COMMENT: Over the past year, there has been an increased number of restrictions on a buyer’s ability to get a mortgage. Investors have undoubtedly been hit hardest by these.
Loan to Value Ratios (LVRs) restrictions are probably the main hurdle for investors but there are others. Next month the changes to the tax-deductibility of interest will come into play. Debt to Income ratios have been threatened but, to date, have only been implemented by one bank.
So the question is, why are investors still looking to buy? Why haven’t they left the market?
Investors are, of course, still shopping for a number of reasons. Property remains New Zealand’s favourite way to increase wealth and the exemptions to LVR restrictions and tax deduction rules for new-build properties have meant investors are still looking in that part of the market.
One less obvious reason is that anyone who owns at least one property has had significant capital growth over the past few years. The two main hurdles to getting a mortgage are income and equity. However, equity has effectively sorted itself out as house prices rise. For anyone who has owned a property for a while, the only hurdle to becoming an investor, therefore, has been income.
So, how long ago would you need to have bought your first home to have enough equity to buy a similarly priced investment property? To quote a well-used trope, the answer may shock you…
To stretch the limits a bit, I’ve assumed that when you bought, you only had a 10% deposit. In other words, you were a low-deposit borrower at 90% LVR.
Currently, the maximum LVR for an investment property at most banks is 60% if the house is older than 6 months (existing) or 80% if it is a new-build. Most banks will lend up to 80% on the house you live in when buying an investment property.
With that in mind, the question therefore is: when would a homeowner who bought with a 10% deposit (90% lending) have enough equity for a 20% deposit on a new-build investment property and still have 20% remaining equity in their own home. Or, a more simple way to put it, how long to go from 90% LVR to 60% LVR using only capital growth.
It’s probably easiest to think about the question using dollars rather than percentages. A first-home buyer may have bought a property worth $700,000 and borrowed 90% – a mortgage of $630,000. For that $630,000 to now be 60% LVR, the house would need to increase to a value of $1,050,000. This represents an increase in value of 50% or $350,000 from the purchase price.
A couple of caveats before we go any further; I haven’t taken income into account here, I’m only looking at this from an equity point of view. Additionally, because – spoiler alert – it’s not a very long time, I haven’t factored in the principal payments on the mortgage.
According to the growth rate, as measured by the CoreLogic House Price Index, the average NZ homeowner who bought in, or prior to, September 2016 at 90% lending would now have enough equity to purchase a similarly priced new-build. That’s just 5 years of homeownership, not taking into account any mortgage principal payments.
Whanganui’s Castleciff. Real estate in the city has enjoyed good capital growth. Photo / New Zealand Herald
But averages are a funny statistic. If you put one hand in boiling water and another in freezing ice, averages say you should feel warm. Not true, obviously, so let’s look deeper into the regions to see the hotspots.
Aucklanders, if you bought before August 2015, odds are that you now have enough equity to purchase an investment property. This may come as a surprise to some of you because Auckland gets a disproportionate amount of attention on their rising house prices. However, most of that attention is on the actual price of houses in Auckland (currently around $1.34m) rather than the percentage of capital growth.
If you purchased a home in Wellington prior to September 2018 – just 3 years ago – you are likely to have enough equity to start an investment portfolio.
Gisborne and Whanganui are even more impressive with the average buyer who purchased prior to December 2019 and January 2020 respectively having enough equity to consider investing. That’s just 21 months to go from low-deposit, 90% borrower to starting an investment portfolio
But Whanganui didn’t even take out the top spot. According to CoreLogic’s House Price Index, that honour goes to the average house buyer in the neighbouring Tararua district who bought prior to 12 months ago in September 2020. Tararua has had a 50% increase in value from their original purchase price in 12 months!
So while some investment property buyers may have begrudgingly exited the market, every month that properties increase in value adds more potential buyers with sufficient equity to join the queues at open homes. Often these buyers are enthusiastically looking as they are keen to become investors. Additionally, they are often relatively young so aren’t too worried about what the next, say, 5 years of capital growth looks like. They can hold a property for 20 or 30 years and weather any temporary value fluctuations along the way.
– Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.