Latest Economic Commentary & Property Report

25 February 2010

We cover:

The Housing Market

Vendor listings are still relatively short, resulting in good, tidy properties selling fast.  2009 saw New Zealand house values rise 2.8% and are now only 4.9% below the peak of the market.  Some areas will have experienced housing values closer to the market peak.  Nationally the drop was 9.6% below market peak.

Sales activity early 2010 hasn't risen as expected although values have held up in Auckland.  The future of the housing market is still uncertain and business confidence tends to wax and wane  as investors wait to see impact of pending government regulation.

We expect rents will rise this year as much to keep in step with revalued property assets as due to an expected shortage of rental property in sought after areas.  Also landlords will be forced to treat their portfolio as a business and will look to more realistic returns for the capital outlayed.

Mortgage brokers and planners like ourselves are finding themselves more in demand, for the advice and guidance they are able to give. This is not just for arranging the initial loan but for ongoing advice as to when to fix, how long to fix for, where are rates going, best taxable structure for my loan, etc.

Pending Government Rule Changes - Property taxes

The tax working group has come up with a number of measures to change our lives forever.  This long overdue overhaul of the tax system does make many radical changes, some of which will not be adopted by government as it would be seen to commit political suicide.  However, the fact remains that New Zealanders don't like to accept tough medicine, yet we complain that we are behind the rest of the world.

Proposed taxes on property by the committee are

-   A land tax 0.5% (not likely)

-   Tax returns on residential rental property

-   Remove allowable tax depreciation on buildings if they do not depreciate in value                    

-   Increase GST from 12.5% to 15%.

The property sector has come in for a hammering over recent years, in the guise of being 'non-productive' investment.  If that is the case what about Hairdressers, Finance Advisors, Accountants, etc.  Simply we need Property Investors to provide rental accommodation for those who can't buy a property.  Living under bridges is not an option in New Zealand.  The free market will decide if there are too many property investors - they won't be able to rent out their properties.                             

The Official Cash Rate (OCR)

Key Dates:  

11/3/10    Monetary Policy Statement

29/4/10    OCR Announcement

10/6/10    Monetary Policy Statement

29/7/10    OCR Announcement

16/9/10    Monetary Policy Statement

28/10/10  OCR Announcement

9/12/10    Monetary Policy Statement

The Reserve Bank has the right to change this schedule should it be necessary.

Commentary – The recent CPI fall of 0.2% has taken the pressure off a rise in the OCR in April, as was previously forecast by many commentators.  The RBNZ is now likely to stick with earlier statements that the OCR is likely to be revised upward “around the middle of the year.”  Latest data would tend to indicate a capping of the OCR at 5% (currently 2.5%) rather than the 5.5% earlier predicted.  It reached a high of 8.25% on 26 July 2007.  However note that bank funding costs for longer term money have increased.

Interest Rate Outlook

ASB continue to lead the charge to raise all but the floating and 6 month rates.  Funding difficulties have been forecast for future years, which could see rates rise into the 9% region by 2012.  Any borrowing strategy should take account of future higher interest rates and do what my Dad always said 'Make hay while the sun shines', which translates to 'get rid of debt while the rates are low'.

Fix or Float

We are at an interesting juncture as to which decision to take.  Fixing long term last year when the five year rate was at around 6.5% (or less) was a no brainer when the floating rate wasn’t much less.  Now we have a position where the longer term and mid term fixed rates have hiked (5 years 8.5%) and the floating rate has either decreased or remained low, so that the spread is now much greater.

Latest economic and statistical bulletins would seem to verify Bollard’s statement that interest rates will not rise until mid year.  Earlier it was expected to be in 0.5% rises but now it is more likely to be a bearish 0.25%.  Also the OCR is now only expected to rise to top level of 5%, lower than the 5.5% previously predicted.

This tends to make us favour the floating rate for now and maybe look at fixing 12-18 months before the RBNZ raises the cash rate in June (expected).  That way you will get a low floating rate between now and May, compared with fixing for one year at around 6.25%.  Following expectations of a lower top level OCR we believe clients may now be better advised to go for a ride on the floating rate to its highs and set their repayments at a level equivalent to 7.5% - 8.0%.  That way you should achieve savings and capital reduction.  Talk to me about the strategy that suits you and more particularly one that you are comfortable with.  You may also wish to spread risk by taking different combinations of fixed and floating.

How long should I fix my interest rate?
 

Please don't hesitate to email or phone us if you are contemplating buying a property or properties whether for yourself or for investment. We will look at your situation now and what you want to achieve in the future, so that we can structure your borrowing with the right package from the right lender for you. All this is backed by our Unique Performance Guarantee.

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