2011 is shaping up to be an interesting year. In my opinion mortgage rates don't need to increase and the Auckland property market (at least for first home buyers) seems to be growing in confidence. That said, I expect fixed mortgage rates to increase rapidly later in the year but not due to anything logical! Back to that soon. One thing that seems to be building slowly is a lack of availability of reasonably priced quality rentals in the Auckland City fringe. A number of our first home buyers have tired of:
This is a key difference between the Auckland property market and the rest of the country. The Herald reports that rental vacancies have doubled in most towns and cities, but Auckland is only at 0.70%.
Wholesale interest rates (the rates banks fund at) eased off towards the end of last year in recognition of a slow recovery. As a result there is minimal pressure on mortgage rates to increase and rates should stay around current levels for the next six months. However, there is a big BUT in that. With such a big proportion of Kiwis sitting on floating rates, fixed mortgage rates will be less driven by fundamentals and more driven by emotion. Given how much debt we have and a history of high rates, Kiwis are inherently nervous about mortgage rates increasing. Most people I talk to want to fix, but are waiting until it looks like rates will go up. When this trigger happens my view is that rates will go up very quickly, not fuelled by the market itself but by the stampede to fix.
Exactly the same thing happened in early 2009. 2009 will repeat in 2011 but from a higher starting point. Economists never seem to allow for irrational behaviour so I'm expecting them to think "floating is a great idea" for a while yet. There will also be some confusion in the media about floating and fixed rates. The headlines will all be about increasing interest rates and which bank moves first. Lost in the detail will be that floating rates will only increase slowly even into 2012. Fundamentally (and rationally) mortgage rates do not need to increase fast. On the other, hand two-and three-year fixed rates will probably increase too far and then decrease again later on. (The five-year rate is already too high so won't be under the same pressure to increase.) With the floating rate only marginally below the two-year fixed rate, and rates not expected to fall, my view is to not second-guess the market: fix now or in the next three months. If you are buying now then fix. If you have an existing mortgage and are currently floating then there is no immediate rush but you should start to consider fixing sometime after March. I think the two-year fixed rate (between 6.45% to 6.50%) offers the best value for money followed by the three-year fixed (6.85% to 6.95%) Personally, I have already fixed half of my lending for three years at 6.80%. The other half is floating and I’ll look to fix that shortly. I'm thinking two years at 6.45%.
If you have a discounted floating rate (rate less than 6.00%) then you might want to keep part of your mortgage floating over the long term. There are a large number of packages that provide discounted floating rates for clients who are accountants, lawyers, police officers, primary school teachers, doctors and nurses, as well as packages for a large number of companies like Fonterra and Air New Zealand. These packages tend to discount floating rates to an extent that I would advise leaving a chunk of your mortgage floating for the long term. Current packages floating rates range from (5.75% to 5.95%)
This is a hard topic to talk about because the housing market is not one big amorphous beast. There are so many different things going on. Outside of Auckland the market is generally very tough especially anywhere coastal. Coastal subdivisions have been smashed due to oversupply of sections. In Auckland the same old property investment circus plays in South Auckland, but it feels like they are flogging a dead horse. The house prices in most parts might sound cheap but they’ve still got room to drop further and good luck on finding tenants that pay their rent. Experienced investors can do well down there, but newbies whipped into a frenzy at “get rich quick” meetings tend to come a cropper. Generally speaking I think there is some good value around the Auckland City fringe. I define fringe as an area between 5km and 10km of the CBD. It picks up areas like Sandringham, Three Kings, Hillsborough, Mt Roskill, Waterview, Avondale, Onehunga, Ellerslie, Birkdale and Birkenhead. This is where a large number of first home buyers are looking and picking up some good deals. With higher demand in these areas from buyers and renters they are amongst the safest suburbs to buy into, but still at the right price. In terms of value for money you can’t beat Glen Eden and Birkdale. We have a number of first home buyers buying in both locations, and getting renovated homes on full sites for under $425,000. So what’s my overall summary?