Mortgage rates have been low and falling for So long now that it is easy to be lulled into a false sense of complacency – Sandy Richardson

The auckland property market seems to have gone off the boil for a number of reasons. Investors are finding prices too high and consequently yields too low, with many taking a wait-and-see approach before committing to further purchases.

➤ Reserve Bank restrictions on the minimum amount of home loan equity required to buy an investment property in Auckland have channelled investor funds into other regions, pushing up prices and prospects for capital gains elsewhere.

➤ The two-year ‘bright line’ test for taxation of capital gains on property transactions appears to have set back the trading activities of high turnover investors.

➤ The requirement for offshore investors to obtain an IRD number for transacting property in New Zealand has created a backlog of applications at Inland Revenue. The backlog is temporarily freezing some foreigners out of buying and selling real estate, which particularly impacts on Auckland.

➤ Interest rate uncertainty has reared its head again because of an increased belief in markets that the US Federal Reserve is likely to resume raising interest rates in 2016 rather than hold off for fear of deteriorating global economic conditions. Increases in American interest rates have global effects. They filter through into mortgage interest rates via international money markets because banks use offshore borrowing to fund some domestic lending.

For all these reasons, now is a good time for property investors to take stock of the situation and perhaps consider some more conservative options, assuming they are not enticed by the rally in property prices outside of Auckland.

Strategies for Uncertain Times

In terms of investment activities, a few strategies present themselves as attractive when the wider market outlook is unclear. One option is to increase equity by renovating to modernise properties already owned.

This is the classic ‘do up’ approach to boosting property portfolio value, which in the short term can generate higher rental income and appeal to better quality tenants, while in the longer run it can position the property for eventual resale at premium value.

Another strategy, linked to the ‘do up’ approach, is purchasing properties with future potential to unlock. These can be cheaper properties with renovation and/or subdivision prospects for later on when the time is ripe.

In relation to the home loan equity limitations imposed in Auckland, buying lower-priced properties with future potential may be a smarter route to higher future portfolio value than purchasing fully-priced properties dependent on passive capital gains when the market resumes an uptrend.

Thinking Strategically

On the financing side, with the potential for an interest rate upturn looming ahead, it's wise to think strategically about how to structure mortgages to reduce the risk of future cost shocks. One strategy to diminish this risk is interest rate averaging, where investors split the terms on their mortgages to mitigate the impact of interest rate increases later on.

With this technique, investors ‘ladder’ their borrowings by taking out multiple fixed-rate mortgages with maturities of lengths sufficiently different so that in the future their loans won't be exposed to potentially sharp jumps in mortgage rates at the same time.

Interest rate averaging can be especially prudent for property investors who have been aggressive with their borrowing while interest rates have been historically depressed.

Mortgage rates have been low and falling for so long now that it is easy to be lulled into a false sense of complacency.