This housing market slowdown hasn't just hit first home buyers, the effects are far more wide ranging than that. But before we look at who is winning and losing, let's put some context to the situation.
This time last year the Reserve Bank had just announced their intention to introduce loan to value restrictions from October 1st 2013 to constrain lending to people with a low deposit, and as a consequence to slow down increasing house prices and protect the banks' balance sheets (and therefore the overall economy) in the event of an economic shock. Then earlier this year, mortgage interest rates began to rise.
The result of this has been a 10% to 20% drop in sales over the past few months compared to the same time last year.
You have probably also heard stories that along with this drop in sales activity, first home buyers have been shut out of the market and have been far less active. But have they? Let's look at that to see if it's true.
Working out who is buying
This time last year, to coincide with the introduction of the LVR speed limits, we began working on analysis to classify the type of buyer for every transaction. Initially this was to help answer the question of how many first home buyers there were, and how that was changing. But it's much more than that.
This 'buyer classification' as we call it is a revolutionary new way of understanding the housing market and gives us a much greater understanding of the dynamics at play. No longer are we just talking about what a house sold for and for how much, instead we are talking about who bought it. Were they a first home buyer, did they already own other property, were they moving from one house to another, and so on.
Before the LVR speed limits came in, first home buyers made up around 19% of the sales transactions. This then surged at around the time that the LVR speed limits came in as buyers rushed to get into the market. Since then, there have been persistent anecdotes from the real estate industry that first home buyers have dropped dramatically.
But as you will clearly see in the chart, while the number of sales to first home buyers has dropped, the percentage of the pie they are buying has only dropped two or three per cent to around 16% to 17%.
The picture is very similar in Auckland where first home buyer sales have dropped from around 22% to 19%, not a significant decrease at all.
What about the rest of the country? We have been hearing that the regions have been hit hard and first home buyers are all but gone. When you look at a map of New Zealand, and compare the percentage of sales to first home buyers before and after the speed limits kicked in, you can definitely see more of a drop (bright red dots) in some smaller towns and cities, particularly in rural North Island. But equally there are many areas where the percentage of first home buyers has stayed flat (light grey) or even increased (darker grey).
Multiple property owners and movers
As the LVR speed limits came in we expected a drop in first home buyers and a subsequent increase in property investor activity. That appears to be exactly what has happened, as buyers who already own properties, let's call them multiple property owners, have increased from 38% before the speed limits to 42% since and rising.
But interestingly, when you dig deeper into how many other properties these buyers already own, those owning 10+ properties, the really serious investors, have actually become less active.
The increase is more from buyers who already owned one, or a handful of other properties. There are a few possible explanations for this. One is that small time investors are choosing to grow their portfolios, another is that home owners are once again buying holiday homes.
A more interesting explanation, backed by anecdotal evidence we are hearing from the banks, is that this is actually mums and dads helping their kids into first homes. If that is the case, and they end up with their name on the title, then we classify that purchase as a multiple owner one, not a sale to a first home buyer.
We are currently trying to see if this is actually happening. If it proves to be true then this increase in mum and dad activity would offset the drop in first home buyers, and they may not have actually dropped much at all since the speed limits.
The group that seems to be hurting the most in recent months is actually those trying to shift houses, the 'movers'. The percentage of sales to this group has dropped sharply from 27% to 22%. This drop is starting to look similar to the one we saw during the 2008 GFC.
So the drop in sales activity hasn't just hit first home buyers, but actually affects a range of buyers. They also haven't been shut out of the market, in fact the lower end of the price range is actually more active than the middle and top at the moment. More about that another time.