Is now a good time to buy a house?

It’s been a difficult few years for prospective homeowners.

Just when borrowing costs started falling in 2020, prices rose sharply and offset any extra spending capacity buyers had.

When the dust settled and prices started coming back to earth, mortgage rates had started to rise rapidly.

They didn’t go as high as during the GFC-era of 2008, but they rose at the fastest pace since the 1980s.

That spooked potential buyers, as did the near 20 per cent fall in prices, which we hadn’t seen in at least 60 years.

If you think it’s tough having been left on the sidelines, count yourself lucky you didn’t buy in 2021.

Some of those folk had to stomach a tripling of their mortgage payments, while watching the equity in their biggest asset slip away.

The housing market stabilised early last year, and mortgage rates are now heading south.

Where does that leave potential buyers, and is now a good time to pounce on that first home?

On balance, yes I think it is.

At the same time, I wouldn’t count on property powering ahead in a big way.

House prices are sensitive to the cost of borrowing, so falling interest rates will be the key driver of a more buoyant market in the coming years.

However, the Official Cash Rate (OCR) could settle a little higher than we’ve seen in recent years.

That could mean be the “new normal” for mortgage rates is closer to five per cent, than three or four.

Policy changes will also help, with CCCFA restrictions having softened and the interest deductibility returning for investors.

Migration is likely to remain supportive too, although it’s well down from its highs and headed lower.

On the other side of the coin, the costs of home ownership have increased sharply in recent years.

Mortgage rates are coming down but higher insurance, rates and property maintenance costs are here to stay.

The labour market is also expected to weaken further, despite a string of OCR cuts on the horizon.

The unemployment rate has increased to 4.6 per cent, up from a multi-decade low of 3.2 per cent in 2022.

Reserve Bank projections suggest it will keep rising, peaking at 5.4 per cent next year.

When people don’t feel confident about their job security, they’re more cautious about borrowing, buying or spending decisions.

The biggest headwind of all could be the fact that affordability remains low, and prices are still high compared to history.

The Real Estate Institute’s national house price index fell by 18.1 per cent between November 2021 and May 2023, and prices haven’t moved much since then.

That was a big fall, but don’t forget prices surged 48 per cent in the two years leading up to that 2021 peak.

That’s a staggering rise, given the average gain since 1990 has been 5.9 per cent per annum.

It means that – even after such a substantial decline – prices are still 22 per cent higher than where they were at the beginning of 2020, just before the pandemic hit.

Rents haven’t risen as much as prices, which means yields don’t look as attractive to investors.

According to CoreLogic, gross rental yields nationally are around 3.2 per cent, while in Auckland they’re even lower at 2.6 per cent.

That’s higher than 2022 when prices were close to the peak, but it’s below where yields have typically sat in the past.

Unless an investor can see opportunities to add value, those levels of income (which are before costs) probably aren’t particularly enticing.

When you put all of that together, I still think it’s a good time to buy, especially for first home buyers.

If you’ve got a deposit together and funding lines in place, you’re in a good position and are luckier than many.

As interest rates keep coming down, more competing buyers will enter the fray and their purchasing firepower will increase.

That suggests it might get harder, rather than easier from here, especially if prices start moving up at the same time.

The worst is behind us, and we should see a recovery in the housing market over the coming years.

However, I would be banking on modest gains, rather than spectacular ones.

We might see something closer to the 5-7 per cent annual average we’ve seen over the long-term, rather than the double-digit rises we’ve seen at times in the past.

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