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Some hard truths for home purchasers

Hello everyone


My apologies for the lack of updates on the status of the housing market over these past 6 months but things have been very busy. As anyone trying to purchase a property currently knows the competition amongst buyers is fierce. I am witnessing unprecedented demand now for new home loan approvals at levels not experienced before. Bank turnaround times are currently stretched to 10-15 days in some instances so many purchasers are struggling to meet finance deadlines unless they have had the foresight to secure pre approval first through their mortgage broker. Anyone selling and buying in the current market needs to have sold their existing property first either been cashed up or having a delayed settlement to enable them to then make competitive cash offers on any new property.


Despite the Reserve Bank and Government confidently predicting that they have checked house price inflation via increased loan to value (LVR) restrictions and removal of interest deductibility for most investment mortgages I see no sign that either will decrease demand for property. The returns available from residential property at present represent a far greater incentive that anything been offered by the banks be it on call savings accounts, term deposits or managed funds. The Reserve Bank’s earlier push to drive down interest rates to lessen COVID-19’s financial impact has back fired spectacularly with money becoming very cheap to borrow but also at the same time making it highly unattractive for people to have their savings sitting with their bank. Temporarily reducing the LVR restrictions for investment mortgages last year was also foolishly implemented by the Reserve Bank which only added further fuel to the fire. Only when it had become obvious that house price inflation was been exacerbated by the above did the Reserve Bank move to reintroduce higher LVR restrictions on the banks. It’s clear that some of the decision making been done by the supposed economic experts at 2 The Terrace Wellington leaves a lot to be desired.


I have also been witnessing over the past 6 months increasing amounts of gifted deposits been provided now to 1st home purchasers from family who recognise the much better return that can be gained by helping sons and daughters secure a foothold on the property ladder. The Reserve Bank seems oblivious again to the fact that their drive to lower interest rates has been the instigator of this trend. Again I question whether New Zealanders are been well served now by the some of the decisions made at the Reserve Bank.


I don’t believe either the talk from some economists that the supply of additional houses will be improved in New Zealand in the next few years’ time. I am routinely witnessing customers experience increasing delays from local councils now on any new building project or subdivision. It is clear to many people now that a big part of New Zealand’s current problem with not been able to build enough new homes fast enough is local government bureaucracy. Local Government in New Zealand now consists of 78 local, regional and unitary councils. With these 78 councils having approx. 1600 elected members does any New Zealand rate payer currently feel like they are getting good value for money?


Open boarders once the rest of the world opens up again is going to see a return to pre COVID levels of immigration to New Zealand, likely higher. As a country going forward now when it comes to the price that people expect to pay for housing we need to have a debate about whether or not pre COVID levels of immigration can be sustained with both our current housing stock & infrastructure clearly not adequate for the people already living here. We need skilled migrants but we have to acknowledge also the impact that new arrivals have been having on New Zealand house prices & our infrastructure over the last 15-20 years. Successive Governments both Labour and National have failed New Zealand voters by not investing enough money in new housing & infrastructure.


Those people currently sitting on the fence about purchasing a property hopeful perhaps that house prices might fall need to face reality. Demand for housing in New Zealand will not be reducing any time soon and thus neither will house prices. Either interest rates will have to become unaffordable to make people’s appetite for a mortgage lessen or somehow as a country we actually manage to build enough new homes meaning that purchasers are then spoilt for choice. Both these scenarios are unlikely to happen anytime soon. There is realistically little any Government can do to slow house price inflation and any significant regulatory pressure imposed on the banks i.e. debt to income ratios will see politicians been punished by voters at the next general election. Currently vendors are the ones dictating the cost of housing to purchasers. Not the other way round. Anybody who purchased a property over the last 5 years already knows the good judgement of their earlier decision by looking at what their house is now worth.


The Reserve Bank looks likely to get its wish next year in July & introduce the much delayed increased bank capital holding requirements. This will see the banks having to hold more money aside than they do currently for the money that they lend to borrowers. Banks will almost certainly pass these increased costs on to their customers in the form of higher interest rates and over the last two months we have already seen the longer term fixed interest rates now start to move upwards. Short term fixed rates look set to remain at their current levels for a while yet. Whilst it’s been wise for most borrowers post COVID-19 to remain on a short term interest rate going forward it appears now that fixing longer is now the better strategy. As always borrowers need to decide themselves though which fixed term best suits them financially. It’s likely that we won’t witness the full impact of these increased bank capital holding requirements on interest rates until March or April 2022 but meantime it’s clear that some banks are starting to budget early for these changes. It’s important to stress that New Zealand’s current rate environment over the last 16 odd months has been largely artificial having been determined by COVID-19’s financial impact on our economy. Prior to early-mid 2020 interest rates for borrowers had been expected to increase with July 2020 being the initial intended start date for the above extra bank capital requirements.


Please let me know if you would like to discuss the current interest rate you are on with your bank or are needing assistance with finance to purchase a new property.


Kind Regards


Simon

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