Is now the time to get back into the property market?

If you're a New Zealand resident looking to invest in residential property, now may be the perfect time to do so. Several key factors are converging to create a favourable environment for property investment, including dropping inflation rates, mortgage interest rates looking to have peaked, predicted reductions in the Official Cash Rate potentially coming later this year, and loan-to-value ratios (LVRs) relaxing as soon as next month.

Inflation

One factor that should be of particular interest to investors is the recent drop in inflation rates. Inflation is a measure of the rise in price of goods and services over time, and when it is high, it can erode the value of your investments. In saying that, with property it can sometimes be positive, as it also erodes the value of debt. However, the recent inflation numbers in New Zealand have dropped more than expected in recent months, which leads on to the next point.

Interest rates

Another factor that is creating a favourable environment for property investment is the current state of mortgage interest rates. We appear to be at or very close to the top of where interest rates will go. This is good news for property investors, as it means decisions to borrow money to invest in property can be made more safely than over the last 18 months, when we had rapidly increasing rates and uncertainty about how high they would go adding risk to investment decisions. 

In addition to dropping inflation rates, some economists are predicting that the Reserve Bank of New Zealand (RBNZ) will have to start reducing the Official Cash Rate by the end of this year. 

Loan-to-value ratio rules

The RBNZ have announced that they are consulting on relaxing the LVR rules from 1 June 2023, which will definitely be implemented. This results in two main changes:

1. Borrowers who meet lending criteria will be able to borrow up to 65% (currently limited to 60%) on existing investment property. This is unlikely to move the needle too much.
   
   
2. Borrowers (read first home buyers here) who are wanting to borrow with less than 20% deposit for owner-occupied property, and who cannot meet other exemption criteria (such as new builds for Kainga Ora First Home Loans), will find that there is increased capacity. The banks have only been able to lend 10% of total mortgage lending to these borrowers and this is to be increased to 15%. This will bring more first home buyers into the market, which is also a positive for those flipping properties because they will suddenly have more purchasers available to buy.

In addition to the previously mentioned factors, there are also several other positive indicators that suggest investing in New Zealand residential property could be a smart move.

Migration increasing

Firstly, New Zealand is experiencing strong migration, with the year to February experiencing net growth of 52,000 versus a loss of 20,000 a year earlier. The influx of people is driving demand for housing, and this is good news for investors. As the population grows, the demand for rental properties increases, which leads us to the next positive indicator.

Demand for rental accommodation

The rental market in New Zealand is strong, with high demand for quality rental properties. This is partly due to the difficulty many people face in getting onto the property ladder, which means that more people are turning to renting as a long-term solution. 

Low unemployment

Although the Reserve Bank has up to now aggressively hiked the Official Cash Rate to try to kill inflation and thus caused some business failure and job losses, overall unemployment will stay low. Mortgagee sale numbers can hardly be seen to be concerning with only 38 being advertised last week in comparison to 3024 at one stage in the Global Financial Crisis.

Lending criteria relaxing

Off the back of a very tight credit market caused by overregulation, banks are showing some signs of trying to relax their criteria for assessing mortgage applications. One example of this is that a higher percentage of rents are being taken into consideration when assessing an applicant's ability to service a loan. This is a positive development for investors, as it means the potential rental income from a property is given greater weight when assessing affordability. It is still not as good as a couple of years back when property-specific rates and insurance were not taken into consideration (instead a percentage of rent was allocated to cover these and other expenses such as vacancy, maintenance etc.), but it is an improvement on where we got to. 

In addition, there seems to be more common sense being applied to which expenses need to be looked at when assessing a mortgage application. Banks are taking a more realistic approach to assessing the applicant's ability to service the loan. This is a positive development because it means that more people may be able to access funding for investment in residential property.

As banks relax their criteria, the non-bank market will also need to relax to maintain market share, offering more funding options to investors. The non-bank lending sector has traditionally played a critical role in providing funding for those who are unable to access traditional bank lending. With banks showing signs of relaxing their criteria, the non-bank lending sector will need to adapt to ensure they remain competitive in the market. This could mean more flexible lending terms, lower interest rates, and a greater willingness to consider a wider range of income sources.

Overall, the relaxation of criteria by banks, and the potential for the non-bank market to adapt and offer more funding options, are positive developments for investors looking to enter the New Zealand residential property market or to add to an existing portfolio. 

Summary

While investing in property is not without its risks, the current economic conditions in New Zealand and the potential for greater access to funding make it an attractive option for those looking to build wealth through property investment. As always, it's essential to do your research and seek professional advice before making any investment decisions.

If you want to discuss how you stack up in regard to borrowing in the current market, or have a chat about managing interest rates or anything else to do with property finance, get in touch with Kris Pedersen Mortgages HERE and we will arrange a time for a free property finance review.