How rising interest rates have affected property investment in New Zealand
After spending the last three years taking advantage of relatively low risk, New Zealand property investors are beginning to take a step back. Interest rates and inflation are up, property prices are down, and we may face a recession. The uncertainty and a possible rate rise make any unnecessary debt a bit too risky. We sat down with Aseem Argawal, Head of Mortgages at Global Finance, to find out why property investors should focus on managing their current investments rather than expanding their portfolios — at least for now.
House prices continue to fall
According to the Real Estate Institute House Price Index, the market is down 13.7% this year — a major turnaround considering the market grew by 27.6% in 2021. It’s also the biggest fall since June 2009 after the Global Financial Crisis, when prices fell 6.4%. The question on every investor’s mind is, “When will it bottom out?” ANZ predicts it will decline to 25%, while the Reserve Bank estimates 20%. Based on those numbers, we may only be halfway through the downturn. While lower house prices should make the market more accessible, Aseem notes that nobody wants to invest in a property market with declining profit. “Market predictions have shot investors’ confidence, encouraging more of a wait-and-see approach.”
Interest rates are too high to break even
Increasing at a faster pace than rent prices, higher interest rates mean debt can no longer be covered by rent payments alone. That reduces potential earnings and investors would have to fork out hundreds of dollars each week to cover repayments. For example, a new build property worth $780,000 with a 20% deposit would mean a mortgage of $624,000. At a 3% interest rate, that’s around $608 per week. At today’s interest rate of approximately 7%, it’s gone up to $958 a week. If rent is only $650 a week, investors have to find the extra $300.
If you need to borrow from the bank to buy, which most investors do, the investment doesn’t look as attractive as it did a few years ago. According to Aseem, this is one of the main things dissuading property investors from buying right now.
“We’ve been helping clients figure out how much they will have to fork out to cover the repayments if they go ahead with a new investment.”
A likely recession
The global economy has had a rough ride over the past three years, and although New Zealand has done plenty to prepare, we’re never completely immune from the impact. Last November, the government warned that our economy would shrink in the second, third and fourth quarters of 2023. This would be in part thanks to higher interest rates, as the Reserve Bank tries to lower inflation and get employment to a sustainable level. How long and deep the recession will be is hard to predict. According to the Reserve Bank, “employment levels remain high, and income growth and household savings are still supporting spending.”
Use the break to your advantage
For any investor, being more analytical is always a good thing. This year will be a chance to weigh the pros and cons of any opportunity more thoroughly. And while we wait to see what the market does, Aseem says it’s a great time for investors to focus on optimising their current portfolios.
“Owning properties can include maintenance costs, so why not use any extra resources on modern updates that could save money long-term? For investors keen to enter the market, focus on saving as large a deposit as possible. The less you need to borrow, the more profitable your investment will be.”
Waiting for a green light
If you’re a property investor keen to make moves, you might wait months before anyone has a clear idea of what the market will do. Some banks are predicting the RBNZ will start easing financial conditions at the end of this year, with rate cuts beginning in November. But there is no certainty. If the cash rate goes down, so will interest rates, giving you more confidence in an investment’s profitability. Once we know that house prices have stopped falling, interest rates have peaked, and the recession isn’t so bad, it may be time to grow portfolios again.
Time to be conservative
Most investments face some uncertainty, but our economy and housing market have seen unprecedented changes over the past three years. The general belief is that house prices will continue to increase long-term, but if short-term profitability is a key factor for you, it could pay to wait for interest rates to come down and house prices to bottom out.
Need expert advice about property investment? Talk to the team at Global Finance today.
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