You’ve got a small deposit saved up, so should you buy a house now or save up for a bigger deposit? Brendon explores and offers some tips on timing the market and seizing the day.
I talk to potential first-home buyers every week and one of the most common questions I am asked is, "Should I buy now or should I keep saving and wait a bit?”
This is how I answer.
1) You have to have at least ten per cent deposit.
If you want to buy a house for $500,000, $50k is pretty much a minimum figure needed through savings or KiwiSaver (or a combo of the two. If you haven't got that (and you can't get some help from family—which is another blog in itself) then keep saving!
Be aware also that banks are a little tougher with a ten per cent deposit than a 20 per cent deposit. And some types of property (i.e. apartments) won't be possible to purchase with only ten per cent. That aside all aside, however, you may well be ready to go.
So, if you have ten per cent then lets have a talk.
2) If you have 20 per cent deposit, you are in a better position to buy.
Twenty per cent is the magic number, and if you fall just short of that, and you can get there within a few months, it may be worth saving hard to get to this figure. When you go to the bank with 20 per cent, the deal you will get (in terms of interest rates and the cash contribution they offer) will be better and the banks will be a little more lenient on the amount of income you need.
So, in summary …
Don't be put off by number 1. Lots of my first-home buyers only have ten per cent and they have successfully purchased their first home.
Finally, a helpful comment on getting in to the market ...
I would argue that when you are ready to buy (see above) and you find the house you want to live in, then attempt to buy it. If you plan to hold the property for many years, I am just not convinced "timing the market” is the way to go.
Take the Wellington market, for example. There was high price inflation from 2000-2007 (with a wee slow down in 2004). The Global Financial Crisis happened and Wellington house prices "nudged back" by maybe five per cent. They were then steady right through till 2016, and since then have increased by around 40 per cent. Through all this period of almost 20 years, the best time to buy would have always been "today".
I am not promising there will be no market corrections in the years to come, however, Wellington’s house market history is periods of stability followed by bursts of increases. Adding to this argument is, the longer you plan to hold the property, the less relevant trying to "time the market” becomes, because, prices will increase over time. If you’re planning on trading properties, that is a completely different conversation—another blog!
Yes there is a conversation around renting forever and investing the savings. If you are that way inclined, there is a conversation to be had, but if, at some stage, you are wanting to live in a house you own, then see above.
At the risk of sounding like a real estate agent (forgive me all my real estate agent friends!) I think it is generally true, the best time to buy your first house is now!
Brendon Ojala is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.