New Zealand at a turning point in the real estate investment market
Another factor influencing the residential real estate investment landscape in New Zealand is the recent rise in mortgage interest rates.CoreLogic suggesting that the market is close to an important turning point.
This is mainly due to affordability pressures, the 40% deposit requirement and extended light line test for property investors, tighter interest deductibility rules, as well as the approval of the Reserve Bank of New Zealand (RBNZ) to look at debt to income restrictions.
The housing market is also likely to be affected by reported tighter monetary policy. Although the RBNZ kept the official cash rate (OCR) unchanged at 0.25 percent in its announcement earlier this month, major banks have already started to raise fixed-term mortgage interest rates.
Calculating the Numbers for Mortgage Brokers
Rising interest rates by various national banks will have an impact on new borrowers.
CoreLogic provided the example if there was a 0.36% increase resulting in an initial interest rate of 2.95%, which equates to additional repayments of $1,824 per year ($152 per month) on a recent buyer’s $800,000 mortgage on a 30-year home loan. term.
If interest rates continued to rise and reached the long-term average of 6% (which, for now, is an indication based on a scenario rather than an actual forecast), this same new buyer would pay 19 $164 more in mortgage payments per year ($1597 per month), or about $4800 per month in total repayments over the remainder of the mortgage term.
CoreLogic said even a new borrower with a “lesser” mortgage, say $500,000, will need to find an additional $246 to $388 per month ($2,952 to $4,656 per year) in repayments if rates rise to 3, 5% or 4%.
CoreLogic NZ chief economist Kelvin Davidson said those who have entered the market over the past seven years are expecting a rude awakening.
“Those who have entered the housing market since 2014, the last time the OCR rose, have only experienced low interest rates, so the effects of a pattern of increases are likely to be a shock for many who have a heavy mortgage, which includes many who have bought recently in Auckland and Wellington, the most expensive markets, ”he said.
“For those still trying to buy their first home, interest rate hikes will raise the bar on entry. That said, a real increase in the official exchange rate is the next step in removing emergency support for the economy.
“This is directly affecting the housing market, with borrowers already seeing mortgage rates rise – and from a low rate base, as well as higher debt levels, this could have quite a strong effect on the market. Admittedly, the share of mortgage investors in real estate purchases has declined over the past two to three months.
Davidson said these events reinforce CoreLogic’s view that sales activity and price growth are near or at a peak.
“This is just reinforced by the fact that the New Zealand government tax changes at the end of March, while not having a major impact yet, will start to have an effect more as the months pass and the possibility of interest deductions from claim is slowly phasing out for current owners,” he said.
“However, with unemployment low and in the absence of a GFC-style credit crunch, a full housing downturn seems unlikely.”
Notable changes in market patterns
After a stellar start to 2021, sales volumes have dipped slightly, hovering around the same levels as 2019, with 2020 not being a fair comparison.
The continued lack of listings still has a restraining influence on realized sales volumes, but CoreLogic’s data on bank-ordered ratings – as an early indicator of borrowers applying for loans – also suggests demand is picking up. is also attenuated.
“In the mortgage market, our analysis suggests that activity has held up better than expected, likely due to ‘other’ lending such as top-up lending, bank changes and possibly early fixed loan breaks,” Ms. Davidson.
Monthly gains in the CoreLogic home price index have also eased somewhat in recent months, falling from 3.1% in April to 2.2% in May and 1.8% in June.
“As sales activity declines over the months, it is also likely that a slowdown in values will become more evident, although house price declines still appear unlikely in this cycle,” Ms. Davidson.
“In terms of the tax changes at the end of March, the effects so far are not overwhelming – we have yet to see a massive sale by current owners or clear evidence of a large increase rents.
“It is important to note that our buyer classification series shows a sharp decline in mortgage investor market share since March, but we suspect this is largely due to the 40% deposit requirement rather than testing or removing the extended light line. of interest deductibility,” he said.
“However, as the months go by, we expect the tax changes to have a greater effect and will certainly push investors towards new construction rather than existing properties – especially if the possibility of claiming interest as a tax deduction becomes more difficult. applies indefinitely for the first owner (investor) of a new construction.
First-time home buyers and the RBNZ’s next moves
On the other hand, Mr Davidson said there were signs that first-time home buyers were doing better in getting into the market, after struggling in the first quarter of the year.
“However, they’ve traditionally been quite fond of new construction, so an influx of investors may not be ideal from a first-time home buyer’s perspective,” he noted.
“As the market cools over the next few months and into 2022, we should see a return to ‘normal’ for sales activity and price growth, and pressures on potential first-time home buyers. in terms of trying to save enough for their filing to keep pace with the market aren’t as intense.
“Another notable development over the past few months is that the RBNZ has been given permission to design and implement a debt-to-income (DTI) ratio cap system for mortgages, potentially at seven for homeowners and may -be six for investors.
“However, given the process required for the DTIs to be operational, it seems unlikely that they will be introduced before November this year. And more importantly, the RBNZ wants to sit down and assess the effects of the rule changes already done before taking further action.
Mr Davidson said the market will have slowed on its own by the end of the year, so IDT will not be needed in this cycle.