Banks driving apartment buyers to the suburbs

Bayleys residential sales manager Rachel Dovey says the requirement by major banks that first time home buyers have a 35% deposit for inner-city apartments less than 50 square-metres in size, is forcing many potential purchasers to look to more traditional ‘brick and tile’ dwellings in the suburbs – where only a 20% deposit is required.

“It’s creating a disparity in buying habits,” Dovey said. “For example, to buy a $200,000 two-bedroom apartment, first home buyers now require a $70,000 deposit, and even then have to jump through hoops to get mortgage approval from the banks.

Some banks won’t even lend on apartments. “By comparison, to buy a $280,000 three bedroom home in more established suburban areas, the same purchasers only require a $56,000 deposit. So our first home buyer is getting more ‘home’ for less deposit.

“As a result, we’ve seen a noticeable shift in the buyer demographics for inner city apartments over the past 16 months. It used to be that a sizeable percentage of enquiries were coming from professional ‘20-somethings’ attracted to the convenience and lifestyle of living in the CBD.

“Now that demographic has shifted more to investors taking advantage of lower property prices in the apartment market, combined with ‘cheap’ lower mortgage interest rates,” Dovey added.

She says previously buyers were basing the value of an apartment on emotion and location. Now, apartment buyers are increasingly basing the value of a property purely on financials – the purchase price, the rental yield, the occupancy level, and the cost of servicing debt.

“For investors, they’re looking at getting in the region of $450 per week for a 75 square-metre inner city apartment. Properties under 50 square-metres are becoming harder to finance – and harder to calculate long-term revenues from.”

Dovey said that traditionally, smaller apartments were sought after by the Asian student market, but this sector was considerably weaker than it was three or four years ago.

“Overall, prices in the Auckland apartment market are now fairly stable after 18 months of steady decline. They are now at, or close to, replacement values. And with very little new middle and upper-end quality stock scheduled to come onto the market, the supply/demand gap is narrowing quickly. This has helped underpin prices over the past four months,” Dovey said.