Lending Criteria

As lenders continue to make changes to comply with amendments to the Credit Contracts and Consumer Finance Act (CCCFA), along with increasing interest rates, we can expect to find that lending will become tighter for a period of time. For those who will still be able to get lending, this is great news as there will be fewer buyers to compete with in the property market. For those who won’t be able to get lending, talk to your mortgage adviser to see what you can do to change this. It could be as simple as reducing your credit card limit, or watching your spending for a few months.

RBNZ Restrictions

The property market is showing signs of slowing down, but if that changes, then it is likely that the RBNZ will tighten restrictions in order to reduce the risk to the economy. They could increase the loan to value restrictions (LVR) further or implement an interest rate floor (the interest rate that banks calculate your loan serviceability with). They could also introduce debt to income ratios (DTIs), although this is probably the least likely scenario as it will take a lot longer for banks to implement, so will take longer to have an effect on the property market. If the market continues to slow, then we are likely to see the RBNZ lift their restrictions (slowly).

Government Regulation

The regulations and tax changes the Government has imposed on property investors (particularly the removal of interest deductibility) has been worse for tenants than investors. Any further government regulation affecting landlords will increase the likelihood that some mum and dad landlords will be forced to sell, making the rent crisis even worse. We are seeing an increase in the number of renters, and a decrease in the number of investors (who provide over 80% of the rental properties in NZ). Any further reduction in rental properties will simply push market rents higher. This is of course helpful for landlords to cover increasing costs, but terrible news for tenants. As the majority of children living in poverty also live in rented properties, this will hit them the hardest. Increasing child poverty will obviously be seen as another failure by the Government, so it is likely that as rents increase further, at some point the Government will impose some form of rent control, increasing the likelihood for the next government to repeal these recent changes.

Sector At Highest Risk

Due to increased demand in the new build sector of the property market (caused by exemptions from LVR restrictions and tax changes), and continued shortages of building supplies causing inflation, we will continue to see rental returns drop in these properties as the prices will increase faster than market rents. As demand from investors for new builds decrease, watch this space for the “financial advice” companies that promote new builds to investors (because they make their money by selling them for the developers) to change their business strategy towards “property mentoring/coaching”. Larger developers will start to slow down, so that they can pick up the pieces when the smaller developers start to go broke. Unfortunately some buyers will find themselves in a position where they may not be able to obtain lending to settle the new builds that they went unconditional on, as lending rules tighten up and pre-approvals expire.

Property Values

In previous cycles we have seen that the main centres tend to perform better in economic downturns than the regions do. Small towns with shrinking populations tend to get hit the hardest. So, although some areas are likely to see decreasing values, the majority of NZ is more likely to see a plateau. However it is important to remember that property investing is a long-term game, so don’t make the mistake of trying to time the market, or you are likely to look back with regret at all of the opportunities you missed.

Remember that the best way to reduce the risk in the property market is to increase your knowledge, and surround yourself with a team of experienced professionals.

Property Apprentice is 100% NZ owned and operated, and is NZ’s leading property and real estate investment coaching program. With their lifetime coaching support program, and no vested financial interest in any property you purchase, they are there to help you to reach your property investment goals.