Buying in the reality of New Zealand’s housing market

Homeownership is a quintessential part of Kiwi culture. Many of us grew up with parents and grandparents who lived the ‘quarter-acre’ dream, owning decent-sized homes with a generous backyard to boot for games of cricket and barbeques on balmy summer evenings.

Unfortunately, for most Kiwis, the quarter-acre era has come to its cessation. Housing prices are far from affordable for many, with the average housing price sitting at $935,000 according to Quotable Value (QV). Most banks require a 20% deposit to receive a decent interest rate, the days of buying a Grey Lynn villa or freehold house in Wanaka on the average salary are long gone, people are having to accept that homeownership looks different for future generations.

That doesn’t mean to say you can’t buy a home, but you may have to change your expectations and do some savvy thinking to make your dream a reality. As realestate.co.nz spokesperson Vanessa Taylor said, “the reality of it is, I think we've got a job to do here in New Zealand - to change our psyche.” This might mean living in more modest housing such as townhouses or apartments.

The good news is that if you’ve saved up a decent amount of cash for a deposit, and have a healthy KiwiSaver balance, as far as things go, now is actually a good time to buy.

New Zealand is currently experiencing a market downturn due to rising interest rates. According to the QV House Price Index, the average value of New Zealand homes is down by -12.1% ($129,004) since January last year.

With a steadily increasing Official Cash Rate (OCR) influencing banks to increase interest rates, buyer’s ability to service a mortgage and secure finance is tenuous. QV Chief Operating Officer David Nagel has said that “as the property market started 2023, how it will go on? Only time will tell for certain, but it certainly looks as though the market hasn't hit bottom yet.”

Rent a Home

Renting a home is an excellent option for those who cannot afford to buy a house. While renting, you can enjoy the same amenities as homeowners without the added financial burden of owning a home. Renting also gives you more flexibility to move as needed for job changes or personal reasons. Additionally, renting allows you to save money that would otherwise go toward a down payment or home repairs.

Downsize

If you are currently living in a home that is proving too costly, consider downsizing. Moving to a smaller home or apartment can save you money on rent or mortgage payments, utilities, and maintenance costs. Additionally, downsizing can help you declutter and simplify your life, which can lead to greater peace of mind.

Hacks to make a Home Purchase Feasible

House Hacking

You may have heard of house hacking before; the term refers to clever ways to make money from your home. Thankfully for us, it is very in line with classic Kiwi ingenuity.

You can house hack in many ways – the most typical option would be through a flatmate scenario. If you purchase a home with more bedrooms than you need, you can rent one or more rooms out to help service the mortgage.

Yet if the thought of continuing to have “who drank my last beer or ate my leftovers” conversations gives you a sense of dread, there are other clever options. Buying a home that can be split into two units and renting one, or converting a basement into a self-contained living space for tenants (although being in New Zealand, you would have to ensure this space complies with the healthy home standards).

House hacking without having people living in your space is also on the cards. People often don’t realise the tangible value of garages or outhouses; these can be rented to artists and craftspeople for a studio space. You’d be surprised how many freelance or side-hustle creatives or handymen are willing to pay up to $150 a week for a studio space in cities including Wellington or Auckland. Garages can also be rented out for storage, with websites such as allspace.co.nz advertising private spaces for both studio and storage needs.

Don’t underestimate the value of your car park either, a park in central Wellington or Auckland goes for around $75 a week. Facebook groups or websites such as sharedspace.co.nz are great places to advertise your park.

The one issue with house hacking is that banks do not recognise it as a legitimate means of income to qualify for a higher mortgage. However, it can certainly help reduce the cost of servicing the mortgage you do end up with.

Home Loan Grants

There are several home loan grants available to first home buyers in New Zealand that you should seriously consider taking advantage of. The grants are offered by the New Zealand government for the very purpose of making it easy for people to get on the property ladder.

