2020 was full of highs and lows, so what’s in store for the property market this year? Mortgage adviser Ryan Smuts, of Kris Pedersen Mortgages, lists his four predictions.
Interest rates will remain low
It is likely short-term interest rates will stay low, or even decline slightly. There is fierce competition in the banking space around the 1-year rate, which is currently the favourite term for borrowers and the lowest rate fixed term offered by banks. This sits at around 2.29% for most banks. While economist predictions have largely shifted that there will no longer be a negative Official Cash Rate, there may still be a slight reduction in May which could cause a further drop to short term fixed rates. Despite this, global interest rates are rising, which may have an effect on our longer term interest rates here. This might be something to consider when fixing your interest rates – and hedging your bets.
House prices will increase
House prices in New Zealand are booming, despite any negative effects of Covid-19 on the economy. There is usually a slight lag between market changes and their effect on house prices. Besides the elephant in the room, being Covid-19, there are two major factors I see influencing house prices in 2021. New LVR restrictions may have some effect, but for those who already own property and have seen drastic increases in price, this probably isn’t likely to be huge. In addition to this, first-home buyers and other owner-occupied purchasers are out in force – demand for property is still high.
Low interest rates make borrowing more affordable. From this time last year, interest rates have dropped by circa 1%. This might not sound significant, but when it equates to almost one third of borrowing costs, we have many borrowers (if they’re on lower rates now) paying interest costs at two thirds of their previous costs, or even less than. This encourages borrowing, particularly for those who aren’t earning anything on their savings in the bank and comparing these returns with what they could get through property.
LVR restrictions will tighten further
ANZ, New Zealand’s largest mortgage lender, increased their deposit requirement for property investors to 40%, meaning their maximum LVR (Loan to Value Ratio) is currently at 60%. This will have an effect on mortgage borrowing for many people, and I do expect that we may see further restrictions like this one from other banks in the year ahead. There’s massive pressure on the powers at be to control the level of house price inflation.
Non-bank market share will increase
With the tightening in main-bank criteria to get a loan approved (i.e. how strict it is to meet their criteria) AND how long mortgage borrowing is taking to get approved, many clients are borrowing from non-banks to ensure they don’t miss out on deals that are too good to pass up.
While there might be additional costs in using other lenders, this cost is often a lot less than the opportunity cost of missing out on the deal entirely. Non-bank lending can be a good fit for people with unique individual circumstances that a bank may not find appealing.
Another huge benefit of working with non-bank lenders is that they don’t have the same LVR restrictions as banks, so are able to lend to a higher percentage of the property’s value – for example up to 80% LVR on investment properties. Their affordability criteria is also often a lot easier. In a market like this one, this is a recipe for increasing demand from clients.
Published 3 February 2021
Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with an independent financial adviser. All content is correct at time of publication date.