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House for sale in Auckland (Photo: Phil Walter/Getty Images)
House for sale in Auckland (Photo: Phil Walter/Getty Images)

MoneyNovember 24, 2020

Are first home buyers really in a worse position than three years ago?

House for sale in Auckland (Photo: Phil Walter/Getty Images)
House for sale in Auckland (Photo: Phil Walter/Getty Images)

Thanks to falling interest rates and higher wages, mortgage affordability has remained surprisingly steady, writes Greg Ninness for interest.co.nz. But that doesn’t mean things aren’t a lot tougher for those trying to get onto the housing ladder.

The latest house price figures make startling reading for potential first home buyers. According to the Real Estate Institute of New Zealand, the national lower quartile house price was $520,000 in October.

That means it has increased by $85,000 (+19.5%) since October last year, and by $157,000 (+43.3%) since October 2017. That’s an average increase of $1000 a week over the last three years for homes at the most affordable end of the market (the lower quartile price is the price point where 75% of sales are above and 25% are below).

In Auckland, where prices are the most expensive in the country, the lower quartile price has increased from $654,000 in October 2017 to $769,000 in October this year. That’s an increase of $31,500 over the last 12 months and $115,000 over the last three years.

That means a 10% deposit on a home at the national lower quartile price would have increased from $36,300 in October 2017 to $52,000 in October 2020. The size of the mortgage needed to go with that would have increased from $326,700 to $468,000 over the same period.

A 20% deposit for the same property would have increased $72,600 to $104,000 over the same three years, while the size of mortgage to go with that would have increased from $290,400 to $416,000.

Those are pretty steep increases, especially when you consider what has happened with wages over the same period.

If you the take the national median rate of pay for couples (male and female) throughout New Zealand aged 25-29, and assume they are working full time, that would give them combined after-tax pay of $1713 a week in October this year. That’s an increase of $34.14 a week (+2.0%) compared to October last year, and an increase of $129.91 a week (+8.2%) compared to October 2017.

So, over the last three years, the cost of homes in the part of the market likely to be of most interest to first home buyers has increased 43.3%, while the take home pay for typical first home buyers on the median rate of pay has increased by just 8.2%

That suggests lower quartile house prices have risen at more than five times the rate of after-tax wages for typical first home buyers over the last three years. But to get a complete picture of the pressure faced by first home buyers, we also need to look at what has happened to mortgage interest rates over the same period. In October 2017 the average of the two year fixed mortgage rates offered by the major banks was 4.7%. It fell almost continuously from there to 2.65% in October this year.

That decline had a huge impact on mortgage payments.

In October 2017 the average two year fixed mortgage rate was 4.7%. It was 2.65% in October this year. (Photo: RNZ)

If you had purchased a home at the October 2017 national lower quartile price of $363,000 with a 10% deposit, which would have required a mortgage of $326,700, the mortgage payments would have gobbled up about $446.71 a week, or just over 28% of the take home pay of a typical first home buying couple.

If the same property had been purchased with a 20% deposit, which would have required a mortgage of $290,400, the payments would have been about $347.19 a week, or just under 22% of a typical first home buyer’s take home pay.

At the October 2020 lower quartile price, the mortgage required with a 10% deposit would have increased to $468,000, which would have pushed up the mortgage by $43.93 a week even after allowing for the drop in interest rates.

However the after-tax pay of typical first home buyers would also have increased by about $142 a week over the same period, more than making up for the increase in mortgage payments.

Measuring mortgage payments as a percentage of after-tax pay in the above examples shows that the figures have remained remarkably stable at around 28% over the last three years for buyers with a 10% deposit, and 22% for buyers with a 20% deposit.

So as far as mortgage affordability is concerned, there has been almost no change over the last three years, with lower interest rates more or less cancelling out the effects of rising prices on mortgage payments.

Mortgage affordability may have hardly budged, but it’s still far harder for buyers to get into their first home (Photo: Jessie Casson via Getty Images)

Higher prices make it harder to cobble together a deposit

Where rising prices will have made it harder for first home buyers is in raising a deposit.

