The effect of increased interest rates on the property market

The Auckland property market is consistently in the media these days, with advisers giving advice as varied as “pool your resources” to “it’s just about savings” to “give up”. However, the market is changing significantly, so it’s worth staying up to date with what’s happening – and what that means for you.

An update on the NZ property market…

Between loan-to-value ratio restrictions, higher interest rates, and credit rationing, it’s perhaps unsurprising that demand isn’t as high as it was a year ago. We’ve seen this cooling of the property market before – and previously it’s been followed by another surge. However, this time around the prospects are quite different. With interest rates continuing to rise, and policymakers becoming more strong-willed around their efforts to prevent excessive lending growth, particularly among foreign investors, we’re likely to see a more subdued property market going forward. Good news for most Kiwis!

We investigate one of the reasons for this change - Interest Rates:

Interest rates affect all. Loan-to-value ratios might create a temporary lull, but interest rates are what will truly affect the market. Exceptionally high house price to loan ratios might look do-able when interest rates have bottomed out, but as soon as interest rates start to head upwards, a high ratio becomes completely unsustainable.
What does this mean?
1. Affordability metrics are changing sharply – and a mortgage is likely to cost a lot more. Currently, for an average Auckland household to buy an average Auckland house, a mortgage would be about 51% of the household’s average disposable income (considering a 20% deposit, 25 year mortgage term and at the cheapest mortgage rate on offer). A 1% increase in mortgage rates would see this jump to nearly 56%. That’s far higher than even 2007, when the minimum mortgage rate was closer to 9%!
2. The whole mindset towards the property market is likely to shift, with people thinking about where rates could be in a couple of years down the track – this could have a huge impact on the market.
3. Higher interest rates could mean more of a change towards the fundamentals of investing, with many stepping away from negatively geared properties.

It’s important now more than ever to keep an eye on the rates and how those will affect house prices. And if you are looking to buy, ensure you get the best rate possible locked in for as long as you can so you can pay off as much of your principal as possible.

As always, give me a call if you have any questions at all.