Please note: I am not a qualified financial adviser and the opinions offered here are purely my own. It is critical that you seek professional advice from a solicitor before embarking on any property purchase. Read: Don’t buy a home without speaking to these 5 people first

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According to CoreLogic, average property values in Wellington’s Northern Suburbs have increased 8.7% in the last 12 months.

This from an update recently published on their website: (read the full article here)

“The heat comes on again in the Wellington area, which some are describing as the new Auckland when it comes to property market fervour.

Over the past year the Wellington market has become progressively tighter as sales activity out-stripped the number of new properties coming up for sale. We now see the total number of properties listed for sale in Wellington being only half of what they were this time last year. This comes at a time when demand is astronomical with attendances at open homes in Wellington City by dozens or even hundreds of groups not unheard of, and multiple offers being made very quickly. Unsurprisingly values have been rising quickly since September, and over the last three months are up 4.2%. The rise in values in the Hutt Valley, Porirua and Kapiti Coast are slower but the demand is beginning to spread there as the city market heats.

The impact of Auckland investors is much less in Wellington than further north. According to our buyer classification only 4% of Wellington sales in the past three months have been to Auckland investors, up from the 2 to 3% we have seen for the past few years. First home buyers have remained steady at 26% for the past few months; meanwhile other investor activity has climbed further to account for 40% of all sales.”

The new Auckland?? Damn that sounds scary…

From our point of view we have seen a jump in property values of +10-15% in the last 6 months. We regularly meet Auckland property investors at open homes down for the weekend to buy property, and investors in general would be the successful purchasers for around 40-50% of recent sales putting massive pressure on first home buyers. This is in stark contrast to 2014/2015 when investors weren’t really in the market and Aucklanders were busy doing their own thing.

What a scary and difficult time it has quickly become for first home buyers, especially if you started looking 6-12 months ago and have watched house prices quickly move up and out of your budget.

In light of this sudden jump in values and increased investor activity would you be best to just step out of the race and wait for the market to come back to a more ‘normal’ activity level? Should you put your home buyer dreams on hold for 12 months and focus on saving instead?

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Should I buy a home in 2016?

It’s a tough question and one I believe many young couples are asking themselves (and probably arguing over right now). The Kiwi love affair with property is so inherently strong that a fervent market like we are seeing now breeds desperation and determination to buy ‘at all costs’. It can cause extreme stress for young people who should be having the time of their lives planning weddings, starting careers and possibly travelling the world. Instead the pressure comes on to keep up with your peers and get on the property ladder as quick as possible, forsaking all other interests.

Pressure can come on parents too who are now required / expected to contribute to their kid’s deposits to make up the 10-20% required by most banks.

If I was looking to buy my first home in this market, this is what I would do…

Firstly, have a frank discussion about your wants / needs / goals. Ask questions like:

Do we value freedom or security? (eg. renting vs owning your own home)

Are we likely to want to do extensive travelling in the next 5 years? 

Are we planning to stay living where we are for the next 5-10 years?

When are we hoping to have kids? Where do we want them to grow up?

How long will the type of home we are looking at suit our needs? (eg. 3 years, 5 years, 10 years)

If our plans change will this home make a good rental property?

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Once you have a clear understanding of each others goals. You have 3 options to consider:

Option 1: Buy a home to live in right now.

Put your shoulders back and pay what you have to. If you can’t afford anything decent in the area you like, think one step further out. Eg. Can’t afford Brooklyn? Buy in Johnsonville. Can’t afford Newlands? Buy in Tawa. Tawa too expensive? Buy in Titahi Bay. The keys to success are buying a home that you plan to keep for at least 5-10 years. People lose money on real estate when they need to sell quickly. If you keep it for a decent amount of time you should be ok. Look at 20/30+ properties before you buy so you can learn the local market and avoid paying too much.

The next key is to take on a level of debt that you can afford even if interest rates go up, because sure as eggs, rates will go up again at some point. Just a few short years ago many of my friends were locking in for 5 years at 9.5% (bugger). A $400k mortgage at 4.25% will give you an interest bill of $327 per week. At 8% (the floating rate 5 years ago) the weekly interest bill goes up to $615, and that’s just the interest!