The rise in the national lower quartile price since October 2017 has pushed a 10% deposit up from $36,300 to $52,000, and the amount needed for a 20% deposit from $72,600 to $104,000.

If couples at the median wage rates outlined above were able to save 20% of their after tax pay each week to put towards a deposit, it would take them 2.8 years to get enough for a 10% deposit on a home at the national lower quartile price (up from 2.1 years three years ago). A 20% deposit would take 5.8 years to save (up from 4.2 years three years ago).

So looking at the overall picture, mortgage payments have generally become easier for typical first home buyers over the last three years, but raising a deposit would have become more difficult.

That is particularly true in Auckland, where lower quartile prices are significantly higher than in other parts of the country.

You would need $76,900 for a 10% deposit on a house at Auckland’s October 2020 lower quartile price of $769,000, while a 20% deposit would set you back $153,800.

With a 20% deposit you would need a $615,200 mortgage and the payments on that would be about $572 a week. That would take up just under a third of a typical first home buying couples’ take home pay, which should be reasonably affordable.

But if they only had a 10% deposit, the mortgage payments would jump up to $725 a week, eating up almost 42% of their take home pay. At that point their weekly cash flow would be starting to get tight and it would mean that housing in Auckland is starting to get into unaffordable territory for people on average wages without a substantial deposit.

The tables below summarise the main affordability measures for buying homes at the current lower quartile prices in all main regions and districts throughout the country, with both 10% and 20% deposits.

Keep going!
(Photo: Tina Tiller)
(Photo: Tina Tiller)

MoneyNovember 19, 2020

The sustainable tourism start-up that keeps the cash in the community

(Photo: Tina Tiller)
(Photo: Tina Tiller)

With New Zealand tourism in a lull – and backpackers in the firing line – Queenstown-based start-up Kiwi Welcome is creating a new model of sustainable travel where visitors add value to the land.

For the past few years – up until Covid-19 began hoarding the headlines – one of New Zealand’s most pressing public issues was poo. It seemed like it was everywhere: on our beaches, in our public reserves, on our footpaths, and, perhaps most shockingly, on our sacred campgrounds.

Discarded faeces in our beautiful environment came to symbolise the limits of the booming tourism industry – a smelly consequence of the kind of high-intensity, low-value model that corralled too many frugal backpackers into too few places, where the main things they contributed was litter and Lord of the Rings fandom.

In remote regions where scarce ratepayers’ funds could seldom afford the necessary toilets and bins, freedom campers were starting to be viewed with the same contempt as stoats. The sight of a convoy of Toyota Estimas made entire South Island communities grimace and shudder, aware of the impending clean up at the local reserve once they moved on.

Then, as if overnight, Covid-19 came along and it all disappeared.

Freedom camper (Photo: Phil Walter/Getty Images)

The pandemic has been a mixed blessing for New Zealand tourism. It’s provided some much-needed respite from the hordes of backpackers and freedom campers, but it’s also forced whole businesses into liquidation, hundreds of redundancies and prompted the government to launch a $400m support package to prop up the crippled industry.

But for those lucky enough to be able to tough it out, it’s provided breathing room – some valuable quiet time for operators to reflect and ask earnestly what they want New Zealand tourism to be when the borders reopen; the same low-value, high-turnover hustle? Or something more sustainable and holistic? The issue was given more oxygen recently when minster of tourism Stuart Nash announced that low-budget backpackers were not in his plans for the recovering industry.

However, it was over seven months ago during New Zealand’s lockdown, that Sam Brough, founder of sustainable tourism start-up Kiwi Welcome, first started pondering the question: “What if we could encourage or incentivise visitors to not just see New Zealand, but to protect it or preserve it and contribute to it?”

Having seen the demand and prices for tourism services collapse, Brough spotted an opportunity within the vanished margin. Because customers were already paying less than they would have before Covid-19, the idea was to create a paid subscription to a website that directed visitors to registered tourism operators in Central Otago. Members would pay $79 to sign up and, in return, receive special discounts from registered merchants.

But the main point of difference for Kiwi Welcome was that the entire value of the $79 membership fee would stay in the community in the form of a donation to a local charity or trust.

