The price gap between three and four bedroom properties has fallen in many parts of the country over the past year, suggesting that it’s become a bit easier to ‘trade up’. The gap, or trade-up premium, is still sizeable in parts of Auckland, but this is also where property values have recently fallen the most, e.g. on the North Shore. Of course, given the LVR rules and the banks’ own cautious lending practices, some would-be movers up the housing ladder won’t have been able to capitalise on a smaller trade-up premium.
CoreLogic Senior Property Economist Kelvin Davidson writes:
About a year ago we looked at the difference in median values between three bedroom properties and four bedroom properties across the country to try to quantify the ‘trade-up premium’, or the extra money that needs to be found for somebody to move up from a first/starter home into their next step up the ladder*. We’ve now updated the figures, and it’s really interesting how things have changed over the past year.
As the first chart shows, three bedroom properties have outperformed four bedrooms in many areas over the past year, albeit in Auckland City and on the North Shore, this has just meant smaller falls in median property values. The strength of the Dunedin market that we’ve seen for a number of years now is also clearly evident in these bedroom count figures.
So now looking at the actual trade-up premium itself, there’s been a sizeable fall in Auckland City and the North Shore, and smaller drops in Tauranga, Christchurch, and Hamilton (see the second chart). In other words, larger properties have become relatively cheaper in these areas over the past year, suggesting it’s become a bit easier to trade up. By contrast, the gap has widened in Dunedin and Wellington, albeit by less than $10,000 in both markets.
Of course, whether or not homeowners can actually take advantage of this situation is another matter. After all, they still need to have the required amount of equity, while the banks continue to impose strict income/expense testing, as well as needing to be satisfied that borrowers could service their new, larger mortgage (after trading up) at theoretical interest rates of 7-8%.
Indeed, it’s interesting that our Buyer Classification series is recording a relatively low market share for movers (i.e. existing owner occupiers who are relocating) at present, or in other words that they’re tending to sit tight and perhaps renovate their existing property at the moment, rather than move (see the third chart). To be fair, this may not necessarily be due to restrictions on credit; it could just be a choice for some would-be movers.
In a bit more detail, the biggest fall in the trade-up premium (across the areas looked at here) has been on Auckland’s North Shore, where the value gap has dropped by $53,000, from $283,000 to $230,000. That remains high by the standards of most other parts of the country, but it’s still the lowest for the North Shore since 2015 (see the fourth chart). As we’ve noted in other research for a while now, the North Shore has lately been one of the softer parts of the country in terms of property values, and the analysis here highlights that now may be as good a time as any to upgrade to a bigger property (obviously provided it’s still affordable).
* See https://www.corelogic.co.nz/news/greater-christchurch-countrys-best-functioning-property-market. To be fair, bedroom count is clearly not a perfect measure of ‘starter’ vs ‘second homes’, or of quality or suitability for each individual/household, but it nevertheless reveals some pretty interesting insights.