Return to the status quo?
Whether it was the election, the miserable winter (which seems to be lingering), school holidays, bank policy or a mix of these, something brought the property market to a halt over the last few months. My guess is it was a combination of these which led to convenient excuses for people to sit on their hands for a while and not make any decisions. Banks reported significant drops in housing and lending activity and for us, enquiry was down to frustratingly low levels.
But with the election almost over, warmer weather and spring home loan campaigns in full swing, there appears to be some life coming back in the market. A lot of real estate agents I’m talking to are saying activity is up and houses are starting to sell quickly again. I had a purchaser come to me recently with five days’ finance to go unconditional on a new property. In that time, we not only needed to get bank approval, but we needed to list and sell their existing property. We managed to do it and with back up offers! I say this because it supports my gut feeling that things are starting to return to normal.
That being said, banks aren’t making it any easier with incredibly tight lending criteria and credit policy. A recent article in the NZ Herald mentioned that consumers are borrowing at 9-10 times their income level. I’ll challenge you to find a lender approving at that level. Whilst this has absolutely been true of the last few years, it simply isn’t true anymore. Today, with bank test rates sitting at between 7% - 7.9% (principle and interest), borrowing at even six times income is next to impossible. Right now, a first home buyer couple with two dependents and a joint household income of $130,000 (and no consumer debt) would be able to borrow between $650,000 and $850,000 (depending on the lender). Add in any student loan or consumer debt repayments and this number will drop again.
Rates remain low and they will do for some time to come. I’d argue that we are in a new normal when it comes to interest rates. As I said above, Spring is here and with it is the usual special interest rates. I’d be very cautious about making borrowing decisions purely based on price though. Just because the rate is good, doesn’t mean it’s the right place for you to be. It’s a bit like flying with a cheap airline – whilst it may be cheaper, you may not get where you want to go and even if you do, it’s likely to be a painful experience.
I see the biggest concern for property investors at the moment being interest only periods coming to an end. If you have looked to extend your interest only period recently then chances are you know what I’m talking about. A lot of the banks will now do a full credit assessment at the time of your fixed rate roll-over and they will do this assessment at their test rate, on principle and interest over 25 years and using only 75% of your rental income. If somehow you pass that test, only then will they extend your interest only period. If not, then be prepared for an increase in your repayments. A $1,000,000 loan switching from interest only to principal and interest would cost an extra $1,808 per month! I’m already seeing investors having to refinance their lending or even sell properties because of this. It’s another clear reason why split banking is crucial in today’s market. Give yourself an out if one bank isn’t playing ball.
So, whilst things appear to be returning to normal from an activity point of view, borrowing remains difficult. There are significant differences across lenders so make sure you have a good adviser on your team and you speak to them before making your next move.