First home buyers to get ready as house prices may show significant corrections soon

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First home buyers to get ready as house prices may show significant corrections soon

New Zealand house prices had a rapid surge through the first quarter of 2021. According to the Reserve Bank’s recent Financial Stability Report, “house prices have risen 24 per cent in the year to March, a rise much higher than that seen in other countries.”

It has been noted that first home buyers have been struggling to afford due to inflating prices. Latest Real Estate Survey by REINZ and Tony Alexander states that ‘young individuals have been greatly acknowledged in the recent media stories due to increased struggles in finding, affording and purchasing a new property.’

REINZ report highlights that this is caused not because of population boom or decrease in supply but as a result of “Reserve Bank cutting interest rates to record lows, removal of Loan to Value Ratios, and indicating low interest rates as likely to continue for a number of years.” These low interest rates have led to more investing and spending, partially by supporting risk taking and contributing to rising asset prices.

Report findings also suggest that young buyers are following the footsteps of what investors are doing, as investors are slowly backing out, as with “This month a net 63% of agents have reported that they are seeing fewer investors. This is a continuation of the initial decline post-March 23 to a net 41% seeing fewer investors.”

The main concern for the buyers is fear of overpaying (FOOP) as record house prices were rising steeply over last quarter as evident in the auction rooms. It shows buyers abstain from the market as they are worried that prices might fall soon. This raging price increase has impacted the housing market for first home buyers and has caught attention for changes to maintain sustainability. RNBZ is worried that “risks associated with the housing market are accumulating.”

The recent biannual Financial stability report from RBNZ has responded with intentions of tightening LVR requirements. Since May 1, “investors’ loans need to be less than 60 percent of the property value while new loans to owner-occupiers need to be less than 80 percent of the property.” With these restrictions in place, the Reserve Bank expects new lending to investors to slow down. The recent property investment tax changes comply with the same goal of correction in the housing market.

Tony Alexander mentioned that people are hoping that the “recent rash of anti-investor policy changes will result in some big bargains becoming available.” In addition, CoreLogic’s chief property economist Kelvin Davidson also says, “property market slowdown is likely to occur in the second half of 2021- the Government changes just reinforced that”.

These tightening in LVR requirements for investor lending may slowly flush out investors from the market and will help to mitigate some of these housing risks and support more sustainable house prices. All these changes focus on improving affordability for first home buyers and giving them a higher chance of acquiring a property.

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Ravi Mehta