do find is that often the whole first home purchase process is not really that well thought out. Often an “affordability” discussion on the matters addressed above can help align expectations with the market. Instead of buying a home with all the brand appliances and trappngs, one that needs a a lot of work that can be worked on over a few years can help bridge the gap.
If you want expert advice on buying and selling your home, check out our ‘On The Move’ Guide, dedicated to helping you better understand the purchasing/selling process.