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Staring At The Big Credit Crunch

The dynamics for investors will have a wide-ranging impact, John Bolton warns, and there are big trends on the horizon.

By: John Bolton

1 February 2022

As we start to feel the bite of the legislative and bank policy changes introduced in recent months, New Zealand has found itself staring down the barrel of a major credit crunch.

In such a nuanced situation, it’s impossible to say exactly how everything will pan out. When it comes to the housing market, the impact will vary from region to region, and even property to property.

For investors, the dynamics at play are going to have wide-ranging impacts – and there are a few big trends you should watch for over the coming months and years.

Between new responsible lending laws, tighter LVR restrictions, and higher servicing and interest rates, it’s a hell of a lot harder to access credit these days than it was a few months ago. And investors aren’t immune.

If you don’t pass the new servicing requirements, you won’t get approved to buy – regardless of whether it’s your first property or your fifth. If you need a loan top-up or want to borrow against a property in the event of an emergency, that’s going to be harder too.

For investors with several cross-collateralised properties with a single bank, it could be an especially tricky environment to navigate.

When you sell one of those properties the bank is going to review all your other loans too. If they don’t think you can afford the remaining debt, they might opt to take the full proceeds of the sale to repay more than just the loan on the property you’ve sold. We always recommend our clients split their properties across different banks, to help manage that risk.

Prices May Drop

In my opinion, the biggest risk in the coming months is going to be a combination of a slowing housing market and potentially softer house prices.

A lack of immigration and population growth, reduced affordability and borrowing power, has meant less buyers. Throw in the flood of new builds we’re seeing, and a degree of price softening is inevitable. In short, we’re seeing a shift towards a buyer’s market.

With current levels of development and consenting, large, second-hand properties are still going to be attractive to developers, and should maintain their value quite well. As always, though, location is key.

New builds could see a slight reduction in price, as reduced affordability means buyers can’t front up on the prices we were seeing towards the back end of 2021. That adjustment could also flow onto the value of development land.

Good looking properties in great locations are still going to sell well, particularly in areas where demand is high, and there’s no development and intensification potential.

Historically, lifestyle properties have experienced softer prices in a buyer’s market. But with people increasingly working from home, these properties have gone through a bit of a renaissance. I think they’ll broadly hold up, especially anything that’s really unique.

Tough-to-shift properties are going to be those that aren’t well presented, in less desirable locations. That said, these can offer an interesting opportunity for property traders looking to buy, repackage and on-sell to a first home buyer – provided they know their market.

Bear in mind that when we say price softness, we’re not talking a crash, but more a correction of the (insane) prices we saw at the end of 2021. For anyone who’s been in the market for a while, and is already sitting on considerable gains, the impact should be negligible.

Liquidity Issue

If you’ve got all your wealth tied up in property, it’s always been a pretty safe assumption that you could easily sell part of your portfolio to tap into that wealth. Under this new environment, selling could be a harder and slower process.

And back to that earlier example … even if you can sell, but the bank takes the full proceeds to pay off other debt, you might be left with nothing to show for it.

None of this is to say that property investment is a bad thing, but there are a lot of headwinds pushing against the housing market right now, and not a lot supporting it. As an investor, caution is advised. Be aware of the factors at play, and the implications they could have for you and the wider market.

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