Rentals costing landlords up to $450 a week in top-ups

1. It’s harder than usual for “Mum and Dad” investors

With gross yields sitting at around 3% and mortgage rates at 7%, it’s certainly not easy to get the sums to stack up on a typical rental property purchase in the current market. That negative gap between rent returns and mortgage costs equates to perhaps $350-$450 needing to be found from other sources every week just to keep the cashflow going. To be fair, top-ups have always been part of the property investment model in New Zealand; it’s just that they’re so large at present. Some are making it work, but not as many as usual.

Of course, that only applies to new investors. By contrast, those who have been active longer will have probably purchased at a lower price with a smaller mortgage anyway, and could also have seen some rental growth as well as reduced their debt levels – meaning they’re more comfortable with the current situation, and we certainly haven’t seen existing landlords selling en masse.

In regards to other buyers (e.g. first timers), the relative absence of mortgaged investors means they can theoretically secure property more easily. But clearly that still hinges on being able to raise the deposit and satisfy bank servicing criteria.

2. GDP data: “note it but move on”

Stats NZ’s data last week showed a 0.1% decline in GDP in the final quarter of 2023, after a 0.3% fall in Q3 – hence a technical recession (two falls in a row), after a previous dip in Q4 2022 and Q1 2023. This means GDP has actually only risen in one of the past five quarters, and the figures are even worse when you consider that our population has been rising strongly.

But what does it mean? In a nutshell, I wouldn’t be panicking. After all, the figures are already quite old (we’re almost into April) and they really just confirm what we already knew; that the economy is struggling. In turn, that’s no surprise either, given that this is exactly what the Reserve Bank has been trying to achieve anyway – raise interest rates, reduce spending and economic activity, and (hopefully) bring down inflation.

So I think it’s probably a case of ‘note it but move on’. At the margin, the latest weak figures might slightly raise the chances of an OCR cut late this year rather than into 2025, but I wouldn’t necessarily bet on that just yet either.

3. A slow-burning lending recovery

Moving on, and this week the Reserve Bank will publish February’s mortgage lending data. It seems likely that the slow upwards trend seen in recent months will have continued in the latest results. The emerging growth seems to be coming from house purchasing activity, with bank switches and equity withdrawals still fairly muted. Similarly, low deposit finance remains difficult to secure, with the LVR rules still relatively restrictive, so it’s the higher equity borrowers boosting lending flows.

CoreLogic chief economist Kelvin Davidson: "We certainly haven’t seen existing landlords selling en masse." Photo / Peter Meecham

It’s also worth noting that 57% of existing mortgages (by value) are fixed but due to see a rate repricing within the next 12 months, and generally that change could be a rise in the vicinity of 1-1.5% (depending on rates at the time the loan was originally fixed). In other words, the process of repricing our mortgage stock onto current interest rates isn’t finished, and there’s still a lingering risk of some repayment problems emerging yet. Something to keep a close eye on.

4. Any clearer trends for confidence and inflation expectations?

On Thursday, ANZ will publish both their consumer and business sentiment measures for March, with recent trends having been a little mixed. Ideally, the next results will show rising confidence and clearly easing input cost/pricing/inflation expectations measures, further reducing the chances that the OCR will rise again. That would help out on the mortgage rates front.

5. Labour market still supporting property

It’s a busy week for data, with Stats NZ also publishing February filled jobs figures on Thursday. Employment has been trending higher lately, and that’s been very useful in terms of helping mortgaged households adjust to current interest rates.

- Kelvin Davidson is chief economist at property insights firm CoreLogic