A lot has been happening the past few weeks that has impacts for property and investors. There is so much going on, it is hard to bridge the gap between macro and micro factors affecting property. You need to read this post in the context of all of our other posts.
Firstly as I signaled in an earlier post the Reserve Bank has begun putting tighter rules around low deposit mortgages. Initially the focus had been on encouraging banks to tighten up on their over 85% lending. We are now seeing these new rules impact approvals. It's not biting First Home Buyers so much as a gentle nibble. The bigger impact is on highly geared investors. As the Reserve Bank pushes up capital requirements, and puts in LVR speed limits, banks are unlikely to support investors leveraging multiple properties above 80%. Certainly don’t expect to borrow 90% on that third property for much longer. For larger investors the target LVR is likely to drop below 80%. Policy is essentially reverting back to where it was post GFC in 2009 with the difference that this time around its not discretionary. These changes are likely to help keep interest rates lower for longer. The Reserve Bank will want to use its new tool kit to influence the market and at the same time keep the brakes on the exchange rate. This will reduce pressure on interest rates in the near term. With the rest of the world still in low growth environments, the RBNZ is conscious that a shift towards increasing interest rates would see our exchange rate go through the roof, and that would bugger up our commodity-based exporters.
The Government and the Auckland Council have drafted a property accord for Auckland. In theory this will make it easier to do small subdivisions in and around the wider city. I’m cynical and already exhausted from dealing with Council bureaucracy. (That comes from being 1 year and $500,000 into a land use consent and having to fight it out in Environment Court.) Nonetheless there are already a number of large property developments in the pipeline in and around the city. I wonder if in 2 years time we’ll have a rush of medium and high-density property to the market. This will be a good test of how much excess demand there really is. In the meantime prices will continue to go up, but in my mind speculating and developing are becoming riskier. The smart guys bought 2 years ago and are well advanced on developments and consents. We’re now seeing more lemmings in the market, wide-eyed and brain washed, out to make their fortune in property. Given the long lead-time for development, a number of investors will get caught out when the market eventually turns. It’s the cycle of life - boom, bust, and boom and bust again.
I know its hard to fathom in NZ, but there are other ways to make money. The New Zealand share market seems to be kicking itself back to life. We’ve got lots more IPOs in the pipeline and have had a string of Kiwis doing well building start-ups especially IT ones. As an investor, who of you wishes that they bought $50,000 of Xero share at $1.30 in September 2009. Those shares would now be worth $500,000. Similarly, imagine if you’d put $10,000 into Diligent shares in early 2010 for 30 cents. They’d now be worth $233,000. I'm liking NZ's obvious potential right now. I think we've got some great talent coming through, we have huge growth potential out of Asia, its a great place to live (and everyone knows it), the rest of the world is seriously f##ked, and we have a growing maturity and awareness about who we are (albeit off an extremely low base.)
There are a number of influences that could push up interest rates. The primary driver will be inflation. The RBNZ seems happy with inflation coming out of the Christchurch rebuild. It will only become concerned if increasing house prices flow through to Kiwis spending up large on our "newly created equity." I'm hoping this time around Baby Boomers will still be scarred by the GFC and focus on their impending retirement. With an improving share market and the Government hocking off its assets, we could also see an increase in competition for bank deposits, which would force bank-funding costs up a smidgen. I don’t see this as a big factor at all, but it does influence rates at a micro level and could be the difference between 5.00% rates and 5.50% rates. The end of money-printing offshore could see bond yields go up (price down) and this would flow through to higher bank-funding costs. We are starting to see a significant increase in Australasian credit default spreads, which is a sign of heightened global risk. Banks will want to increase mortgage rates to preserve healthy margins. That said, it’s a dog eat dog world out there and its hard to see any end in sight for low interest rates. ANZ is using its newly found cost efficiencies to stay aggressive in the market. Similarly, Kiwi Bank can use its growth rate to fund investment. Other banks however will struggle with costs growing faster than revenue. As profitable as banks are, bonuses rely on the share price going up. Just how much further they can go is any ones guess. CBA (ASB’s parent) has been trading as high as $72.80 up from $55 in 2010. Currently trading at of 15th June at $65.12