The cost to ‘trade up’ to a larger home remains significant across the country, but recent market movements suggest now may be a more favourable time for aspiring upgraders.
It’s never been cheap to move up the so-called property ladder – such as buying a house with more bedrooms – and even after some falls lately, the ‘trade-up premium’ is still $100,000 or (significantly) more across the country. However, past experience suggests that a flat/soft property market can be a good opportunity to trade up, and of course mortgage rates are currently down, while there’s plenty of choice out there for buyers too. ‘Movers’ remain a group to keep an eye on in the coming months.
One way to measure the potential costs facing a homeowner looking to ‘trade up’ is to look at the difference in median values between three-bedroom and four-bedroom houses – this equates to the extra debt and/or equity that needs to be found.
Now, it’s not a perfect measure; some people might see trading up as getting the same-sized house that’s newer or in a ‘better’ suburb. However, getting extra space would certainly be how many households view a trade-up.
How has the trade-up premium changed lately?
Using the Cotality Market Trends dataset (basically a compendium of all our core measures down to suburb level), the first chart shows the gap in estimated median values for three and four bedroom houses across some key markets in the middle of last year and now the current figure.
As you can see, it’ll currently require an extra $601,000 or so to step up to four bedrooms in Auckland City, which probably isn’t too surprising given the concentration of top-end property in that area (e.g. Herne Bay). That said, the gap in Auckland City has nevertheless dropped by around 5% – which is more than $32,000 – over the past 12 months, as four bedroom house values have dropped slightly more than three bedrooms.
Manukau, North Shore, and Rodney also currently have trade-up premiums in excess of $300,000 (albeit all are lower than 12 months ago), while at the other end of this chart, the gap is sub-$200,000 in Dunedin and Upper Hutt. The only market amongst this group where the trade-up premium has actually increased to any meaningful degree in the past year is Franklin, with four bedroom house values falling by less than three bedrooms.
Chart 1: Trade-up premium and % change in past year
Taking a look outside the main centres (and also filtering out any areas that have less than 500 houses of either bedroom count, such as Kaikoura and Kawerau), there are six other areas with a trade-up premium of at least $300,000 – namely Queenstown, Hastings, Mackenzie, Waipa, Whakatane, and Western Bay of Plenty.
By contrast, Ruapehu is the only area where the trade-up premium is below $100,000 ($97,264), although Clutha and South Waikato are only a touch above that mark.
In terms of the recent changes, the trade-up premium is down by at least 10% in the past year in Central Hawke’s Bay, South Waikato, Whanganui, and Whangarei, although amongst the provincial areas Far North (-$26,644) and Hastings (-$24,254) have seen the bigger drops in dollar terms.
By contrast, South Wairarapa’s trade-up premium has risen by around $15,000 over the past year, as four bedroom house values have stabilised but three beds have fallen.
What does this mean for potential upgraders?
One could make the case that it may not be a bad time to at least ponder trading up. Granted, the extra finance required to make the move is still significant whichever part of the country you look at, and a lot of people moving house at the moment probably still need to sell before they buy, and conditional offers are always trickier.
However, mortgage rates have fallen steadily, there’s plenty of choice/listings on the market, and the gap in values between three and four bedroom houses has also come down in a lot of areas. Take Wellington City, for example, where after the premium spiked up from around $197,000 in 2020 to $284,000 in 2021, it’s since dropped back to less than $240,000 – see the second chart.
Ultimately, that decision will be up to each household to make, but given that ‘movers’ on our Buyer Classification data have remained quieter than normal in recent years (despite life-changes always going on such as births, kids leaving home etc), the falls in the trade-up premium support our view that they’ll be a group to keep an eye on. In other words, it wouldn’t be a surprise to see more owner-occupiers shifting home in the medium term.
Chart 2: Trade-up premium
Meet Kelvin Davidson
Chief Economist
Kelvin joined CoreLogic in March 2018 as Senior Research Analyst, before moving into his current role of Chief Economist. He brings with him a wealth of experience, having spent 15 years working largely in private sector economic consultancies in both New Zealand and the UK.
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