Home buyers are faced with paying even more for new houses as developers reduce the number of their properties that they sell off plans, opting instead to cash in on finished builds.
In a hot property market where the median house price increased 28.7 percent over the past year, real estate agents and second tier lenders say developers have recognised the money they can make out of selling finished builds, meaning new home buyers end up paying more.
Lodge Real Estate Managing Director Jeremy O’Rourke says there is a trend in the market where properties that were traditionally being sold off plans by developers are now being marketed upon completion.
“Developers have realised in the current market the type of properties they used to try to sell off plan to get some cashflow up front, are worth a lot more if they can hold off selling until it's built because residential prices are rising rapidly month by month,” said Jeremy.
This meant home buyers end up paying more for their home and they lose out on any gains they may make during the construction phase. That money, instead, is going directly into developers' pockets.
The only issue developers faced was finance because banks often want to see most of a development sold as quickly as possible, rather than funding it through to construction.
“In some cases, developers have been staging their projects, selling what they need to off plans and holding off on the last couple of lots, building the houses and taking them to auction,” said Jeremy.
In many cases developers have been using second tier lenders to fund a development’s construction phase, and while the lending interest rates are higher, the borrowing cost was still lower than the margin they can make by selling the finished property.
Omega Capital Director Scott Massey said this is a trend non-bank lenders are seeing right across New Zealand.
He said as the banks continue to tighten loan to value ratios and debt to income ratios and the Government looked to change more rules to cool the market, second tier lenders had become attractive options for developers.
“We’re light on our feet and as an independent fund we are not bound by these rules, and we can meet the market,” said Scott.
He said Omega Capital had funded developments in Hamilton, Auckland, and Christchurch, with most loans around the one-year mark and covering the five to six months build period.
“Developers know the prices are continuing to go up because they’ve seen what has happened in the market so far and it’s given them reason to pause and think they’ll take profit off the top of that, which more than offsets the additional cost of non-bank lending rates,” said Scott.
Currently second tier lending rates are around the 7.5 -7.95% percent interest rate mark while the current variable floating interest rate with banks is around the 4.4 percent mark. One-year fixed rates range from 2.55 percent to 3.34 percent.
When compared with house price increases, the higher interest rates offered by second tier lenders are small. REINZ figures show the median house nationally increased by 28.7 percent from $637,000 in June 2020, to $820,000 in June 2021.
“Developers are wanting to maximise the opportunity they have in front of them, where previously they were keen to just get the sections and properties sold,” Jeremy said.
Jeremy said, in respect to Hamilton, developments are happening across the city which is undergoing a renaissance as more professionals relocate to the region for jobs and lifestyle.
Alongside infill housing which is widespread, there are significant developments underway at Peacocks in the city’s southwest which is close to the Hospital and Hamilton Airport. North of Hamilton, Te Awa Lakes is being developed by Perry Group.