If you’re anything like me, there’s nothing that will enrage you more than a clickbait piece about a ridiculously young person (who it turns out are bank-rolled by their parents) buying their first house, or baby-boomers bagging on millennials for not being able to forgo their morning latte in order to save for a house.
So right up front, I’m going to assure you that this piece is neither of those (although I will touch on the merits of the second point).
While levels of income relative to house prices currently inhibit many people from entering the property market, it’s still important that children are given the opportunity to learn about buying property. While they may not go on to recall the intricacies of the house buying process, if they gain an appreciation of the sacrifices and hard work that their parents (and hopefully them one day) are required to make to purchase a house, then it will be worth it.
Understandability many people don’t have the first-hand experience of buying a property, so the task of teaching children about doing so can seem daunting. Children have a strange knack of coming up with curly and complex questions. This piece is intended to provide a little bit of run down of the process, which will hopefully provide some direction.
First and foremost, most New Zealanders obviously can’t afford to buy a house outright. So at some stage before you start getting too excited about the dream home that you’ve just stumbled across, it’s a good idea to organise finance. This will tell you how much you can borrow, and therefore the house you can afford.
There are several approaches you can take in organising this, either by liaising directly with your current (or preferred) bank or through a mortgage broker. A mortgage broker will be able to go around all the banks and, generally, find you the best deal. During this process you’ll have to provide your bank or mortgage broker with all sorts of information, including proof of your current income, savings and investments. You’ll then be told the amount you can borrow and the interest rate you’ll pay on borrowings.
But how do the banks arrive upon this number? And why can’t I borrow the full amount!? In New Zealand restrictions on the amount you can borrow to purchase real estate are determined by the Reserve Bank of New Zealand. Their loan-to-value ratios (LVRs) restrict the amount you can borrow relative to your deposit. Generally, if you are purchasing a home to live in, you require a deposit worth 20% of the house’s value (10% in some instances, however additional fees apply). If the property is being purchased as an investment property, then a 40% deposit is required.
While these LVR’s may be frustrating for those struggling to afford their first home, and seem nothing more than the Reserve Bank meddling in our lives, they really are there to protect us from ourselves. They are intended to protect banks from becoming too exposed to the property market (in the instance that there is an extreme downturn in the property market, banks could be left compromised), and to also slow down the rampant property market (particularly in relation to investors, who until the LVR for them was increased to 40%, were driving up property prices).
Once you have your finance approved, the fun really starts. And while the process of organising finance may have seemed onerous, it’s nothing on the process of finding and actually purchasing your first home.
With the property market currently being so strong, the majority of properties are being sold at auction. This means that before the auction for your dream home, you’ll need to ensure your bid is unconditional (ie. you have everything sorted, and once your bid has been made, there is no going back). As we’ve discussed, you’ll already have financed approved. However, on top of that you’ll need to a builder to review the property (and produce a builders report), have a lawyer review the Land Information Memorandum (“LIM”) report (which shows details on a property such as plumbing, drainage, water reticulation plans, consents, licences and permits, etc) and Sale and Purchase Agreement and get confirmation that your insurer will insure the property. Once you have all this complete, you’re ready to bid. Obviously there is a risk that having spent a lot of time and money on the above, you won’t be successful at auction and it will all be for naught.
However, if you’re lucky enough to come across your dream home which the vendor (seller) is instead looking for offers over a certain amount, opposed to an auction, then you can make an offer conditional to all of the above. In this instance, the vendor approves your offer, and then you complete all all of the nitty-gritty stuff. If you then can’t get finance or insurance, or don’t like something in the LIM or builders report you can pull out of the sale.
For obvious reasons, Banqer’s Real Estate module is a lot more basic than real life. It’s designed to teach students that sacrifices are needed in order to afford a property. In reality you may have to forgo your overseas holiday for a couple of years if you’re saving for your first home, and Banqer students should have to forgo spending on such things as free time on their iPad or treats from a class auction. We recommend this is kept in mind when setting the prices in the Banqer property market. Like in real life, purchasing a property should be achievable, but require a period of diligent saving and sacrifice.
Insights Simon Brown (Banqer team member and budding property mogul)