Suburbs win over city

Banks' lending policies squeeze first-time buyers out of the CBD market. Photo / Supplied

With the Reserve Bank set to keep interest rates low well into next year, prospective first-home buyers have reason to feel more confident about plunging into the market.

But buyers who jump in while interest rates are low can strike trouble when rates rise if they miscalculate how much they can afford.

Traditionally, the guideline figure on which buyers calculated the proportion of income they could spend on mortgage payments was 25 per cent, says Professor Bob Hargreaves, Massey University real estate analysis director.

That should now be upped to 30 per cent to account for interest rate rises.

While low interest rates fuel property booms, Hargreaves advises prospective buyers to be cautious through this period of flat prices.

Previously, first home buyers were committing a higher proportion of their income to servicing mortgages, thinking if they didn't jump in prices would keep showing 15-20 per cent annual increases.

But the days of rocketing prices are over, and Stephen Hart, director of www.aucklandhomefinders.co.nz, says this is a time for thinking conservatively.

"We're still not seeing huge property bargains, prices haven't dropped from last year - at best, they've flattened," Hart says. "Think about what if you lost your job or your partner gets pregnant. If house prices drop substantially, you could still get negative equity."

The latest Terralink mortgagee sales report shows the dangers of over-committing, with 247 mortgagee sales in May alone and almost 1000 mortgagee sales in the first five months of the year.

The previous worst start to any year was 2002, when from January to May there were 642 mortgagee sales. Figures for the Auckland region are up more than 200 per cent year on year. The next highest activity is in the Canterbury and Waikato regions.

Traditional price guidelines, such as spending 3 times your annual salary to buy a home are gone. Hargreaves' latest home affordability report shows the median house price in the Auckland region is $450,000 - 8.66 times the average annual income of around $52,000.

He says prices will not drop back to their pre-boom levels - the only way to realign them with average incomes is "to build smaller houses and stack them on top of each other in high densities.

"You could make the ratio work with some central Auckland apartments if you buy them at the right price, but they're not always top of the first home buyer's list."

And banks' tight lending criteria is driving many first-time property buyers into suburbia.

Bayleys residential sales manager, Rachel Dovey, says the major banks' requirement that buyers have a 35 per cent deposit for inner-city apartments smaller than 50sq m is forcing them to look to more traditional homes in fringe suburbs, where only a 20 per cent deposit is required.

"It's creating a disparity in buying habits," Dovey says. "To buy a $200,000 two-bedroom apartment, first-home buyers now need a $70,000 deposit, and even then have to jump through hoops to get mortgage approval from the banks. Some banks won't even lend on apartments.

"To buy a $280,000 three-bedroom home in more established suburban areas, buyers only need a $56,000 deposit. So they're getting more 'home' for less deposit."

Suburbs offering entry-level properties tend to be out-lying, such as Ranui, Swanson, Beachhaven, Glenfield, Glen Innes and Onehunga.

Hart says house-hunters who move to outer suburbs often leave behind family and friends, going into an environment that may feel foreign.

"If you feel wrong for your environment, it's always a bad move, no matter how much money you think you might make or how affordable the house is, because your home is only part of life's experience."

Most people stay in their home for seven to 10 years, Hargreaves says, so it's worthwhile getting the decision right.

Buyers need to consider commuting costs and transportation links when moving to outer suburbs, Hargreaves says. "From an affordability point of view, at first glance it might look like being located further out is the right thing to do, but the complications include school standards and commuting time."

With commuting, you need to think not only of costs, but "how mentally draining it is", Hart says.

Buyers may be better off buying a smaller, more centrally located house than a larger home further out. "You've always got the danger that when prices do start to rise, they'll often be slower rising further away from the city," Hart says.

However, he says it makes sense to acquaint yourself with areas with which you're unfamiliar. "The people I worry for most are those who will only consider the inner west or the eastern suburbs - they're missing opportunities that might be in other parts of the city."