2022 'worst time' for first-home buyers in 65 years

Kendall Hutt
Source: 1News

Economic consultancy Infometrics says 2022 is the "worst time" for first-home buyers in about 65 years.

House keys (file photo).

Analysing housing data from the last seven decades, Infometrics has published a report - Housing update: A new lens on affordability - looking at what could be in store mortgage and capital gains-wise for today's buyers down the line.

Produced by its chief forecaster Gareth Kiernan, the report says 2022 is the worst time since 1957 for first-home buyers to break into the New Zealand housing market.

"Our analysis suggests that the millennials wanting to enter the market now face the least attractive housing prognosis since their grandparents in the 1950s, if not longer," the report noted.

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Infometrics compared the payments made by homeowners over the lifetime of their mortgage against the value of the property once it had been repaid to reach such a conclusion.

It looked at mortgage rates throughout the life of the loan, consumer price inflation, income growth over time, house prices at the time of purchase and house price changes during the period of ownership.

The report said first-home buyers in 2022 are essentially signing up for high ongoing mortgage costs.

Kiernan explained there are two key factors contributing to 2022 being a bad time to buy a house - overinflated prices have significantly increased the proportion of people's income they need to devote to servicing their mortgage and significant capital gains are heavily limited.

"Our analysis shows that even with mortgage rates below 5%, the average home's million-dollar price means that today's first-home buyers face much less favourable financial outcomes than a buyer in 1987 did with interest rates of 20%," he remarked.

Kiernan said average first-home buyers are facing initial mortgage repayments equal to 49% of their income thanks to house price increases in 2020 and 2021. The lift in mortgage rates since mid-last year also won't help this.

Modern townhouses (file image).

According to Infometrics, this 49% figure is the highest on record, surpassing previous records from 1987 and 2007.

To make matters worse, Kiernan said current buyers face committing an average of 33% of their income over the next 25 years to pay off their mortgage. This is "considerably higher" than the 21% seen through the 2000s and 2010s, he said.

He added house price projections for the next 25 years mean buying in 2022 is almost as bad financially as 1955 - one of the "worst years" for first-home buyers.

"Young people are effectively signing themselves up for a lifetime of debt if they want to get into the housing market, with much less money left over for discretionary spending than previous generations enjoyed."

Infometrics principal economist Brad Olsen told Breakfast young Kiwis are "very much locked out" of the housing market.

He said being burdened with debt, having less capital gains than previous generations and paying "a lot more in money" over the lifetime of a mortgage "is dire stuff".

"As a country, it's a damning indictment on where we're willing to leave young New Zealanders. Previous generations have screwed young Kiwis going into the future with a housing outcome that means we'll be paying a lot more and getting a lot less from it.

"Politicians have got to be a lot more serious about the sort of changes that need to happen to expand our housing supply and make it affordable, because at the moment, the social divides, the awful outcomes that are going to come through from housing, will mean that young Kiwis are not able to buy a house as they go into the future."

Best and worst years to break into market

Kiernan also said Infometrics' analysis had been able to look at the "everlasting debate" of who had it harder - baby boomers or millennials.

Infometrics had been able to pinpoint the best and worst years to buy into the housing market in the past.

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It said the best years to have been a first-home buyer were 1949 and 1996 due to relatively low interest rates throughout the life of people's mortgages. There were substantial house price rises as well.

In today's dollars, Infometrics said a buyer in 1949 faced an average house price of $104,000. They would have been earning about $53,300 per year and had an initial mortgage rate of 4.0%.

"By the time they'd paid off the mortgage in 1974, they would have paid about $106,200 in interest and capital to the bank and have an asset worth over $294,000," the report noted.

Meanwhile, a buyer in 1996 paid an average house price of $299,600 in today's prices. They would have been earning about $81,100 per year and had an initial interest rate of 7.6%.

"By the time the mortgage was repaid in 2021, they would have paid $470,300 to the bank and had an asset worth $1,064,000, for a net gain of 126%," the report said.

In comparison, the worst years were 1955 and 1975, as the following 25 years included periods of substantial house price weakness, Infometrics said.

But there is a caveat in all of this. Infometrics said its assessment of 2022 relies heavily on its forecast of house prices, interest rates and income growth over the next 25 years. It said future house price movements have the greatest potential to affect the outcomes.