Wholesale interest rates hit 0%, The housing market just went BOOM and 8 other insights affecting investors in property news this week…
In property news this week…
- Olly Newland retires
- $3.2 billion in Bonus Bonds looking for a new home
- An expert’s view on interest rates
- Wholesale interest rates hit 0%
- The economy has fared better than Budget forecasts
- New Zealand’s housing picture
- The housing market just went BOOM
- Why no major political party will go near the behemoth that is housing
- Co-buying property with friends
- Good news for those already on the property ladder
Grab a nice hot cuppa and enjoy your property news this week…
Olly Newland retirement
We wish to advise that Olly Newland will step down as a director and is retiring from NBCO effective from 7 September 2020.
The NBCO team thanks Olly for his service to the company and wishes him well for the future.
$3.2 billion in Bonus Bonds looking for a new home
With Bonus Bonds now closed to new investors and starting to wind up from the end of October, $3.2 billion of funds will be looking for a new home.
Bondholders can either cash in their bonds or leave them in the scheme for up to 12 months, in the hope they’ll be worth slightly more after the wash-up.
With historically low interest rates and forecasts of a negative cash rate next year, the 1.2 million bondholders in the scheme as at the end of August, will be forced to rethink where to put their money.
Newshub spoke to financial experts about some of their options.
Here’s what they said about property…
Options for investing in property include through direct ownership (residential or commercial property), through a syndicate (commercial property) or through a property fund or shares (commercial property).
Financial educator and property investor Lisa Dudson, said the more money borrowed (or ‘leveraged’), the higher the potential risk and return.
“In general, property has outperformed term deposits substantially, but people carry a lot more risk to get that higher return,” Dudson said.
“Advantages are the ability to use leverage, manage a property directly and add value, disadvantages are the overuse of leverage [borrowing too much] and tenants who damage the property or don’t pay the rent,” Dudson added.
An expert’s view on interest rates
Ex-BNZ chief economist Tony Alexander is in a better position than most to give us the inside word on interest rates.
“Banks have been cutting their term deposit rates bit by bit over the past few weeks, and that process has yet to show any sign of ending.
“The average 90-day rate across the banks I look at has fallen to just 0.55% this week from 0.69% four weeks ago, 0.84% eight weeks ago, and 2% in February.
“This decline well exceeds the 0.75% cut in the official cash rate undertaken by the Reserve Bank in March and shows that one way in which banks are looking to offset losses expected from the Covid-19 shock is by slashing returns paid to depositors.
“They are able to do this because one characteristic of this shock around the world is an increase in deposits held in banks by households and businesses.
“This deposit growth reflects a combination of pulling back on capital spending, money not spent during lockdown or on travelling overseas, and payments for bonds purchased by central banks.
“Also, banks have been given leeway to run retail funding ratios below usual levels.
“The chances are good that deposit rates will fall further over coming weeks.”
Wholesale interest rates hit 0%
It has happened. Wholesale swap rates sank to 0% on Wednesday.
The 1-year wholesale swap rate is down 2 basis points to just 0.09% pa. That is $9 of annual interest for $10,000.
But the 2-year wholesale swap rate is down 3 basis points to just 0.0025%, or just 25 cents per year for a $10,000 deposit. You don’t get any closer to zero than that.
Swap rates for 3-year wholesale terms are the same – 25c per year for $10,000. Or 75c for the full 3-year term!
“These minuscule returns are being driven by market acceptance that the Reserve Bank of New Zealand will cut its Official Cash Rate to zero soon, and may even go negative.
“What that will achieve is uncertain. What the RBNZ wants is to encourage investment and spending, and by implication, jobs. But if 0.20% doesn’t do that (the two year swap rate on August 1), it seems very unlikely -0.20% will either.
“But it will effectively wipe out returns for savers, returns that were already almost non-existent. Bank treasurers can borrow wholesale at 0.0025% so why would they want to offer retail savers anything?”
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The economy has fared better than Budget forecasts
ASB Bank’s latest economic note out today reports on the Pre-election Economic and Fiscal Update (PREFU).
PREFU is a pro-forma update of the Budget fiscal outlook to take account of updated economic forecasts. Its purpose is to give all political parties and the wider public transparency over the fiscal position heading into October’s General Election.
In layperson’s language, it updates the fiscal outlook with refreshed economic assumptions.
ASB economists say the 2021 outlook is likely to show less red ink, given the economy has fared better than Budget forecasts. But the longer-term outlook is likely to reflect a more gradual recovery relative to the Budget.
New Zealand’s housing picture
Writing in yesterday’s Tony’s View, economist Tony Alexander explains the state of the housing market from an economist’s perspective.
“In the year leading into the shock from Covid-19, the number of properties being sold in New Zealand was starting to trend up,” Alexander says.
The key forces in play were…
- A big OCR cut mid-2019 driving mortgage interest rates and bank term deposit rates to record lows.
