The Reserve Bank on February 11 officially required banks to impose a 40% minimum deposit on all new investor borrowers who did not already have finance approved. Can we see any evidence yet of the 40% rule having an impact? Yes.
Each month I ask mortgage advisors around the country what they are seeing in their businesses. Are first home buyers stepping forward or back, are more or fewer investors appearing, plus a few other questions.
READ MORE: Find out if your suburb is rising or falling
The results come out in the mortgages.co.nz & Tony Alexander Mortgage Advisor Survey and the key number of interest to us here is this one. Last week a net 5% of advisors said that they are seeing fewer investors in the market.
Start your property search
This is a turnaround from the net 24% in January who were seeing more investors, and the net 11% in December also seeing more. The peak was 34% in October from 28% in September.
In contrast, a net 19% of advisors last week were still saying that they are seeing more first home buyers, from 33% in January and 13% in December.
The many comments which advisors submitted show that there is still a very high level of demand from investors, even though some have been burned off by the 40% demand. Many people of sufficient means are helping their kids onto the property ladder, with a prevalent view that it is pointless leaving money in the bank going backwards after tax and inflation.
The Government and Reserve Bank can hardly express surprise or concern about the surge in general and investor demand for property when savers are being penalised for not borrowing and buying.
These are early days yet and the next two months will show if the 40% requirement is having any effect beyond knocking a portion of the froth off the top. But the chances are that 40% will not be enough to slow things down to a pace of prices growth deemed acceptable to the government.
Does that mean the Reserve Bank will take the minimum deposit to 50%? They might, but it would not be because of the pace of price rises. Instead they would do it if banks continued to lend large amounts of money to investors. We will have to wait for 2-3 month’s worth of lending data to gauge that. So, any move to 50% is probably something for the second half of this year rather than in the next 2-3 months.
In my monthly survey I also ask advisors what term borrowers are showing the greatest preference for. Finally, we are seeing some people looking beyond the candy of one-year rates at 2.29% and thinking about the growing concerns internationally about rising inflation and the eventual monetary policy tightening cycles to come.
Whereas in January only 9% of advisors said that people were fixing for two years, that proportion rose to 20% this month. That is still very low compared with the 73% saying that the one-year term is most preferred. But that 73% is down from 89% in January and proportions above 80% since August. The peak was 97% in November.
5% of mortgage advisors said people prefer the three-year term to fix their mortgage rate, and just 2% selected five years – my personal favourite.
In New Zealand and around the world currently, inflationary pressures are still very light. But there is pressure on businesses to recover costs associated with supply chain disruptions and high shipping costs, commodity prices are rising firmly and there is talk of a “super-cycle”, and the world is awash with liquidity from central bank bond buying operations.
A year ago, central banks stated they are explicitly taking the risk of keeping interest rates too low for too long in order to drive growth to offset the effects of the pandemic, because when inflation appears, they know how to beat it. The new United States Treasury Secretary said exactly this three weeks ago. But she did not finish the paragraph. The way central banks will fight inflation when it eventually appears as they intend is higher, then higher interest rates.
Big rises are not imminent. But bank long-term funding costs in some instances have already risen 1% since October and borrowers should not be surprised if very soon we start to see 3-5-year fixed mortgage rates going up.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
