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Rates Rises Set To Create Headwinds

A major bank believes higher mortgage interest rates will be the key to slowing housing growth, Sally Lindsay writes.

By: Sally Lindsay

1 August 2021

Falling interest rates have been one of the key drivers of the house price boom over the past 18 months. ASB expects this tailwind to soon flip into a light headwind, joining the likes of rising housing supply, tighter credit conditions, and reduced investor enthusiasm for housing.

Mortgage borrowing has gone nuts over the past year, with new lending up about 45% on the previous year. Ever higher house prices have meant more debt has been required to either get on to the property ladder, or to trade up.

Data on mortgage fixing suggests households are quite sensitive to the risk of a mortgage rates rise over the coming 12 months. The mortgage lending boom has been mostly for relatively short fixed-rate terms, says the bank. The average duration of outstanding mortgage debt (including floating) has fallen to around nine-and-a-half months. A full 77% of all mortgage debt is due to reset on to new rates over the coming year.

In tandem, with higher mortgage borrowing, household incomes haven’t increased. This means that much higher mortgage debt is being serviced by roughly the same levels of income, says the bank.

As a consequence, debt-to-income ratios (DTIs) have jumped up. Reserve Bank data shows households with a DTI ratio above six now account for the highest share of new mortgage lending, having been the lowest prior to the Covid-19 pandemic. New lending to households with a DTI of less than four now constitutes only a third of the total.

While the household debt burden has shot up, comparing household debt to equity shows household gearing is actually at the lowest level since records began. ASB’s calculation of a housing gearing ratio has it at a little above 20%.

This reflects the fact the housing boom has inflated the value of housing assets to unprecedented levels, says the bank. Despite record-high debt levels the cost of servicing this debt is by no means excessive. In fact, it’s the lowest since records began at just 6% of total disposable income, the bank says. Just prior to the GFC it was 14%. This reflects the aggressive falls in mortgage interest rates over the past few years.

Given the low starting point for debt servicing, households should be able to tolerate reasonable increases in mortgage rates without budgets becoming unduly stressed, says ASB.

Prices Defy Expectations

Median prices for residential property across New Zealand increased by 28.7% from $637,000 to $820,000 in the June 2021 year, the latest data from the Real Estate Institute of New Zealand (REINZ) shows. However, the increase shows a slowing in the market as it was just a little above the May median of $817,500 and slightly down on the record high of $825,000 reached in March.

The median house price for New Zealand, excluding Auckland, increased by 25.9% from $540,000 in June last year to $680,000 in June 2021.

Auckland’s median house price increased by 25.0% from $920,000 in June 2020 to $1.150 million in June 2021 – another new record for the city. It was only up a tad on May’s $1.148 million median price.

Additionally, Manukau City ($1,070,000), Rodney District ($1,194,000) and Waitākere City ($1,065,000) reached new record median prices. In addition to Auckland, four other regions reached record median prices and one region was a record equal. They were:

• Waikato: with a 19.7% increase from $615,000 in June 2020 to $736,000 in June 2021. Additionally, Matamata- Piako District ($665,500), Taupō District ($730,000), Waikato District ($785,000) and Waitomo District ($420,000) all reached record median highs
• Taranaki
: with a 41.5% increase from $410,000 in June 2020 to $580,000 in June 2021
• Marlborough
: with a 56.0% increase from $452,000 in June 2020 to $705,000 in June 2021
• Southland:
with a 23.2% increase from $341,000 in June 2020 to $420,000 in June 2021
• Manawatū/Whanganui:
with a 35.6% increase from $427,600 in June 2020 to record equal high of $580,000 in June 2021.

REINZ chief executive Jen Baird says house price rises have continued to defy expectations with every region in the country having an uplift in median house prices when compared to the same time last year, and five regions seeing records in June.

Even the month-on-month data shows a slight uplift – +0.3% nationally – and more than half of the regions had an uplift when compared to May suggesting that the market is refusing to cool.

“With fewer than 14,000 properties available for sale, the fear of not finding anything is becoming an issue across parts of the country – especially when houses are selling as quickly as they are at the moment,” says Baird.

Rent Raise Plans

A gross 71% of landlords responding to a new survey by independent economist Tony Alexander and property management company Crockers say they plan to raise their rents over the next six months.

Of the landlords planning to raise rents, 39% intend increases of between 1-5%, 43% intend 5-10%, 12% will raise by 10-15%, and 5% plan rises of more than 15%. The average rise planned is just over 6.5%.

Of the more than 1,000 survey respondents, 614 say they plan raising rents, 256 said they do not plan to raise them, and 152 opted for “maybe”.

Alexander says in reality, because rents are set with reference to the market, the actual rise in rents is likely to be less than the “hopes” expressed in the survey by many landlords.

“Nonetheless, it is the change in rent plans which is the important variable, which we will be tracking from next month. It is the change in this, rather than the actual rent rises, we are interested in.”

The survey will track changes in pressures on rents, points of particular concern, plans regarding property purchases, intentions to sell by landlords and shifts in preferences for property types.

Buying property is still top of mind for many investors. A gross 28% of respondents to the survey say they are intending to buy another property. While a percentage are wanting to buy, 26% have indicated they will be selling property within the coming year.

More landlords are intending to keep their existing investment property. More than 40% have no intention of selling and 22% plan on holding property for at least another 10 years. Just over onethird plan to sell within 10 years and 22% within five years.

“Interestingly, while a gross 25% of respondents in the previous question indicated they intend selling their property within the coming year, the proportion implying that in this question is just 6%.” says Alexander.
“We suspect there is a strong element of concern regarding the Government’s recent tax changes which continues to manifest itself as threats to sell.”

For the gross 28% of investors thinking about buying another property, 45% are looking at buying one which is new and 55% are looking at buying an existing property.

Of those intending to buy, 27% want a standalone house, 22% a townhouse, and 7% an apartment and the size preference is for two to three-bedroom houses, with studios and single bedroom properties out the door.

West Coast Best Bet

Residential property investors have been given a steer on where to invest – and it’s not Auckland. In fact, it’s far further south. The West Coast of the South Island to be precise.

It has taken top spot as the highest performing region for residential investors with the highest yield in New Zealand and the fourth highest capital gains, the latest (REINZ) data shows.

The latest edition of the Capital Gains and Rental Yields Report reveals that since the third quarter of last year the West Coast has made the list as the best region for investors.

Yields in the West Coast region are 5.4%, the only region with a yield in excess of 5%. Additionally, capital gains in the West Coast increased 26.3% for the three months ending March this year when compared to the same time last year with median prices going from $229,000 to $289,250 – making it the standout region for residential property investors.

In second equal place in terms of providing strong returns for investors were Gisborne and Manawatū/ Whanganui.


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