- A shift in focus from the regions to Auckland. The regions had been surging since 2016, playing price catch-up to Auckland’s earlier surge. This appears to have been fulfilled because the regions had begun to lose momentum. Higher prices in the regions made Auckland prices look less expensive.
- Strong net migration inflows – believed to be just over 40,000 in calendar 2019 but subsequently revealed by Statistics NZ to be a record 69,000.
- Firmly improving business and consumer sentiment levels after an early-2019 slump.
- Business jobs growth above 2% p.a. and low unemployment at 4.2%.
- Accelerating growth in housing lending hitting 7.2% annual growth in February.
Strength seen in prices and sales was not leading to improving listing numbers ahead of Covid-19. The nationwide stock of listings at the end of February was down 21% from a year earlier, and down 63% from 10 years ago.
“Before Covid, the outlook was for Auckland gaining extra strength while the regions remained strong but would become slowly less so because prices had risen by 48% since the start of 2016 while Auckland prices had risen just 20%.”
The Covid-19 Impact
“Seeing the onset of a global pandemic, an unprecedented thing called a lockdown, and forecasts of deep recession and rapidly rising unemployment, virtually everyone expected falling house prices and collapsed house sales.
“Reporters asked us economists for numbers on the expected extent of declines, and with zero historical precedents to go on we guessed prices would fall on average between 5% and 15% (I picked 5% – 10%) and that sales would settle around 40% down from last year’s levels once an initial surge following the end of the lockdown had passed.
“What has happened is this. NZ average sale prices over the four-month period from April to July were up 0.2% from the previous four-month period.
“These has been no price collapse. Auckland prices have risen 0.8% but they have fallen 0.3% on average elsewhere.
“Thus, the acceleration of Auckland price growth over the rest of the country has continued.”
“Sales activity is quite good in Auckland. The difference is in new listings.
Alexander says that in the May-August period total new listings for Auckland were 19% ahead of last year, but only 5% ahead for the rest of New Zealand. “Good listings growth is happening in Auckland, but it is not happening elsewhere.”
“However, the price response in Auckland is superior to outside of Auckland. What does this tell us? That the relative price graph [shown above] is becoming dominant. The regions are starting to look pricey when compared with Auckland.”
The housing market just went BOOM
The REINZ House Price Index, which adjusts for differences in the mix of properties sold each month resulting in greater accuracy than median house price comparisons, hit a record high in August.
House prices nationally are up 10% over the last year.
Gisborne/Hawke’s Bay had the highest annual growth rate with a 14.7% increase to a new record level. Taranaki followed with an annual growth rate of 14.3% and in third place was Wellington with an 11.6% annual increase to a new record level.
Volumes were up too. The number of residential properties sold in August across New Zealand increased by 24.8% from the same time last year. It was the highest number of properties sold in an August month for 5 years.
Bindi Norwell, chief executive at REINZ says, “The housing market’s recovery post-lockdown over the last few months has been astonishing and has certainly surpassed many predictions.”
COMMENT: It’s a very weird recession when record low interest rates fuel a housing market boom. It’s mainly first-home buyers and investors who are pigging out at the trough.
Why no major political party will go near the behemoth that is housing
Jenée Tibshraeny explains that Labour’s caution on tax is a reminder of how deep the economy’s reliance on the property market goes.
“Our financial system in built on housing.
“The value of outstanding New Zealand-registered bank loans secured against housing is $282 billion.
“This is equivalent to 59% of all bank loans, which comprise 77% of bank assets. These bank assets make up the bulk of the country’s financial system.
“New Zealand’s approach towards monetary policy also supports house price growth.
“If inflation and employment fall below target levels, the Reserve Bank is required to use its tools (the Official Cash Rate, quantitative easing, etc) – which aim to lower interest rates – to get the economy back on track.
“What do lower interest rates do? Encourage people to take their money out of the bank and invest it in property or shares, driving up asset prices.
“High levels of immigration and a convoluted Resource Management Act, and thus supply falling behind demand, have also contributed to house price growth in recent years.
“With this combination of factors, it’s no wonder housing and land values, and thus households’ net wealth, has grown much more on an annual basis than median weekly income earnings (income from wages and salaries, self-employment, and government transfers).”
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Good news for those already on the property ladder
Good news for the diminishing share of the population who already own houses: Bank economists are predicting big price rises over 2021, reports Greg Ninness for Interest.
The current low interest rates are seen as good for both owner occupiers, and for property investors.
There is however a warning for those who are heavily indebted. Although interest rates are expected to remain low for an extended period, interest rates will eventually rise again, meaning there could be a crunch down the line.
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This content is provided for general information only and should not be relied upon or used as a basis for making any investment or financial decision. To the extent that any information or recommendations in this content constitute financial advice, they do not take into account any person’s particular financial situation or goals. As individual circumstances differ, we strongly recommend you seek independent legal and/or financial advice prior to acting in relation to any of the matters discussed herein. Neither Newland Burling & Co Ltd nor Provincia Property Fund Management Ltd nor any person involved in this content accepts any liability for any loss or damage whatsoever may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this content.