By Tony Alexander
During the four weeks since my last column there has been a noticeable lift in general discussion about the housing cycle hitting a bottom. We probably have, but it may be a number of months before we can confidently say exactly which month represented the nadir for average prices.
Frankly, it shouldn’t matter for 99% of buyers. Very few people look to sell less than a year after buying and most people, both owner-occupiers and investors alike, have a long-term period in mind for holding their property asset. As I have highlighted in many of my presentations over the past year, no-one has ever heard their parents or grandparents express woe over buying too early before a cycle’s bottom in the past and paying $78,000 rather than the $76,500 they could have got away with if they had waited a few more months.
For first home buyers conditions remain favourable with still minimal buying interest from investors and owner occupiers showing little inclination as yet to sell then buy or buy then sell. The number of listings is at a good level by the standards of the past few years, interest rates look to have peaked (hopefully this time), and lending criteria are being eased.
Some of the improvement in mortgage access represents tweaking of LVRs and Credit Contracts and Consumer Finance Act rules. Some also reflects banks competing for market share in an environment where over $150bn worth of fixed rates come up for renewal in the next 12 months.
But there are some very large factors arguing in favour of this window of opportunity for young buyers closing before the year is out. Listings have already fallen 13% from their December peak and history tells us that when sales rise the stock of listings goes down.
Net migration inflows have now hit 72,300 in the past year and that means a lot more people seeking rental accommodation which will eventually encourage a flow of renters to look at buying – especially once growth in rents picks up.
The pace of increase in new house supply is also slowing down as the sector retrenches under pressure from soaring costs and buyers backing away in favour of purchasing an existing property.
Just quickly, with regard to interest rates, the chances of a generalised round of reductions in the next wee while look exceedingly small given a recent lift in worries about inflation offshore causing some extra tightening of monetary policies in other countries. This has placed some upward pressure on bank borrowing costs here which doesn’t look like reversing anytime soon.
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 Matt Isbister
It was highlighted to me recently that a mortgage-backed (mortgage is a legal agreement that provides security to a lender) investment company failed to pay their distributions on 10% approx. offered interest rate. Investors had been lured by a high rate of return and the use of the word “mortgage”. When investors think of a mortgage, they think of family-owned property. They feel comfort knowing that their investment is mortgage backed.
The reality is a mortgage can be over a piece of dirt with a hole in the ground for foundations. Other mortgages can be secured against property that is owned by people that have no actual income.
An everyday investor is not going to understand the difference between one mortgage and another. However, most people have heard the saying “If it sounds too good to be true, it probably is”. A 10% interest rate on a mortgage-backed security indicates that there is a high level of risk. Risk usually only rears its head when times are tough. When things are looking rosy, it’s easy to gain comfort from recent events. It’s always the future you should be worried about with finances.
We are often asked what should I do? or What would you recommend?
Finances are often about trade-offs. If you want one thing, it often comes at the expense of another. We have developed a list of common trade-offs to assist you with navigating the world of finances. This is just a sample of common ones:
In keeping with Tony’s thoughts Shall I buy now or wait:
Buying when values are low and selling when prices are high is the answer. However, no one knows when prices have bottomed or peaked. Buying when you can and as soon as you can is really the sweet spot. Asset prices have grown over the long term.
I want to invest in property.
With property you can leverage (borrow) against it to increase your returns. It’s therefore good for providing long term returns.
Trade-offs: Concentration (funds held in property are heavily impacted when the property market tanks), property management can be stressful, borrowing can impact on your cashflow (you have less in your pocket)
I want to fix my home loan rate for 1 year.
That will give you exposure to markets and rates in 1 year. If rates are down, you win.
Trade off: If rates are up you lose.
I want to fix my rate for 5 years.
That will give you certainty and make budgeting easier over a long timeframe.
Trade off: If rates drop during that time, you are likely to be charged a penalty by your lender which could be significant if you break your fixed rate contract.
I want a low-risk investment.
This will likely come with more certainty. That is, your funds aren’t likely to drop in value.
Trade off: Funds held in term deposits at the moment would have been losing money with inflation being measured at 6.7% in April. When you look at term deposit rates, remember tax has to be taken off too!
I want a high return investment.
That will likely give you high growth over the long term.
Trade off: To achieve high growth you will experience high volatility (up and down swings). If you need your money out in the short term (can be a few years) then you may incur a loss.
I want to spend my income now:
You’ll enjoy yourself and get used to a nice lifestyle.
Trade off: What about your future self?
I want to invest in Pumkin Patch
Trade off: The young ones reading this will have to google pumpkin patch. You’re taking on concentration risk (putting all your eggs in one basket) by investing in one business, one fund manager, one country, one property, gold, bitcoin.
Finally, the Kiwisaver year ends on the 30th of June. You need to have contributed $1,042.86 (via employee or voluntary contributions) to receive the government contribution of $521.43.
Disclaimer: This blog is meant to be informative and engaging, hopefully not a cure for insomnia. Please don’t take this as personalised financial advice. Discuss your situation with an Advisor. This is where I need to say past returns are no guarantee of future returns.