In typical fashion, the New Zealand housing market has gone from an unparalleled bounce post-Covid to a downturn that looks like it could trim a significant amount off the gains earned over the past 18 months.

While the New Zealand economy is stable with high employment and companies are showing good profits – and hospitality, education and tourism are set for a rebound as borders re-open – inflation pressures will force interest rates up and this will put a dampener on the housing market.

On top of this, there has been an unprecedented level of house building. Builders and tradies are run off their feet and refusing to take phone calls, with work lined up for two years. 

If you’re a buyer, this is good news and bad news.

The good news is that if you have finance approved it’s a buyers’ market. Developers are going to be desperate to find buyers and willing to do deals. 

The bad news is that there is an increased risk around the construction of new homes. Building contractors are at risk of collapse. Other buyers may have to pull out, thereby putting developments at risk. 

Risks are great but opportunities are vast, so be bold (but protect yourself).

Before you sign on the dotted line, there are several things to consider and there are certain things you can do to protect yourself.

Advantages

The most appealing aspect of buying off-plan is that you are signing up for a brand-new home. You can, therefore, be confident that it will meet all the latest building specifications and will require minimal ongoing maintenance (remember–no house is maintenance-free and some elements of your new home will require regular maintenance which if not done will void warranties – including cladding and roofing). With a suitable contract, you are able to purchase a house at a set price and with a low initial outlay.

Furthermore, an extended settlement period will give you plenty of time to increase your savings and save up for furniture and fittings.

When the property market returns to buoyancy, you will find that your property increases in value, thus growing your equity and lowering your debt-to-asset value ratio; this means you may end up having a home that’s worth more than your initial outlay. 

The risk here is that some developers put a clause into the contract that if the value of the dwelling you’ve signed up for goes up, they can rescind the contract and sell it over again for a higher price – and not necessarily to you. 

This ‘Sunset’ clause is a protection in case there are building delays – and it can work for you as well as against you. Right now, property prices are (gasp) going down! This means you can use the sunset clause to pull out and buy again at a lower price. However, as we’ve seen, predicting the future of any market is a difficult exercise, so if there is an increase, the developer can easily slow down the build, deliberately missing the deadline which gives them the right to cancel the contract and resell it.

You can protect yourself here by pushing back on the sunset clause.

The most likely change that will get agreement from the developer is if you ask for the settlement date to be longer. An additional 12 or even 24 months to build in the contract means you’re less likely to run into the sunset clause issue. You can, of course, ask to have it removed completely, or changed so that only you, as the vendor, can exercise it, and with fewer buyers, developers may well consider this.

Disadvantages and Risks

The main disadvantage of buying off the plans is that you are entirely dependent on the property developer and their construction company. You could be at risk if the developer or builder runs into financial problems, or the build takes much longer than anticipated–especially with the current building material shortage and inflation on the rise.

Buying a new apartment or townhouse where you’re not in control of the building process in any way, leaves you vulnerable to poor building practices. The dreaded Leaky Home syndrome still happens even though building practices have changed and the materials responsible for the disaster have largely been removed from the market.

There is the possibility that your financial position may deteriorate during the construction period, for example, due to a loss of income, which may result in your lender withdrawing their offer of finance, rendering you unable to complete settlement and thus forcing you to forfeit your deposit.

If the housing market falls, you could end up with a home that is worth less than what you paid for it, at least temporarily. And, with interest rates on the rise, you’ll be paying more for your mortgage repayments; this can lead to a reconsideration of lending by your bank.

Steps You Need To Take

Buying off-plan may well be the perfect choice for you. However, before you go ahead, be sure to do your homework.

Start by googling the property developer and the construction firm. Research into their past developments and whether there have been any issues that might raise a red flag. Find out what would happen if the developer goes into liquidation, or the company is sold. You should feel confident your money is safe and secure. Look into using an ‘Escrow’ lending option.

Next, carefully examine the floor plans and specifications. If the developer has a show home, make sure you check it out and confirm you are happy with the home’s size and fit-out. Look at how furniture fits in, and how the floor plan works. Even buy some water-soluble spray paint and map out the floor plan on someone’s lawn (ask first!) – you’ll be surprised what you can learn.

In most cases, you are expected to provide a deposit up front when buying off-plan. The rest of the money is due on completion. The long lead-in time allows you to save and get your finances in order. However, it could also put you at risk if interest rates go up or lending criteria change in the meantime. It’s essential to be prepared for all possibilities.

Independent Legal Advice

Buying off-plan is a complex and potentially risky option, it is, therefore, vital to obtain legal advice at the outset.

Some developers impose land covenants which restrict what you can and can’t do with the land. We have seen purchase agreements include restrictions on fencing, landscaping and even external colours.

Extra care also needs to be taken with maintenance provisions and issues with defects, especially in apartment blocks. The Unit Titles Strengthening Act 2022 has just been signed into law making apartment and townhouse owners safer with regard to body corporates and unscrupulous building management companies, but it’s important to investigate further.

Conclusion

Apartment owning and living is becoming a more accepted part of homeownership in New Zealand–and about time. It’s commonplace worldwide, it can be a great way to live and it has environmental benefits around being close to places of work and lower heating usage. 

Past missteps in construction have been addressed (though still be wary) and the new Unit Titles legislation will help protect apartment and townhouse owners. New apartments can be a great investment and a great place to live.