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Housing Affordability

14 August 2009

For many people purchasing their home is the biggest investment that they will make in their life.

It is therefore important to seek professional advice to make sure that your investment is sound and that your decisions are based on a thorough and unbiased knowledge of the market.

Affordable housing is important for people's welfare as high housing costs relative to income can create financial difficulty and leave people struggling to meet basic needs such as food, clothing and education.

Housing affordability can play a major part in property purchase decisions. The recent softening in property values and the lower interest rate environment has improved peoples ability to service housing debt. Massey University's home affordability report undertaken in May 2009 showed national affordability improving 8.5% over the last quarter and 17.7% over the last year. This is partly due to the reserve bank cutting the Official Cash Rate (OCR) 5.25% from a record high in June 2008 down to a record low of 2.5%.   The full effect of this has been tempered to some degree by pessimistic economic forecasts and rising unemployment which has recently lifted to 6%. Offshore borrowing costs have also risen due to a continuing shift of assets away from fixed interest securities to shares.

Lending criteria also impacts on people's ability to purchase property. Earlier this year, tightening criteria from most lending institutions meant that some potential purchasers were shut out from the market while they saved for larger deposits which were required (20%). Within more recent months, lenders have become more relaxed on lending limits and schemes such as The Welcome Home Loan, which is supported by Housing New Zealand Corporation, have also been the introduced. This has led to an increase in the level of enquiry for property within the lower to medium price range and a greater number of house sales. There is now a shortage of good properties for sale within this category and the increased competition from potential purchasers has seen higher prices than expected and multi offers in some situations.

First Home Buyers

Many first home buyers struggle to save the traditional 20% deposit that has been required from lending institutions and this has been partly removed by the introduction of schemes such as The Welcome Home Loan. This package makes it easier for first home buyers to own their own home as you can:

  • Borrow up to $200,000 with absolutely no deposit.
  • Borrow up to $280,000 with a deposit of just 15% of the amount above $200,000.
  • The deposit can be gifted.
  • Three or more friends or family members who will be living together can team up to purchase a home.

There are various conditions in order to be eligible such as:

  • Maximum household income for 1 or 2 borrowers less than $85,000.
  • Maximum household income for 3 or more borrowers less than $120,000.
  • The loan is for owner-occupied properties only. It is not for rental properties.
  • Borrowers may not own any other properties.
  • Participating lenders will also apply their own credit criteria.

There are many things you must consider prior to purchasing a house such as how much you can afford, and how much it will cost you now and into the future. As well as the deposit (if one is required), there are a number of other costs associated with purchasing a property. These can include:

  • Loan Fees - Each lender will have different fees for the loan, however these can often be built onto the total loan.
  • Valuation Report - In most cases, lending institutions will require a valuation from a registered valuer so that they know the value of the house you want to buy. A valuation can also be used to establish an offer and to negotiate with the vendors.
  • Land Information Memorandum (LIM) - It is a good idea to get a LIM from the Council as it tells you what the Council knows about the property and if there are any potential issues such as work that has been undertaken without any permits.
  • Lawyers Fees - Any documents should be overseen by your lawyer prior to signing and therefore you will also need to allow for lawyer's fees. This will generally include the land registration fee that is incurred when changing the ownership records for the property.
  • Builders Report - It can be prudent to get a house checked by a suitably qualified building surveyor before proceeding with a property. The inspection will reveal if any repairs or maintenance are required and the likely cost. This may be able to be used to negotiate the purchase price.
  • Removal Costs - These can range from hiring a trailer to using a removal company to do the moving for you.
  • Bonds/Fees - Bonds or fees may be incurred for connection to services such as power, phone and gas.

As well as the initial start up costs above, there are also annual costs that include:

  • Rates - Rates must be paid to your Council for services such as rubbish collection and roading.
  • House and Contents Insurance - All lenders will require full replacement home insurance on the property.
  • Repairs and Maintenance - Keeping up to date with repairs and maintenance helps maintain or improve your property value.

It is important to budget for all of the costs above and take into account everyday living costs such as food, power, phone, education, doctors, and car maintenance and running costs. Also, be aware that interest rates change over time and that your payments may increase at the end of a fixed term.

Purchasing a house is a major decision and it is important to seek professional advice to make sure that you get the best value for money and avoid any unwanted problems. Prudent and well informed buying is the key to good investment. TelferYoung has the expertise to provide the appropriate level of advice for all types of property.

Mike Drew

 

This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.