Have rates peaked? Property Investors are coming back and Political Lolly Scrambles
The Reserve Bank have just reviewed monetary policy and left the cash rate at the 5.5% they took it to late in May. Since then, fixed mortgage rates have risen another 0.25% or so and these rises are at odds with the fresh news for the New Zealand economy.
China’s economy is deteriorating, and this is leading to reduced demand for our commodity exports with dairy prices in particular falling sharply. Amidst a near one-quarter rise in on-farm costs over the past two years recession now looms for the primary sector. That means a worse outlook for the economy overall which is something that brings a rising risk that interest rates fall early in 2024 rather than late in the year.
But at the moment there is still some upward pressure on NZ bank borrowing costs because of an improving outlook for the United States economy. Prospects for imminent interest rate falls there have been pushed well into the future and this effect is offsetting our own weakening economic fundamentals to produce higher interest rates.
Looking through the huge number of uncertain factors in play the incentive for most borrowers is to remain focussed on the short-term rates of 12, 18 and 24 months. At some stage the time will be ripe for fixing longer – but we are nowhere near that point in the interest rates cycle as yet.
As for the housing market itself, this is where a lot of people will – yet again – be in a state of confusion. The market is turning upward on the back of record net immigration, expectations of interest rates falling next year, young people acting on their higher wages and deposits, cheaper prices, improved credit access, and falling supplies of new houses.
These factors have already pushed my reading of FOMO to its highest level since late-2021 and as more people step back into the market after holding back for up to two and a half years, further gains in real estate turnover and prices look likely – despite the worsening short-term economic outlook.
For additional information on the economy, housing market, and interest rates, you can subscribe to Tony’s free weekly Tony’s View publication at www.tonyalexander.nz
By Tony Alexander
Property Investors are Back
Based on what Tony has written (interest rates peaking, property plateauing), it’s probably no surprise investors are coming back into the market. They’re not back in mass……yet. Yields are still terrible (comparative to other asset classes like bonds), although are improving. You can see the latest figures here Latest rental yield figures suggest the days of mum & dad buying a rental unit to provide a decent retirement income may be coming to an end | interest.co.nz
Buying existing property means there is no tax deduction for your interest costs if you make a loss. So, what are investors buying? Generally speaking, properties they can pick up cheaply because the vendor is missing compliance documents or significant work needs to be done. These types of properties effectively rule out first home buyers that have low deposits. Reports from clients, agents and solicitors suggest well-heeled investors are jumping on these hoping to snag a bargain, do it up and sell it or rent it at good yields in anticipation of reducing interest rates and rising house prices.
We’ve been saying for a while the window for first home buyers has been open wide. The window just shut a little.
Political Lolly Scrambles
With the lead up to election, both major parties are throwing lollies out there to grab your vote. Both have come out with some clangers. The National came up with a proposed policy change around Kiwisaver. They have two brain waves to try and capture your vote. Firstly, allowing people to withdraw from their Kiwisavers to pay their rent bond. Of course, every young person on the planet thought it was a good idea.
Let’s just revisit why Kiwsaver was started. Kiwis are generally terrible savers. The Labour party thought it would be a great idea to incentivise Kiws to save for their retirement by forcing employers to contribute and offering free money from the government. The catch is, you can’t get money out unless you are buying a home or going through some kind of hardship. Its working well, and millions of Kiwis will be better off in retirement as a result. Leave it alone. Tinkering, or even just talking about tinkering puts people off.
Next. National thought it would be a good idea to allow Kiwis to diversify their funds across different Kiwsaver providers to diversify your risk. Old news National. You can already do that. You just need to work with an adviser. The proposed changes that National are pushing would increase the administration for each provider and therefore cost. Guess who would wear the extra cost? Hint: It’s not the National Party.
- Posted by Isbister
- On August 17, 2023