Small developers or builders trying to make money are likely to be the ones left behind as real estate prices appear to be falling.
Data from CoreLogic shows that while year-over-year growth remains strong at 23.4%, prices are slowing and in some cities are contracting month-over-month.
Last month house price growth hit its lowest point in 19 months, with prices from February in some cities like Wellington, Hamilton and Dunedin trending in reverse.
Mortgage broker Bruce Patten said anyone who bought in the past two years hoping to make a profit could have a rude awakening.
“A lot of them, unfortunately, will end up being your little developers or your builder getting together with his brother and his parents and thinking they can be developers and buy land and do things.
“I think those are the people who are going to come unstuck.”
He said this group was different from people who were buying with the intention of living in the house, who might see they were paying too much but had no intention of selling anytime soon anyway.
“The only people losing money in this current market are the people who have to sell. If you don’t have to sell and you can take advantage of whatever the next two years have in store for you…because this what we always get on the back of a slow or declining market is another boom.”
However, he said that while recent buyers were stress-tested to make home loan repayments at higher interest rates, there was no doubt the next few years would be tough for some.
“There are really going to be people who bought and paid, certainly in the last 12 months, at 2.5% interest and now they’re going to go to 5%…so if you borrowed $1 million, your cost interest was $25,000 a year, it’s now going to be $50,000, which is going to really hurt some people.
“I don’t worry so much about young people because they’re early in their working life and they really tend to have steady income increases. It’s probably anybody who’s very fit and who has a fixed income, and the prospects for increased income are limited, they are the ones who will be in trouble.”
Buy ‘a development opportunity’ – property developer
Professional renovator and property developer Tom Faye said those who have recently bought properties with the intention of selling quickly may find themselves refinancing or selling for less.
“He’s the one that’s going to attract people. Those kind of people tend to work with a short-term lender, so the short-term lender might give you a loan for six, eight or 12 months.
“Now, if you were expecting to transform this property in this time frame, you are going to start to feel the pinch.”
He said supply chain delays and offsite workers with Covid-19 were other factors costing anyone in the business.
However, he said, even with the cooling there were still plenty of opportunities – speculators just had to be smart.
“The best thing you can do now [is] buy in high value suburbs go buy long term because when the market gets cold what happens is $30,000, $60,000 – even $100,000 come off the top so the creams come out from the top.
“So that means we can now go to really nice neighborhoods all over the country and buy ourselves a renovation opportunity…that’s the kind of purchase you want to make.”
Economic pain may lie in wait
Meanwhile, Ryan Greenaway-McGrevy, associate professor of economics at the University of Auckland, warns then that there was no doubt that house prices had become unsustainable, weaning the economy from them would be painful.
“So I’m talking about a recession…So we’re seeing rising unemployment, shrinking wage increases over time, certainly in real, if not nominal terms. That’s the kind of economic pain I’m talking about . “
He said three decades of policymakers have let the economy become too dependent on rising house prices.
“Tying economic growth to ever-increasing house prices will ultimately not be sustainable and what exacerbates this is the fact that to support these increases in house prices, households are borrowing more and more.
“Borrowing to finance consumption is not a sustainable way to manage your economy. And it has worked well so far, but eventually you have to pay your debts and making that structural adjustment can be quite painful.
“If our decision makers had been a little more observant, had paid attention to these things, we wouldn’t be in this position now.”