The big news this month is the Election result and the positive effect the result will have on the property market, particularly the investor property market. It doesn’t matter which side of the political spectrum you side with, the fact is that the non-introduction of Property Gains tax will keep investors in the market. Home ownership is dropping all the time for various reasons (LVR, affordability, investor growth due to capital gains) so the fact is that the investor market needs to remain strong to provide the housing required.
Interest rates (real) continue to fall with the two year rate at 5.75% and the occasional special in the three year field at 5.75% to 5.85%. The benign inflation figure just released at 1.00% per annum is likely to mean that the OCR (3.50%) may not need to be increased perhaps until late 2015 and then probably not to the level previously forecast by the Reserve Bank (4.50%).
This coupled with the falling milk prices at the moment is actually very good news for the home owner and investors (if not the economy in general). The tried and true method of annual roll-over at the very best rate comes back into vogue as a very good strategy in a low interest rate environment as it affords the very best value for money and flexibility.
Now for an interesting case study. While what I call real rates are dropping, (two and three year rates) – I call them “real rates” as that is where the majority of clients end up – the Banks are gradually increasing the rate that they work out the servicing criteria on and the peak rate currently used is 7.75%, even though you can get a three year rate at 5.85%. This seems to be due to Reserve Bank pressure. The Reserve Bank has been talking about enforcing affordability limits based on interest rates increasing to say 8.00% – well, the Banks are nearly there. And, even though an investor may have a loan on Interest Only for ten years and locked in on three years at 5.85%, the banks are working the servicing ratios on Principal and Interest over 30 years at 7.75% so the variance is huge.
The actual numbers look like this… my typical investor may look a little like this – six rental properties at say 6.75% yield on gross value of $2,250,000 equals $151,875 rental gross per annum. The same client may have personal income of $100,000. The true servicing calculation is $2,250,000 x 5.85% = $131,625 interest per annum. The rental is $151,875 x 75% = $113,906. So say interest of $131,000 less net rental of $113,000 = $18,000 to be paid from the $100,000 salary is a very respectable and easily affordable 18% of gross income. 30.00% to 35.00% is seen as acceptable.
Same transaction – $2,250,000 @ 7.75% over 30 years = $193,428 less net rent of $113,000 = $80,000 ÷ $100,000 = 80.00%. This obviously is never going to be approved by the Bank at 80% even though the actual servicing is only 18% – which every bank in New Zealand would approve.
Affordability limits are here already.
Please do not hesitate in contacting me if you wish to discuss your own particular set of circumstances.