In recent years, New Zealand’s property market has experienced a rollercoaster ride of values. After a dramatic surge post-Covid, we’ve seen a significant correction, leaving many homeowners wondering how to navigate this new landscape.

This volatility has brought both challenges and opportunities, particularly when it comes to using home equity for investment purposes.

In this article, we will explore the intricacies of leveraging home equity for financial growth in today’s fluctuating market. We will look into strategies, risks, and potential rewards, providing you with the knowledge to make informed decisions about your property investments.

Whether you’re a seasoned investor or a homeowner considering your options, we invite you to join us on this journey of discovery.

The Post-Covid Boom and Recent Correction

The Surge
In the wake of the Covid-19 pandemic, New Zealand’s property market underwent an unexpected and dramatic boom. As the initial uncertainty faded, a combination of factors such as historically low interest rates, pent-up demand, and a shortage of available homes contributed to an unprecedented surge in property values.

Across the country, prices rapidly rose, reaching record highs, and the property market became one of the most competitive in recent memory. This sharp rise reflected the eagerness of buyers and investors to secure real estate during a time of economic uncertainty.

The Correction
However, the rapid growth in property prices proved unsustainable in the long run. After this sharp increase, the market began to cool and entered a period of correction. Shifts in economic conditions, including rising interest rates and stricter lending requirements, contributed to the gradual decline in property values from their peak.

The extent of this correction varied across different regions, with some areas seeing more pronounced drops than others. In certain districts, prices fell steeply, while traditionally robust markets, including parts of Auckland, also experienced notable price declines. This adjustment reflected a natural rebalancing of the market after an intense period of rapid growth.

Understanding Home Equity in the Current Market

Given the volatility, it’s crucial to reassess what home equity means in today’s market. Home equity is the difference between your property’s current market value and the amount you still owe on your mortgage. In a declining market, this equity can shrink rapidly.

For example, if you bought a home in Auckland for $1 million at the market peak and borrowed $800,000, you initially had $200,000 in equity. However, with Auckland values down significantly, your property might now be worth $850,000, leaving you with just $50,000 in equity.

Accessing Home Equity in New Zealand

Despite the market correction, there are still ways to access* home equity for investment purposes :

• Mortgage Top-Up: Increasing your existing mortgage to access additional funds.
• Revolving Credit Facility: A flexible mortgage structure that allows you to borrow against your home equity.
• Second Mortgage: A separate loan secured against your property, in addition to your primary mortgage.

Major banks like ANZ, ASB, BNZ, Westpac, and Kiwibank offer these options, but their lending criteria has tightened in response to the market downturn.

The Allure of Investing with Home Equity in a Volatile Market

Using home equity to invest in a declining market can be both risky and potentially rewarding:

Buying Opportunities

With property values down, there may be opportunities to invest in undervalued assets. For instance, some Auckland suburbs have seen price drops of over 6% in just three months, potentially creating buying opportunities for savvy investors.

Diversification

In a volatile property market, using home equity to invest in other asset classes can help diversify your portfolio and potentially offset property market risks.

Potential for Recovery Gains

If you believe the market has bottomed out, investing now could position you for gains when the market recovers. However, timing the market is notoriously difficult.

The Heightened Risks in the Current Market

The risks of using home equity to invest are amplified in the current environment:

Negative Equity Risk

With property values falling, there’s a risk of ending up in negative equity, where you owe more than your property is worth. This can severely limit your financial flexibility.

Market Uncertainty

The property market’s future remains uncertain. While some areas have held their value, others have seen significant declines. This unpredictability makes investment decisions more challenging.

Interest Rate Volatility

While the Reserve Bank recently cut the Official Cash Rate, interest rates remain relatively high. Any future increases could significantly impact the cost of borrowing against your home equity.

Consider the story of Hannah, a 45-year-old small business owner from Christchurch. In 2022, Hannah took out a $300,000 revolving credit facility with BNZ to invest in what she thought was a promising property development. Unfortunately, the project stalled due to regulatory issues, and the property market simultaneously experienced a downturn. Hannah not only lost a significant portion of her investment but also found herself with substantial debt against a home that had decreased in value.

Best Practices for Using Home Equity to Invest in the Current Market

If you are considering using home equity to invest, here are some best practices tailored to the current market conditions:

• Reassess Your Equity Position: Given the market downturn, your equity position may be less than you think. Consider getting a current valuation before making any decisions.
• Stress Test Your Finances: Ensure you can handle repayments even if property values continue to fall or interest rates rise further.
• Diversify Wisely: Consider investments that aren’t correlated with the property market to spread your risk.
• Stay Informed: Keep a close eye on market trends. CoreLogic and REINZ regularly publish detailed market analyses.
• Seek Professional Advice: In this volatile market, professional guidance is more crucial than ever. Consult with financial advisors licensed by the Financial Markets Authority (FMA).

The Bottom Line: Harnessing Home Equity for Your Financial Future

Exploring home equity as a means to achieve financial growth in New Zealand can be a strategic move for homeowners looking to maximize their investment potential. Whether you’re accessing funds through a mortgage top-up, utilizing a revolving credit facility, or considering other options, understanding the opportunities and risks is crucial.

As the property market continues to balance, staying informed and making informed decisions will empower you to navigate this landscape effectively. Always consider your financial situation, risk tolerance, and long-term goals before proceeding. Consulting with a financial advisor can also provide valuable insights tailored to your unique circumstances.

By taking the time to explore your options and make informed choices, you can leverage your home equity to build a stronger financial future.

Remember, your home is not just a place to live; it can also be a powerful tool for wealth creation and as you navigate the complexities of home equity investment, we encourage you to reflect on your financial goals and how they align with the insights shared here. 

*conditions apply