When buying a home in New Zealand, there are lots of decisions you’ll need to make and possibly the most important is whether to buy a new home or buy an older one. The idea of a brand-new home with shiny new fixtures, lovely new flooring, great layout, heaps of storage space and no worries about ancient pipes bursting, dodgy electrics, damp or poor insulation is very attractive.
Buying an existing home may give you more opportunity to get a home on a larger piece of land in an area where you really want to live. Developments are moving further out from city centres, so buying an established home could mean you are closer to amenities. You can also get a feel of the neighbourhood you’ll be moving into, as opposed to building in a developing area.
With property prices expected to go down by 10-15% and some even predicting 20% drop, you may be tempted to wait in the market and go for an existing home purchase at the right time. More properties are coming in the market every week and with properties taking longer to sell, you’ll be spoilt for choice and will also have room to negotiate the price. In the end, if the property price drop continue and building costs going up, purchasing an existing home can be cheaper than purchasing a new build or building a new house.
Ultimately, building vs buying comes down to personal choice and there are valid pros and cons for both. In this blog however, we’re not going to examine those advantages and disadvantages. What we’re going to look at is how the path to home ownership you choose affects home loan options, finances, timelines, and process.
Crunching the numbers on new homes
Firstly, new builds are generally more costly than existing homes, which is not really surprising as new stuff is generally more expensive than second hand. According to Canstar, the average New Zealand home costs close to $3500 per m2 to build, so a 155m2 home, which was the average size built in 2021, is going to cost close to $550,000. Land value now accounts for around 60 per cent of the median house price, so when the price of land is factored in, building new works out to be 25 per cent more expensive than buying an existing home.
Lower home deposit
If you’re building a new home, banks require a lower deposit than if you were buying a pre-existing house at the same price. Current LVR restrictions don’t apply to new builds, so banks are lending on a case-by-case basis. Most lenders are willing to lend up to 80 per cent on new builds and some banks will even approve lending up to 90 per cent. But because the way building new homes differs, not all construction loans are built the same way. Mortgages vary depending upon whether you will be responsible for managing the build and land purchase yourself, you purchase a house and land package, or you buy a turnkey home package.
Construction loans are not created equal
Construction loans, for example, are commonly sought by homebuyers managing their own build. This type of loan is far more complex than your average home loan, with payments in stages, and approval required at different points during the build.
As we are hearing all the time in the media, building a home can take longer than planned due to weather, shortages of both labour and building materials, council requirements, and let’s not forget, global pandemics. It’s crucial you clarify how long is your construction loan is valid for. If your bank will only give you approval for 12 months and the build takes 18 months, that leaves you short of mortgage, as construction loans are drawn down in tranches.
One of our financial advisors can clarify for you how long the bank will honour your loan conditions if the build takes longer than expected.
Banks will generally factor in 15 per cent over and above the original construction cost listed in your building contract to ensure you are covered for delays. To have to be sure you can afford that when applying for a loan.
It’s really important that you to talk to an expert mortgage broker before making up your mind about how you would like to make you dream home come to life and how to finance that.
Building developers in today’s market
We’re currently looking a perfect storm of rising interest rates, tighter lending laws, inflation, and a high cost of living in Aotearoa New Zealand. Building costs are increasing at the same time as sales are slowing down. Factor in the supply-chain related delays, and labour shortages, and right now might not be such a great time to be a property developer.
How does that affect someone looking to buy a new build? Because many developers’ cash flow is tied to sales, there’s a lot of uncertainty affecting those builders without effective management and planning.
Construction firms are going under, and there has been a warning that the industry is likely to see more liquidations. David Kelly, chief executive of Master Builders Association, said sadly both commercial and residential builders were in difficult positions with developments being delayed or cancelled.
This is why it’s so important to do your research on the developer and their record for delivering homes on time prior to signing anything.
Fixed price contracts?
When building a home, you generally sign a contract before you start, but this does not always guarantee a fixed price. You can still be hit with price rises even if it’s a fixed price contact. How? The standard Registered Master Builders’ contract has a clause that allows builders to pass on increased costs which you have to pay. Specific stipulations and clauses in your contract limit what cost increases builders or developers to pass on, so you must see a lawyer to ensure that the contract is fair, reasonable, and balanced. A lawyer will be able to pour through the fine print, and let you know what can be done to make sure your contract is acceptable, for both parties.
Walking away from building contracts
We’ve all heard about the delays in sourcing Gib board and timber and their effect on builders, developers and sub-contractors alike. These delays cost money. To protect both the builder and buyer from unreasonably long delays in a building project, off-the-plan deals commonly contain a sunset clause. These allow either party to walk away if certain requirements are not met. For example, if the build gets held up a buyer could get out the contract and still get their deposit back in full.
While sunset clauses exist to offer security, they can sometimes be manipulated. For example, in a hot property market, or a market with skyrocketing prices, some developers have been known to use the sunset clause to cancel the contract and put the property back on the market for a higher price. Buyers should be aware of the risk of sunset clauses before signing any off-the-plan development and seek legal advice. A lawyer can make an amendment in a contract so developers can’t re-list the new home for the sole purpose of making more money.
This is why we reiterate that you should consult a financial advisor to ensure you absolutely understand the deal you’re entering into.
Talk to the financial experts
We’re not saying that building new is a bad idea: there are many pros to building your dream home, which we have discussed in other blog posts. What we are saying is that it’s important to get your finances in order before you buy, whether it’s off the plan or an existing house, and that’s where Global Finance comes in.
We can’t do much about Gib shortages or rising prices, but we can work with you to ensure you have a good lawyer on your team and that you fully understand what is and isn’t covered in your building contract. We can work with you so you can protect yourself from the unexpected and the unscrupulous and that you have got finances fully sorted out before you enter into any building contract.
Our team of registered mortgage brokers can help you iron out all the details and find the right loan for your new home.
**These are general guidelines and are by no means a reflection of bank or lending policies