A question we’ve been asked many times recently is: as a first home buyer (FHB), should I purchase now, or wait and see if I can get a ‘bargain’ later?
No doubt some will be able to get a cheaper price by waiting or a better house for the same money, but it’s also important to keep in mind the potentially offsetting influence of higher mortgage rates later. Let’s run the numbers.
Currently a first home buyer (single or multiple people) earning the average household income and paying the average value for a property ($1.01million), with an 80% mortgage on a ‘special’ (high equity) rate (5.1%) over a 25-year term, would have annual mortgage payments of around $58,000/year, equivalent to 48% of their income. At the trough in mid-2020, those figures were around $32,000 and 29% respectively for the average valued home of about $745,000 on a mortgage rate of 2.6%.
Average household income
Average property value
High equity mortgage rate
Annual mortgage payment
% of income on mortgage
Figure 1: First home buyer repayment proportions on 80% new loan (rounded/approximate numbers)
So how might the figures evolve over the next year or so? In a simple scenario where incomes rise by 5%, property values drop by a further 10%, and mortgage rates increase by 0.5% (to around 5.6%), payments reduce to less than $55,000, or 43% of income. In other words, there might be merit here for a would-be FHB to wait. In the event of house prices dropping by 15% (all else being equal), the saving on mortgage payments grows – they go from around $58,000 to less than $52,000. However, in a scenario where prices fall by 10% but mortgage rates rise by another 1%, the annual debt servicing cost barely changes – holding above $57,000.
Figure 2: New mortgage payments in various price/interest rate scenarios
It’s important to recognise these are just indicative scenarios, and the ultimate scale of house price falls and/or mortgage rate increases remains uncertain. Indeed, mortgage rates for some terms have actually been cut recently on the back of strong banking sector competition and lower offshore financing costs. But with inflation not yet under control (here or overseas) and most central banks, including New Zealand’s, clearly intent on further official cash rate increases, it’s probably still too early to conclude emphatically that mortgage rates have peaked.
The reversal of the Large Scale Asset Purchase Programme is another potential uncertainty here – it’s never been done before, and given that it added to downwards pressure on mortgage rates when it was operating, the scaling back could now add to the upwards pressure on rates.
In addition, there’s also a large caveat that finances probably shouldn’t be the only determinant of the decision to buy. It’s obviously a good idea to actually like the house under consideration, and of course postponing the decision to buy in the hope of paying a lower price later could mean that a buyer ends up with a property that they don’t like as much. Other non-monetary factors such as the value of ‘wasted’ time going to several open homes could be a reason not to delay for some people.
Overall, though, these simple numbers do indicate a tendency for house price falls to outweigh any further mortgage rate increases (if they occur) in terms of the costs faced by would-be FHBs.
Ultimately, however, the decision is subjective and up to the individual. It’s also important to recognise that in each of these scenarios the sums involved to service a new mortgage could still be a stretch for many would-be buyers.