First Home Grant

The First Home Grant provides up to $10,000 for individuals and up to $20,000 for couples towards the purchase of their first home. Eligibility criteria require that you must have been contributing to your KiwiSaver for at least three years, as well as a maximum income threshold and property price limit. Applicants must intend to live in the property for at least six months.

First Home Loan

Designed to help first home buyers who have a deposit of less than 20% to get onto the property ladder. The first home loan allows buyers to borrow up to 95% of the purchase price of their first home and is available through participating lenders (Westpac, Kiwibank, The Cooperative Bank, SBS Bank, Unity, NBS and NZHL).

Kāinga Ora First Home Partner Scheme

A new shared ownership scheme created by Kāinga Ora to aid first home buyers in bridging the gap between what they can afford and the reality of housing prices. If you have at least a 5% deposit, Kāinga Ora will provide you with up to 25%, or $200,000 towards the cost of your new home. You then have up to 25 years to buy back Kāinga Ora’s share of your home. Eligibility criteria require income caps per individual or couple and that you can commit to living in the home for three years after settlement. If eligible, you will enter a Shared Ownership Agreement between you and Kāinga Ora.

It's important to note that eligibility criteria and grant amounts are subject to change, so it's always a good idea to check with a mortgage broker or the relevant government agency for the most up-to-date information.

Consider a Co-signer ("Guarantor")

If you are lucky enough to be able to secure a co-signer, they can be a real lifesaver.

Securing a co-signer is tricky due to the level of risk they take on. If you stop meeting your mortgage repayments, their credit rating takes a hit. The lender has a right to demand payment from the co-signer if you fail to deliver.

A co-signer is essentially someone who signs onto the loan with you but does not intend to live in the room or even repay mortgage repayments. In most cases they are usually parents or willing relatives, who are happy to take on the risk for the benefit of the other party.

Alternative Loans

Most people will take out a mortgage to buy a home, but if you are struggling to get your foot in the door with the banks there are other options, although they should really be considered as a last resort.

Alternative loan options could include getting seller financing, where the person selling the property acts as your mortgage lender. Another common option is to have a relative or friend lend you money for the deposit.

The risk with alternative financing options is the lack of regulation protecting both parties. Seller-financed mortgages don’t offer the same protections as conventional mortgage loans and borrowing from a loved one can cause real familial issues down the line.

A ‘DIY Jobbie’

Kiwis love a Do-It-Yourself (DIY) job. If you’re handy with tools and looking for ways to make homeownership more feasible then buying a fixer-upper is a smart move. However, there are a few things to consider before leaping into full-scale renovation mode.

Firstly, it is always worth getting a second opinion. Even if you believe you can take care of everything yourself, it’s a smart idea to get a contractor in to give you an idea of what the renovation costs will be. Renovating a kitchen or upgrading the flooring is costly but feasible, whereas adding a second bathroom might be pushing the boat out a little too far.

You want something that you can live in and renovate in your own time, not a house that is going to be prohibitively expensive to renovate and unliveable.

Adjust Your Expectations

The reality of the New Zealand housing market isn’t rosy. If you are expecting to buy a home similar to the Boomer generation's first homes, think again. It's good practice to sit down and go over your ‘must-have’ list when buying and cutting that down considerably. Cosmetic details such as particular countertops, newly renovated kitchens, plush carpets or modern lighting fixtures should be the first to go.

Sort your must-haves by priority, for instance, the number of bedrooms will probably trump the need for a bathtub. Prioritising warmth, dryness and good light is also very sensible in New Zealand.

Expand Your Search Area

You may not want to hear this, but if the area you want to live in is too expensive, be realistic and look further afield. Remember neighbourhoods such as Newtown in Wellington and Grey Lynn in Auckland weren’t always groovy, if you buy right, you could find a much cheaper and often better home in an up-and-coming area.

A real estate agent who understands your area well can take on board what you are looking for and point you towards places with more plateable prices.

