Foreword by Ian Thompson, Editor
Welcome to the latest edition of The Build Review. In today’s installment, we have a thought-provoking discussion with Chief Property Economist, Kelvin Davidson. The question at hand: should we buy or build in 2024?
Kelvin, with his wealth of knowledge and expertise, provides invaluable insights for those contemplating whether to build their first new house in 2024 or to buy an existing one.
In this brief video update, Kelvin delves into the intricacies of the current new build market, discussing the issues that potential buyers need to be aware of.
A key point he highlights is the new build premium. This has seen a significant increase over the past few years and can add an additional $50,000 to $70,000 to the cost of an average new build property, depending on the location.
Kelvin also discusses how the lending and tax systems have been favouring new builds, making them an attractive option for buyers, despite the higher price. He explains how the loan to value ratio rule system allows owner-occupiers and investors to get into the market with less than the standard 20% deposit.
The video further explores the potential changes in these benefits due to new government policy changes and their possible impacts on new build prices. Kelvin also discusses the potential for caps on debt-to-income ratios and how they could affect new build properties.
Finally, he delves into his own experience with buying a new build and how it suited his needs, providing a personal perspective to the discussion.
Whether you’re considering a new build for investment purposes or as your own home, Kelvin’s insights will be of great value. Take a moment to watch the video and gain a deeper understanding of the current new build market in New Zealand.
We hope you find this update informative and insightful, and as always, we wish you luck with any property decisions you make.
Hi there, my name is Calvin Davidson, and I’m a New Zealand based chief property Economist. This is just a quick video update for The Build Review, focusing on the current scene for people looking to purchase their first new build.
Whether you are potentially buying property off the shelf or taking on your own construction project, there are a lot of issues to be aware of with new builds. So, I thought it would be useful to provide an update on what’s happening.
We are seeing from the data that there is a new build premium that’s opened up. It’s always been there, but it’s perhaps got a little bit wider over the past couple of years. This is due to the favorable treatment that new builds have had within the lending and tax system, which has probably pushed people towards new builds, creating a bit of a price premium.
We’re currently seeing this premium in the range of about $50,000 to $70,000, depending on which part of the country you’re in. Obviously, it does vary a bit, but that’s sort of a fairly standard gap between an existing property versus a new build. So, they are more expensive, but of course, you get a newer house, potentially with better insulation standards and less maintenance over the long run.
There are always trade-offs, pros and cons. Lending roles have been favorable for new builds over the last little while. The loan to value ratio rule system does favor new builds so, as an owner-occupier, you can get in with less than a 20% deposit, which is the requirement for an existing property. For investors, you can get in with less than a 35% deposit, which is the requirement for an existing property.
Now, the banks have their own rules of course, so it’s not a free-for-all on new builds, but those deposit requirements are a bit less right now. As a property investor, you can claim interest deductions, full deductibility on new build properties, as opposed to less than that on existing properties.
Now of course, with the change in government and the reinstatement of mortgage interest deductibility, that will change. But right now, the tax system also favors new builds. This is something to keep in mind as well. We’ve certainly seen new builds rise as a percentage of the purchases being made by both first-time buyers and investors.
So, there has been that shift towards new builds, which has created a little bit of that price premium. There has certainly been a good range of choice lately in terms of new builds, with a lot of new projects coming online. This is creating a choice for people amongst that new build stock and property.
What might happen next? Well, as I’ve said, the government has changed and the tax system is going to get less favorable for new builds. The interest deductibility is going to be fully reinstated over the course of the next couple of tax years for all properties and all investors, regardless of whether you’re existing or new and whether the property is existing or new. So, potentially that price premium for new builds might fade a little bit, and existing properties might catch up.
So, you know, it could be that you start to see that price gap close a little bit, so potentially factor that into decision making. At the same time, even if the tax system changes, the LVR system, those deposit requirements, are still set to be more favorable for new builds. There’s no suggestion of any real changes there, and we might see some caps on debt to income ratios this year or 2024 from The Reserve Bank.
This is in terms of capping how much loan the size of the loan that people can get in relation to their incomes. Now, we understand that within that system, there’s going to be exemptions for new builds like there is under the LVR system. So, again, thinking about the lending rules, there is going to be that favorable treatment either under LVR and or debt to income ratios for new build properties.
There’ll be a decent level of demand out there for new builds. Yes, mortgage rates are still challenging. I’m not going to see any significant falls in mortgage rates until the end of 2024, so that’s going to be a challenge for next year. But a decent level of demand, we’ve got population growth, we’ve got high migration, we’re going to need new build properties.
At the same time, the cost growth has really slowed down. Supply chains are easing up, maybe a little bit of Bally opening up in the construction sector too. So that’s really just raining in that cost growth, which should help to support demand as well.
I don’t think new builds are going to get cheaper necessarily, but they will not grow at the same speed in terms of cost that they have been lately. So that’s potentially a benefit as well.
Now, as I’ve said, whether you’re buying an existing property or new property, whatever you’re doing over the next year, mortgage rates are still going to be a challenge for people who need to borrow. So that’s going to be putting pressure on debt servicing. There’s no real change there likely for a year or so.
Certainly, there are pros and cons. There are some favorable things out there for new builds, but of course, whatever you buy, mortgage rates are still going to be a challenge if you’re using debt.
So, what would I do in this environment? Well, I’m out of the market, so pretty happy with where I live. But it’s a tough question, and it obviously comes down to very individual circumstances. All I can really say is that I live in a new build. It gave us what we wanted. You can set out your floor plan, choose what you want, and be a bit more selective. That suited us.
But for every property buying decision, it comes down to personal taste, personal choices, and often it needs to be more than just the financials. It’s about location, does the property suit your needs, and does it give you what you want.
So, buy new, buy existing, it’s down to the individual. I certainly don’t offer financial advice. All I can say is we bought a new build because it gave us what we wanted. But of course, existing properties might do that as well. So, it’s ultimately down to personal choice, finances need to work, and of course, it needs to work for other reasons as well.
More generally, we have to accept that we need more new builds. I’m a big fan of housing supply. We need more houses in the country to help with housing affordability over the long run. So anything that encourages new build properties, encourages people to buy them, and encourages developers to keep bringing these things forward seems to be a pretty good idea.
Intensifying the housing stock, we already have a shift to smaller dwellings making better use of our brand fields land. All of these things seem to be a pretty good idea.
Focusing on land supply, getting the infrastructure in the right place, the right properties in the right place, and a bit of a focus in terms of public policy potentially on administration cost, getting resource consent, getting dwelling consent, all these things that can slow stuff down.
So, anything that can be improved on that front would be welcome. But in the short run, 2024, like I said, there are pros and cons for new builds. Ultimately, whether you look at a new build or an existing property is going to be down to personal choice. But whichever decision is made, and if you’re borrowing, then debt servicing and those mortgage rates are going to be a continued challenge.
That’s probably all I’ve got to say. Good luck with any property decisions and hopefully, everyone has a great Christmas. Thank you.