The move by the Reserve Bank to reduce the share (from 20% to 10%) of owner-occupiers that can get a mortgage with less than a 20% deposit will hit first home buyers (FHB) pretty hard – they’ve been the ones taking the most advantage of the current rules. For example, the ‘average’ FHB in Auckland may now need to find an extra $90,000 to get their deposit up to the new required level (from 1st October officially, but sooner than that if the banks move early). One consequence is likely to be a renewed focus on new-builds from FHBs, as these properties are exempt from the deposit rules.
Amidst the broader surge in property values over the past year or so, first home buyers (FHBs) have obviously found themselves also having to pay significantly higher prices to get their foot on the ladder. For example, in June FHBs paid a median price of $685,275 across NZ as a whole, about $150,000 more than the figure of $535,000 in June last year. Of course, this trend of rising FHB prices paid has been in play for a while now, but has accelerated markedly post-COVID.
Chart 1: Annual $ change in FHB median price paid (Source: CoreLogic)
In turn, that obviously also means an ever-increasing deposit hurdle, which some have been getting past by entering with less than the standard figure of 20%. Indeed, as the second chart shows, more than three-quarters of all owner-occupier lending done outside the 20% deposit speed limit went to FHBs in June, a figure that has steadily risen over time. Put another way, 38% of all FHB lending in June was done with less than a 20% deposit. This exemption or speed limit has been a key support for FHB demand in the property market.
Chart 2: High LVR first home buyer lending (Source: RBNZ)
Accordingly, the surprise announcement last week by the Reserve Bank that they intend to reduce the cap for low-deposit owner-occupier mortgages from 20% of lending flows to 10% is set to hit FHBs quite hard. Indeed, a simple calculation which assumes that they previously had 10% but now need 20% shows that FHBs will now need to scrounge together an extra $50,000 in Christchurch (for example), up to about $81,000 in Wellington and $90,000 in Auckland. It’s worth noting that the RBNZ is consulting on the change for a start date of 1st October, but of course the banks themselves could move earlier than that.
Chart 3: Extra $ required based on median FHB price 2021 and rise from 10% to 20% deposit (Source: CoreLogic)
It’s not straightforward to assess which parts of the country might be more or less affected by the proposed loan to value ratio (LVR) changes for owner-occupiers - e.g. an area might have had a very high share of FHBs, but they could have mostly already been using a 20% deposit anyway. Even so, the fourth chart at least highlights some areas where FHBs’ market share so far in 2021 has been much higher than normal, with Kawerau for example about 12%-points above average (34% so far in 2021 versus average of 22%). Put another way, these FHB ‘hotspots’ at least at face value might feel the pinch a bit more than others.
Chart 4: FHB % market share in 2021 versus average (Source: CoreLogic)
All in all, the proposed LVR changes will certainly make things harder for FHBs, and from that perspective probably aren’t the best news that Grant Robertson has ever had. To be fair, FHBs will no doubt continue to find ways to access the market, such as tapping KiwiSaver or compromising on property type/location. But the ability to purchase a property with a lower deposit than other buyers has clearly been a significant support for FHBs in recent times, so it may well be that this funnels even more demand towards new-builds (which are exempt from LVRs).