Should you buy the hype?
The real ups and downs of the Property Market.
We have all noticed there has been a lot of media attention toward the property market. So let’s summarise what is taking place. For the past few years the property market has experienced a property boom, fueled by low interest rates, certainty in employment and incomes, and a strong economy. Historically what follows a market boom is normally a market crash. This is currently driving the media in search of answers, which will vary depending on who you talk to or their motivation. With the market shifting let’s take a closer look;
The Potential Downside of the current market:
Interest rates
The interest rates vary from 8.75% to 10.55%. The impact of this is:
1. With interest rates being high, our repayments are now higher. As most kiwis have taken lower fixed rates, the interest rates rising will only have an impact on the borrower as their current fixed interest rate expires. In some cases clients are paying 2% more; on a $300,000 loan this is $6,000 per annum more.
2. Most lenders will assess serviceability for borrowing based on the variable rate; this means two years ago your affordability was higher than it is now. Therefore lending policy is tightening, you may not pass lending criteria when previously you did.
Supply & demand
For the past few years there have been more buyers than sellers. Those that owned houses could afford the mortgage payments due to lower rates and income certainty so were not selling their property’s, and there were even more buyers as they could not only afford to purchase but the lenders would easily lend the funds.
Now due to the changes in interest rates, some property owners can’t afford to keep their homes, so are selling, and due to higher rates there are also fewer buyers.
Supply & demand has changed - less buyer’s means a buyer’s market.
Residential investment market
According to New Zealand census results home ownership rates have dropped from 74% in 1991 to 67% in 2006. This means more and more people are reliant on renting.
The market needs investors, but currently due to the high interest rates some investors just can’t afford to purchase either. The rent is too low and is not covering the interest, so although there is an investment demand, there are also fewer investment purchasers.
The investors left in the market will start to increase rents, to help cover costs, BUT the rent would still likely be lower than a mortgage payment, so for the renter even with rising rents it could still be cheaper than home ownership
The Potential upside of the current market
Economically
One major difference in previous property downturns is that is has been fuelled by economic uncertainty, and even though there are parts of the economy that is weaker overall the economy remains strong.
Many believe that we will experience a market correction that will really only impact the market in their pockets.
Employment rates
There is still a strong employment market meaning most kiwi’s have income certainty. This makes planning and borrowing easier. Although rates have increased, most will just decide to change their spending habits than sell their house. Over and above this many employees are also asking for pay rises, and due to the tight employment market employers are accepting pay increases, this can also counteract rising mortgage repayments.
Interest rates
The upside to the high rates, it that it is only expected to last 2-3 years, so with a end in sight, many are financially making changes to get through this tight period, without having to sell, or buying using different strategies to get through the 2-3 years.
Investment market
As there are fewer buyers or investors, many investors believe now is a good time to reenter the market, they are able to purchase houses under market value, therefore creating equity at the time of purchase. Some investors are also looking to increase the rents, therefore the “loss” due to higher interest rates wouldn’t necessarily be so great, the fear of losing the tenant is minor, as although the landlord is increasing the rent, the tenant could still not afford to purchase so need to stay.
Upcoming Election 2008
We are also in an election year which is going to be one of the most competitive campaigns in years, this could bring about campaign promises, which may include tax cuts.
In conclusion the one thing that has been proven time and time again is that in the long term the property market will gain in value. You can only base your purchase or selling decisions on your individual position, and this will be different for every single person.
TRACEY MUNNS is a mortgage advisor and owner of Connect Mortgage Services Ltd.
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