Pope & Co. economic update exclusive from Cameron Bagrie

Cam Bagrie blog

Posted 11 months ago by Pope & Co. Mortgages

Exclusive report for Pope & Co. Mortgages with Cameron Bagrie of Bagrie Economics

 

Wellington Kapiti property update

The Kapiti property market continues to perform well, with the market having a spring in its step during October.

The median sales price was up 16 percent on a year ago. The composition of houses sold can throw the median around and REINZ’s house price index for the region showed a still respectable 5.7 percent rise and a nice lift in the month of October. That’s a moderation from double-digit increases seen early in 2018 but a healthy pace of gain.

Wellington city continues to show strong price gains with REINZ’s house price index measure up 9.7 percent on a year ago. The median sale price rose 8.5 percent. Days to sell remains low at 23 days, down 3 days compared with October 2017. The number of sales was up just over 9 percent on October 2017 and the median sale price was just under 40 percent above the median valuation.

The average days to sell was 32 days which is below the national average. A whopping $64 million of property was sold in October, which is one of the highest months on record with 103 properties sold. $650 million was sold in the past year. The median sale price was 16 percent above the median valuation and $26,000 above the median list/buyer enquiry price.

Will a relaxation in loan-to-value ratio restrictions fire up the property market?

The national property market showed some signs of life in October and population growth remains strong courtesy of continued migration gains.

Throw together some sub-4 percent mortgage rates on offer and a tweak in loan-to-value ratio restrictions (investors can borrow up to 70 percent and more scope to offer >80 percent leverage to owner occupiers) and you have a recipe for the market to pick up more steam.

That looks unlikely for numerous reasons.

  • Auckland is showing the most subdued price gains because it is the most expensive. Christchurch is soft too with housing supply exceeding demand. Affordability remains a huge issue restraining price gains. We’re seeing weakness in some major (expensive) city centres including London, Vancouver, Melbourne and Sydney.
  • We have such an array of Government policy changes including extending the bright-line test, greater needs to provide healthy homes (more costs to landlords) and ring fencing of losses. There is uncertainty over what a capital gains tax will look like. It won’t include the family home but will include other homes.
  • Banks continue to tweak (tighten) lending appetites. Credit growth is an important driver of property activity and will be more restrained as banks increase their focus on quality and responsible lending rules.There is now a strong focus on ensuring bank staff are not incentivised to “sell” products.
  • We have uncertainty over how the Australian inquiry into financial services will impact here; it seems inevitable there will be some flow-on effect.
  • The impact of foreign-buyer restrictions is being worked through.
  • Low interest rates are unlikely to be sustained though there are risks both ways (refer below).

 

The relaxing of loan-to-value restrictions has been possible partly because the property market is neither too hot or too cold. That’s where the Reserve Bank (RBNZ) wants to keep it.

 The regions have outperformed and this is likely to continue though gains should be more subdued relative to the past year.

 Is this the low for borrowing rates?

 It’s looking that way though there are risks both ways.

 If the economy weakens of its own accord or the global scene deteriorates (and there is a fair risk of that), the RBNZ could well cut the Official Cash Rate (OCR) to support the economy. That’s been the playbook many times.

 Conversely, we are seeing pressure for borrowing rates to rise on many levels.

  • Inflation pressures are building and this could force the Reserve Bank to lift interest rates. We are certainly seeing a lot of cost (inflation) pressures on businesses (wages, transport costs, regulation, lower currency) and households (rents, housing, electricity, insurance, rates, petrol).
  • The economy is doing well. Unemployment is low. When the economy does well it tends to put pressure on inflation. Historically, the RBNZ has really slammed on the brakes (lifted interest rates a lot). That is not expected this time around but if the economy continues to perform (and there are risks it may not!), some modest rises to the OCR and borrowing rates can be expected. 
  • The government’s policy platform is inflationary which may mean higher interest rates.
  • Banks are set to be hit with regulatory changes including holding more capital. That represents a cost that they will seek to recover.
  • There are some signs of higher funding costs which once again is another cost financial institutions will seek to recover if funding cost pressures are sustained. We’ve seen Australian residential borrowing rates lift as banks face higher funding costs. 
  • A key theme over the coming years will be the availability of credit as the flow-on of more regulation, the Australian inquiry, a stricter regime around money laundering, and responsible lending rules hits the financial services sector.

 

Banks are under the spotlight for culture, and the “selling” of product. The RBNZ and Financial Markets Authority recommended “Removing all incentives linked to sales measures and revising sales incentive structures for frontline salespeople and through all layers of management.”

Borrowers will be asked more questions about their expenditure. There will be more boxes to tick and questions before a loan is approved. More subdued credit growth will become the norm.

That will support the property market in the long term and make it less vulnerable to a boom-bust cycle.

Borrowers should seek financial advice.

While Bagrie Economics uses all reasonable endeavours in undertaking contract research and producing reports to ensure the information is as accurate as practicable, Bagrie Economics shall not be liable for any loss or damage sustained by any person relying on such work whatever the cause of such loss or damage. Data and information have been gathered from sources Bagrie Economics believes to be reliable. The content of this article does not constitute advice.

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