Read: How to find a good deal in a rising market

Option 2: Buy an investment property somewhere else (my choice)

If the idea of taking on a big mortgage right now scares you and you want to keep your options open – the alternative is to buy a home in an up and coming area that you can easily afford so you can get into the market and have someone else pay the mortgage, even if it means you have to keep renting yourselves. It might seem crazy to buy an investment property when you are still renting somewhere else (paying someone else’s mortgage) but it really makes so much sense for young people and in my opinion not enough people take this approach.

This option allows you to be in the market, so you can benefit from further price increases without all the risk of being burdened by a big mortgage. It also gives you flexibility if you want to travel in the future or work in a different City for a period of time. Let someone else pay off the mortgage while you have total freedom to live the life you want to.

All things going well, before you know it your investment property will have gone up in value and you can use the equity to help secure finance for your own home at a later date (wherever that might be).

I would personally look in areas like Newlands, Paparangi, Tawa, Titahi Bay, Lower and Upper Hutt and Palmerston North. I might consider Kapiti Coast with Transmission Gully coming in but nothing too close to the water (global warming sea level rises are no joke). Buy a 2-3 bedroom home in the nicest area you can and if at all possible go for a multi income stream situation (eg. 2 x 2 bedroom properties side by side).

The best part of buying an investment property is that all expenses (and any losses from topping up the mortgage) are tax deductible so if you have a good accountant you should get a big tax refund at the end of the year!

Not so fast buddy!

At the risk of sounding sexist, most Female’s aren’t so keen on this plan (my Wife wasn’t). I think there is a natural tendency to lean towards the security of owning your own home to live in, and an inherent need to start nesting and setting up a home where you can plan to have a family. These are perfectly natural feelings and it’s important that with any property decision you are both on the same page, and that you are both prepared to compromise. In other words – Guys, take it as read that if you want to buy an investment property first, you may a hard road ahead of you and chances are you will probably lose this argument. 

However if you do take option 2, you can set a goal to buy an investment property this year, but still buy your own home in 2 or 3 years time (or better yet, a 2nd investment property). At least in the meantime you get to enjoy being property tycoons and winning your own little game of monopoly! If however during that time you decide to travel, move to another City or get married, an investment property won’t stop you from doing that, but a massive mortgage on your own home and a sudden rise in interest rates forcing you to eat baked beans every night might certainly hold you back!

If you are in your 20’s or 30’s,  this is the prime of your life. Should you really be living like a pauper fighting to pay a massive mortgage without any hope of taking a holiday? Wouldn’t you enjoy having the freedom to quit your job (if you want to) or be a stay at home Mum / Dad when you have kids?

Option 3: Don’t buy a home or investment property, keep renting (or living with family) and saving up money.

I can understand if you feel the market is over-heated and everyone out there is paying crazy exorbitant prices that don’t make sense. I can understand wanting to wait for the market to drop so you can pick up a bargain. My thoughts instantly go to the poor young couples who saw what was happening in Auckland 4 years ago and decided to wait till the market had recovered. The houses they were looking at back then have probably doubled in price now and while the market will cool off at some point, and prices may even drop, they are unlikely to ever drop 50%.

Note: When the global financial crisis hit in 2008, prices dropped around 5-10% in our area.

Investing in real estate is not for everyone but in my mind it’s a good forced savings plan for young people (whether you live in the property or not) and can provide you with added security later in life.

Always be considerate and compromise with each other. Try and understand each others feelings and remember, life is a journey better shared with someone you love and fighting about money is such a dangerous waste of your precious time.

Stay safe out there!

Andrew Duncan

Andrew Duncan

Quote of the day:

“May your choices reflect your hopes, not your fears.”

Please note: I am not a qualified financial adviser and the opinions offered here are purely my own. It is critical that you seek professional advice from a solicitor before embarking on any property purchase.

Read: Don’t buy a home without speaking to these 5 people first

Recommended Reading:

8 Questions to ask before you buy an investment property

5 steps to owning your first investment property

Should you be using a mortgage broker

How to find a good deal in a rising market