What is shared ownership?
People are quick to forget. In 2021 interest rates were at record lows and house prices were surging. Interest rates are higher now, not as high as they have been, but, certainly higher. We’ve seen property prices drop as a result. Commentators are now saying interest rates may have peaked and may be heading down again. It is unlikely that we will see record low interest rates again.
However, with interest rates set to decrease, house prices should start to rise again. Which means that even though interest rates and affordability are tough now, it may be easier in the next 12 months. People may argue that they will wait until interest rates are lower. Although lower rates might improve your affordability, it will improve everyone else’s too. It’s likely that it will just bring more competition for properties and drive prices up.
My advice is buy now if you can. You’ll get the benefit of a lower property price, and while you may have to pay more interest initially, it’s likely that will improve for you.
So what’s holding you back? Not enough deposit?
Kaiangaora came out with a shared ownership scheme last year. They didn’t anticipate how popular it would be and it was oversubscribed within no time at all. Why was it so popular? We’ll need to take you through how it works.
Kaiangaora is a government housing ministry. To assist first home buyers and second chancers they provide funding of up to 25% or $200,000. (whichever was the lesser of the two). In return, Kaiangaora would receive no interest while those funds were being used, only taking a share of the capital gains when the property was sold, or the owner bought them out. Effectively, the occupant had free use of the funds while they lived there. Taxpayers received no compensation for the use of those funds. They received a share of the capital gains, as did the occupier.
We work with a commercial shared ownership scheme called Youown. They operate in the same way that Kaiangaora does. The difference is they are funded by private funders, like Bay Trust, all of which want their investments to have a social impact and support people into homes. However, they do require a return on the funds they lend. Youown has an equity charge on their funding to provide a return to investors, which is less than the interest rate on a home loan.
Youown has helped many clients into their first home. After 5 years many have been able to buy out Youown.
If you’d like to find out more please contact one of our advisors.
From Independent Economist Tony Alexander:
In response to some substantial falls in bank wholesale borrowing costs over the past three months we have started to see some declines in bank fixed mortgage rates. As yet these reductions don’t amount to much in comparison with the borrowing cost cuts and it is fair to say that banks are enjoying a golden period of high lending margins.
Consider for instance bank lending at a fixed rate for two years. Three months ago, the cost to them of borrowing wholesale money at a fixed two-year rate was 5.65% and the best two-year fixed mortgage rate on offer from the biggest lenders was 6.99%. The margin was roughly 1.34%.
Now, the two-year wholesale borrowing cost sits near 4.85% and the mortgage rate is about 6.89%. The margin has blown out to around 2.04%. The average for this margin in the past two years has been about 1.4% - hence the golden period for banks comment.
Why haven’t banks cut their lending rates more aggressively? After all, they are in the business of making money by lending it out. A key reason will be the implied message from the Reserve Bank that they don’t feel the time is right yet for a substantial fall in mortgage rates. Inflation remains high and a well above average proportion of businesses are still saying that they plan raising their selling prices.
There is no shortage of data showing still rising costs for many construction and food items, along with insurance and rates, and we are being warned about extra inflation coming from events in the Red Sea affecting global supply chains.
There is certainly optimism offshore regarding falling inflation and that is why our local bank borrowing costs have declined. They are affected not just by the Reserve Bank’s 5.5% cash rate but movements in medium to long-term interest rates in the United States in particular. In the US, inflation has fallen away and their monetary policy looks set to be perhaps 3-5 times this year.
Eventually we will see a substantial decline in NZ inflation. Mortgage rates could easily finish this year 1% lower than they are now. But until our central bank is very confident that the inflation genie is back in the bottle, don’t get too optimistic about sizeable declines.
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
Disclaimer: This newsletter 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.