There sure is a lot going on in and around the residential property market at the moment. From mortgage rate wars, to a large bounce in sales activity in October, to continued rumblings in the rental sector (the latest hot topic being the transfer of letting fees from tenants to landlords), it’s all happening. So let’s take a moment to step back and assess what it all means.
I’m not surprised at all by the mortgage rate wars currently being enjoyed by borrowers (admittedly only those with sufficient deposits, and the ability to prove their income and expenses, plus satisfy the bank that they could service the debt at a hypothetical rate of 7 percent).
Indeed, way back in June the spread between typical fixed mortgage rates and the base official cash rate (OCR) was looking high. Of course there are valid reasons for banks to operate with a higher buffer than in the past, such as tighter capital adequacy rules. But even so, it looked back then like there was some wriggle-room in that spread - either for banks to absorb higher funding costs (which may already be actually happening; it’s hard to know from an outside perspective), or to pass on sharp deals to customers, or both.
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An important influence has been a relatively low number of property sales (October’s bounce aside) and hence pressure on banks to compete strongly for the small number of new borrowers active in the market, with refinancing customers also hotly contested.
First home buyers and multiple property owners are the key active players in the market currently, so they’ll be no doubt looking to keep their presence high by locking in a low-rate deal in the small window that they might be on offer.
Meanwhile, as for the sharp rise in sales in October, it’s also worth wrapping some context around some of the breathless headlines here as well. Yes, in the single month our stats show that sales volumes were up a solid 12 percent year-on-year. But September was surprisingly weak, so if you take the two months together, the annual rise was only 6 percent – still good, but not rampant. For the next 12-18 months, our basic prediction model also still suggests a flat track for sales activity too, based for example on the prospect of further falls in net migration and a cooling economy.
On property agencies passing their administration fees that were previously charged to tenants on to the landlords, there are probably two points to make. First, although it’s apparently being charged to the landlord, in the end it’ll be tenants that pay in many cases, via rent rises.
However, that doesn't necessarily tenants should expect rents to rise exorbitantly. Yes, they are already rising by around 5 percent per year and will likely continue to do so. But the kind of off-the-charts increases that some commentators envisage don’t seem likely, when ultimately tenants can only pay more if their income allows it (and wage growth is pretty weak at present).
The OCR is set to stay on hold for another two years, and within that time the 74 percent of New Zealand’s total residential mortgage debt that is fixed for up to two years, as well as the 19 percent that’s floating (the final 7 percent is fixed for more than two years), will be able to be refinanced, potentially locked in for a new fixed term at still-low rates.
If you can jump the hurdles, it’s a good time to be a borrower in New Zealand.
