Home Buyers Beware

Caution2Home Buyers Beware

New Zealand has a high rate of home ownership when compared to other countries, although it is falling. More properties are now owned by fewer people and property investors are becoming more influential in the market. Owning property can be a good way to create wealth as the value of property increases over the long term, however in the short term, property prices can fluctuate. The key drivers of property prices are interest rates, population changes (particularly from net migration) and the supply of housing. Other factors such as building costs and bank lending policies can also be important. Getting onto the property ladder can be a risky process. First homes are usually bought with a small deposit and a large mortgage at a time of life when income is low and uncertain. The key risks faced by first time buyers are the risk that interest rates will rise, thus increasing mortgage repayments, the risk that income will drop due to loss of a job or the birth of a child, and the risk of having to sell the property due to financial hardship at a time when property prices are falling. Right now, there are significant medium term risks for first home buyers. Interest rates are low and may fall, property prices are high, investors are very active in the market, and in some areas there is a shortage of properties. This is a dangerous combination. First home buyers who buy now face the risks that interest rates will rise, investors will pull back due to the high cost of borrowing, and the supply of houses may increase beyond the level of demand. Buyers who borrow cheaply now but do not factor in higher interest costs in the medium term may be forced to sell in a falling market.