The latest Government rule changes aimed at property investors combined with current rising inflation and impending interest rate increases will now impact massive downward pressure on a vastly inflated New Zealand Housing bubble.
Those who follow us will remember we made a call twelve months ago of an impending downturn in the property market. While our timing was early and with a recent last gasp melt-up in prices, there has now been significant change in the NZ real estate market.
This turning point is not on the horizon in the future, it has already happened over two months ago starting on the 23rd of March when the Government announced drastic rule changes for property investors.
Since then there has been a serious pullback in buyer enquiry associated with investment property, and an influx of investors trying to offload their properties onto the market. This combines with a decrease of first home buyer activity mainly due to prices hitting a ceiling where home buyers are now showing resistance and have a fear of Paying too much.
“Sometimes it is better to be too early than one second too late!”
Inflation & Interest rates
Currently, inflation is increasing globally, including little old NZ, there are three drivers of inflation that are all firing together in sync right now.
- Demand-Pull; in 2020 household savings peaked due to lockdowns and minimal travelling. Subsequently, consumer spending has surged in the last six months and this is looking to increase substantially with economies opening up.
- Cost-Push; With this increasing wave of consumption spending, supply chains are under pressure and combine this with worldwide low outputs due to lockdowns and the shipping demand crisis this is pushing prices of just about everything higher.
- Monetary debasement; as the general supply shortages escalate and consumers start noticing the increasing prices in their daily living expenses, pressure to increase wages will follow.
The cherry on the top of this gigantic inflation cocktail is the billions & trillions in Quantitative easing stimulus (printed money) Governments all across the world have been pumping into the system. Creating truckloads of new money out of thin air.
This is like throwing petrol on an already roaring bonfire!
Be prepared to start hearing more and more about inflation and there is an increasing possibility we could see hyperinflation or even worse stagflation moving forward. There is only one way for Governments to control inflation and that is by raising interest rates. They will be hesitant to do this as this will create major downward pressure on the housing market & stock market, but the reality is that world Governments are swimming in debt and are out of any viable ammunition with their backs against the wall with little to no options left.
The dilemma Governments are facing is the more inflation takes off and increases, the more pressure they will be under to increase interest rates.
NZs High Mortgage Debt
New Zealanders who already have a high ratio of mortgage debt to income knocked it out of the park in the last twelve months. Mortgage borrowing jumped over 36% from 2020 to 2021 with more than 50% of home buyers taking on debt over five x their income, with residential mortgages breaking all records to now be well over $300 Billion. Yes NZ home owners owe in excess of 300 Billion in mortgage loans to the banks.
To put this into a bit of perspective, March 2021 mortgage lending broke all records with over 10.4 Billion in new lending for the month.
So to fully understand how much money we are talking about here this is;
Over ten thousand million dollars (10,000 x 1,000,000) borrowed in one month to buy property
So the equivalent of ten thousand million dollar houses were purchased in March with 100% borrowing, and that was just March. Don’t think this is just a one off, February’s borrowing was 7.6 billion and January’s was 6.3 billion.
Looking ahead we will start to see more signs of a slowing real estate market as the statistics start to be released through mainstream media, remember the stats are always 2 – 3 months behind what is actually happening in the market.
There will be a large amount of ‘traditional’ investment property come onto the market with a sharp reduction of interested buyers due to the new rules.
“We are now starting to see a ‘crayfish pot’ scenario developing where it was easy to get into the property market but very difficult to get out.” This is mainly with Investors that own specific types of property.
What is worrying moving forward is the potential pressure on interest rate hikes upwards, and what makes this a straightjacket type scenario is for anyone locked into low short term fixed interest rates with the potential for these rates to increase while the lender is still locked in.
The variable floating rate for most banks is sitting around 4-5 % which is an ominous sign. You have to ask yourself if you are a mortgage borrower how you would be placed if the rate eventually rose back to this level in the next 1–2 years?
Change of mind-set required
If you’re sitting there thinking there is no way forward with property investing now due to the new rules and the changing market do not despair! – It’s just a case of knowing the impact of the changes and how to make them work in your favour. Doing this in conjunction with the increasing opportunities opening up in the marketplace as well as the massive reduction in buyer competition, will put anyone prepared to change their mindset in a strong position moving forward.
If you would like to see a breakdown of how the new Government rules have impacted investors and our new strategies to implement to invest around the rule changes so you can keep creating wealth with residential property investment, click the link below to watch a replay of our recent Webinar.
Shane Allen & Clint Taylor
Property investor Centre