It was a big news week for property owners last week. The items are of particular interest have been comments made by the Reserve Bank governor about interest rates, and a new 10-year fixed rate mortgage has been offered by a major lender.
Firstly, the Governor's comments. Graeme Wheeler has poured an ice bucket of water on recent media speculation that the next more in Reserve Bank interest rates could be down. In a recent speech, in his typically measured way, he said a cut in the Official Cash Rate was very unlikely. What it boils down to is the economy does not need stimulus - it is in good shape and there are already a number of positive influences:
- The drop in oil prices is creating cash for consumers
- Net immigration is remains high
- Business and consumer confidence is strong
- Labour force participation is at record levels, and
- Competition within the banking sector has seen fixed-rate mortgage interest rates go down and further falls are likely.
This reinforces the prevailing view which is that the OCR will remain on hold throughout 2015.
Governor Wheeler added a reduction in interest rates would stimulate house prices, particularly in Auckland, which is already over-priced and is a risk to the economy. He says, "...the more that house prices get out of line with historic relativities, the greater the risk of a sharp correction, leading to financial instability."
The Governor cautioned Auckland property buyers, and rightly so. There is no doubt Auckland's property market is red-hot and unsustainable. The question is when are prices likely to correct, and how will that correction play out.
Unlike previous booms, Auckland's price surge appears to have been driven primarily by supply issues rather than cheap and easy money. Quite simply, interference in the market by local planning regulations has restricted the availability of land, and the imposition of new council fees has inflated building costs.
While central government is addressing the supply issue through legislation, the effects will take year to flow through to the housing market, although there are early signs of this happening.
According to Statistics New Zealand the annual number of new dwellings consented in 2014 was 24,680, up 16% on 2013 and at its highest level since 2007. At it's current rate of increase the number of new dwellings consented in 2015 may well be around 30,000.
Most of the new dwellings were in Auckland with 7,595 (up 20% on 2013) Canterbury with 7,308 (up 27%) and the Waikato with 2,369 (up 5.5%). According to the Reserve Bank, Auckland has a housing shortage of about 20,000 homes and will need 10,000 new dwellings a year to meet expected demand.
While building activity accelerates to meet the housing gap, the best weapon the Governor has at the moment is to address the Auckland issue is to express words of caution in the hope that enough people will take notice to take the heat out of the market. That may mean investors will look to the provinces instead of Auckland for their next investment opportunity.
When supply does eventually catch up and Auckland's property market "corrects" it is likely to do so "softly" over many years time rather than as a spectacular crash that one sees with debt driven booms.
The second major news story was that the TSB is now offering a 10-year fixed-rate mortgage. Although long-term loans are common overseas (up to 30 years in the US), this is the first time a 10-year loan has been offered here. And the rate is pretty good at 5.89% for residential and investment property loans with a minimum 20% deposit.
The longest terms currently on offer are a seven-year fixed rate of 6.49% offered by the BNZ, the best of the best five year fixed rate is Kiwibank at 5.89%.
It's great news for long-term property investors and home-owners because it transfers the interest rate uncertainly from them to the bank. It will particularly appeal to property investors who can lock in a long-term tenant at a rental yield greater than 5.89%.