Written by Vicki Holder
When the Reserve Bank announced it would ease LVR restrictions, things became slightly easier for first home buyers in terms of getting a deposit.
From January 01, 2018 there will be approximately 50% more capacity for the trading banks in NZ to be able to lend above 80% LVR to 90% meaning first home buyers will be able to buy a home with 10% rather than a 20% deposit. However, with “affordable” homes priced at around $655,000, that still means a 10% deposit of $65,000, and having to service a mortgage of $589,500. With repayments calculated on 30 years at 4.78% - $709.50 would eat up a large chunk of a couple’s take home pay. Even if first home buyers manage to rustle up a deposit and they can afford the repayments, finding something affordable has been one of Auckland’s biggest problems.
Housing & urban development and transport minister, Phil Twyford says Auckland is currently delivering too many expensive houses and only about 5% of new builds are affordable.
“There’s huge unmet demand for one and two bedroom dwellings in the city, and there’s growing demand for medium density. By working to a more planned approach with the Government as an enabler, we can get a better mix.”
He explains, these homes can be designed by the private sector and the Government will play a coordinating role.
“The role of Government is to take on some of the risk to make it easier for the private sector. One of the ways we’re delivering KiwiBuild is where developers come to us and say, we’re developing a block and some of this would meet your criteria. So, we would buy them off the plan. It gives developers finance to proceed and takes the risk away. That guarantees a flow of affordable units coming to the market. We’ve had some great feedback from developers about this possibility because since the banks tightened lending, a lot of developers have had trouble meeting the bank criteria for deposits.”
The model is Hobsonville - where Government played a planning role.
“We’ll put in the infrastructure and create separate lots of development so that developers can add in the building blocks. That’s the approach we’ll take around the city and we’ll base it around the transport/rail network.” He says, “With KiwiBuild, we’re putting the Government into the market. The Government is going to change things by building affordable homes and on-selling them to buyers. We just need to more build homes more through urban development projects together with more open market homes so we can increase supply.”
The Government will also calm the property market by fixing the bright line test and it is working on legislation to extend the test from two to five years which should be ready in a few months. It’s an early priority. They will also end the negative gearing loophole so investors can no longer write off tax losses on rental properties.
“This gives investors an unfair advantage,” says Twyford. “We hope closing that loophole will level the playing field. Although the market is cooler right now, speculative investors create a huge problem for first home buyers. When the market picks up, changes to the tax settings mean it won’t have the same turbocharged effect on capital gains. The massive capital gains over the last two decades have made life extremely difficult for first home buyers. That’s why home ownership rates are falling so quickly.”
CEO from Loan Market, Brian Greer, agrees, increasing the bright-line test for capital gains to five years rather than two and banning offshore speculators from buying houses will also keep a hold on the market and create less competition for first home buyers. But for first home buyers, their biggest opportunity in an area like Auckland still lies with “the bank of mum and dad and personal guarantees" – that’s the number one way to get a home.
He explains, the Reserve Bank restrictions on banks’ low-deposit home loans has seen a rise in equity rich parents providing guarantees to help their kids get a home loan. Some lenders offer a guarantee limited to the facility and then only to that part of the facility above 80 percent.
“This means parents won’t be liable for any other debts and their obligation will be able to be removed once the loan reverts to 80% of the value of the house, which can easily happen within a couple of years with some small debt reduction and increase in property values. They only guarantee the gap between the deposit their son or daughter has and what is needed to make up a 20% deposit - a small portion and that’s what first home buyers should be exploring. There’s no impact unless your children or the property market lets you down."
“If a parent with equity was willing to guarantee say $70,000 of the loan, the extra interest margin and any low equity fees can be avoided, and banks will be more likely to make a contribution to legal fees.”
This can equate to substantial savings for their children. He adds that, short of going to mum and dad as guarantors, the Welcome Home loan [where a 10% deposit is required for a new home up to $650,000 and existing to $600,000], works brilliantly. “You only need to lift it to $1million and people will be able to get in.”