Consider an Apartment

Apartment living is as far from the quarter-acre dream as you can get, but it does have its perks. In major cities, they are much cheaper than a single-family home and do offer the convenience of central living (an often-overlooked perk - your commute costs may be slashed). Generally, they require much less property maintenance and, in some circumstances, may come with the use of a pool or gym. For young couples and first home buyers, apartments can be a great foot in the door.

Annual body corporate fees can be a silent stinger however, so if you are considering purchasing an apartment, carefully weigh up these in addition to your potential mortgage when comparing the price of a family home.

How to Improve Your Future Chances of Homeownership

If buying a home right now just isn’t on the cards for you, there are still things you can actively do to improve your finances and future chances.

Keep Saving

The bigger your deposit, the more you will be able to borrow from the bank and have smaller mortgage repayments. The more capital you have in your home, the less you have to pay in interest down the line. If you aren’t in an immediate rush to buy a home, continuing to save is a great idea.

Improve Your Credit Score

If you have a low credit score, you can bet banks will be less willing to lend to you. You can receive a copy of your credit score from Centrix, the Credit Bureau of New Zealand. If you’ve never heard of this term before, a credit score is a number between 0 and 1000 that indicates how creditworthy you are. Run-of-the-mill scores are between 500-700, if you’re above 700, lending institutions will look upon you very favourably and if you’re above 900 you’re a credit unicorn.

A good credit score simply boils down to paying your dues on time. If you have a positive history of paying bills and debt on time, your credit score should be high. Basically, if you’re scoring under 700, do some work to bring up your credit score before you start house hunting.

The best way to do so is to get on top of any debt repayments you currently have. Bring any late payments up to date and focus on being on time moving forwards. Aim to keep your credit card balance low compared to your credit limit, ideally, your balances should be less than 10% of your limit. In layman’s terms, if you have a $10,000 limit, don’t spend more than $1,000.

You should aim to pay your credit card balance in full before the end of each monthly statement period. This will ensure your utilisation ratio looks like zero, which makes your increases your credit score.

Pay off Debts

Debt is analysed with scrutiny when you are applying for a home loan. Lenders will look at your debt-to-income ratio and the higher that ratio, the bigger risk you present to the lender. Try to pay off most of your existing debts, be those car loans, credit cards, and short-term loans before you start seriously considering buying a home. Student loans are less of an issue, although they will reduce your usable income in the bank’s eyes, they can never be called in, will always be 12% of your income, and are interest-free – it’s as close to good debt as you can find.

Paying down debt can cause a real conundrum however, as it impacts your ability to save for a deposit. Weighing up the size of your debt and whether it is impacting your credit score, your ability to pay for your current bills should factor into your decision-making on how you utilise your money.

Boost Your Income

Although you may not want to hear this, picking up some extra hours or a side hustle might be what you need to boost your income and ability to save. New Zealand is currently experiencing a cost of living crisis, as average household spending increased by 8.2% in 2022.

For many, it is a struggle to pay rent, save for a deposit, pay off debt, set some money aside for emergencies and dare we say it, fun. If you can accommodate some extra work, it might be the egg you have to suck in order to reach your dream of home ownership.

The Bottom Line: What to Do if You Can’t Afford a House

While the dream of homeownership may seem out of reach for some, there are still many options available for achieving a comfortable and secure place to live.

• Be savvy: Look for ways to make homeownership more affordable, from house-hacking to renovations – there are ways to save cash. Take advantage of government grants and loan schemes.
• Be realistic: Buying a home in New Zealand’s current housing climate requires a degree of realism. Understand what you can afford and where, don’t expect the world, and see your first home as a step on the ladder.
• Future proof yourself: If you’re not quite ready to buy a home, sort out your finances so that you are in a more favourable lending position. Pay down your debt, sort your credit score, keep saving and if you need to pick up a side hustle.

Whether it's renting, downsizing, improving your credit score, or exploring creative financing options, there is a path that can work for you. Remember, the most important thing is to take action and start moving towards your goals. With perseverance, dedication, and a willingness to explore different options, you can achieve the dream of homeownership in the future. So don't give up, stay focused, and keep working towards your dreams – you’ve got this!