Brough says the value to customers, local commerce and the community means Kiwi Welcome has been enthusiastically received by tourism operators. Currently there are more than 50 merchants registered since it launched in October.

“The more operators on the platform, the more savings customers can get with their $79,” he says. “But we want to also be really pushing our message about being purpose-driven and sustainability-led because that’s what separates us from the market; knowing full well that 100% of all that membership fee actually goes back into the land.”

Wanaka in Central Otago (Photo: Getty Images)

Brough says as a social enterprise, Kiwi Welcome is only covering its operating costs. Periodically it will collect the accumulated revenue from membership fees, and then ask a registered business at random which local cause it would like to see the money donated to.

“We don’t want responsibility for making the choice of which social or environmental cause will receive the money because we are not close enough to the real kinds of issues,” Brough says.

“The businesses that are registered with us, they live and work with the community, and they know what is it that really needs protecting and what would actually benefit this place for both people that live here, and people who are visiting.”

Kiwi Welcome has a simple criteria for the donation: it should be registered charity or charitable trust, and it should benefit the local region. While the type of cause isn’t stipulated, Brough says in Otago the vast majority of charities are environmental ones – such as the Kea Conservation Trust – which are already trying to offset the negative impact of too many visitors.

So what are the long term plans for the project?

“We would love to have 100 businesses before Christmas,” Brough says. “I guess it’s a bit of a snowball effect because we’re already starting to get inquiries come to us, which is great. Initially, it was a very much pound the pavement and knock on doors.

“And from a membership point of view, we want to hit 10,000 members in our first year. So by this time next year, if we hit 10,000, then over the course of that year we would have given back over $500,000 to a social or environmental cause, which is big money.”

Kiwi Welcome (Screenshot)

While Kiwi Welcome is only operating in Central Otago for the moment, Brough says he’s had inquiries from Hawke’s Bay, Wellington, Te Anau and even from Canberra in Australia.

“There’s a real desire for a community-led tourism platform like Kiwi Welcome to be helicoptered into those places and we have every intention to do that.”

“But as a start-up, we’ve said: ‘How about we prove the model in a real tourism mecca like Queenstown and then, if we can prove that model works, take it as far and wide as we can’.”

At this stage, Kiwi Welcome is only a website, but Brough says it’s easy for visitors to navigate around and find the businesses they’re looking for. Members can purchase vouchers at discount rates, and then redeem them with registered businesses. Brough says that a couple visiting for a long weekend could book a hotel, hire a rental car and do three activities through Kiwi Welcome and save about $400.

But what do the registered merchants think of it? Kate Mitchell, digital and sustainability coordinator at Edgewater Resort in Wanaka, says its best feature is that the website includes operators that invest a lot in the environment and the community.

“It’s not just anybody can be there,” she says. “They came to us and said: ‘We really like what you’re doing with your sustainability efforts and we feel like that you guys have a focus on domestic tourism that’s responsible for sustainability’.”

“So they may have got us on the hook with the flattery but the overall feel of the programme makes it a no brainer.”

Edgewater hotel (Photo: Supplied)

While Kiwi Welcome ultimately aims to improve the commerce of tourism operators, ultimately its main purpose is to create a partnership between like-minded businesses and visitors with a sustainable goal in mind. Brough says the Kiwi Welcome model will hopefully eliminate the many commission-taking intermediaries from the market and also remove the tension and stress that’s developed through the old high-turnover, low value dynamic.

“The people who live here have to bear the brunt of protecting and looking after the place. So as a traveller with Kiwi Welcome, you’re doing your bit and therefore you’ll perhaps be received more warmly.”

Of course, there’s a lot more needed to be done to fix the industry before the borders inevitably reopen and the tourists return. But Brough says offering something that helps create a sustainable option for both visitors and businesses is a start.

“You could say there’s a little bit of reflection happening, and people are asking themselves ‘why did I get into business in this industry in the first place?’ Most of them will say it wasn’t just to make money.”

“We’re taking the passion and desire of businesses and visitors to create change, and saying ‘you can be a part of that with us’. That’s where we’re getting the most enthusiastic responses of people that have felt that way but haven’t been able to act on it.”

“I think 2020 could be the year of silver lining to tourism.”