DECEMBER 2020

Market Update.
Keeping you up-to-date with market changes.

We have been monitoring the impact on the New Zealand property and mortgage market during these changing times.

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Rising property prices

How fast might prices rise on average in the coming year?

Now that the LVRs are back in place voluntarily, are we likely to see the recent extreme heat coming out of the housing market? 

What lies ahead?

Yes, in that although November will still likely show a sharp price increase, for December onward monthly price gains below the 3.5% of October and 2.6% of September are likely. How fast might prices rise on average in the coming year? In the six months leading into March this year prices nationwide rose on average by 1.1% a month. In the seven months since April prices have risen on average by 1% a month, though with falls in April and May and rises in other months. In all probability, on average in the coming year prices will again rise by about 1% a month, though with a risk that gains are higher than that.

Prices will keep rising despite the immediate return of minimum 30% deposits for investors and 20% for owner occupiers for a great variety of reasons. One is that interest rates will remain at extremely low levels. This not only makes the purchase of a house highly affordable for owner occupiers, but it also nudges more and more investors every day toward doing something more with their low risk bank term deposits.

Retirement
There is currently about $200bn sitting in household bank accounts. Most of that money will stay there and not leave the banking system. But the low returns are going to affect people’s behaviour. A year ago, the average two-year term deposit rate was 2.6%. Now it is 0.8%. Over the same time period the average two-year fixed mortgage rate has fallen from near 3.6% to 2.5%.

Term deposit rates have fallen much more than mortgage rates, and that is why the drive by investors to diversify away from bank deposits will continue. But there are more than just low current returns which will be encouraging investors into other assets. We have yet to see discussion of an underlying change in mindset towards funding one’s retirement, but as awareness of this factor grows, it will drive even more property purchasing.

We Kiwis have traditionally viewed the use of invested funds in retirement as involving living off the income of the assets we might have, be they corporate bonds, bank term deposits, or some rental property. But that approach is not going to be possible in the future outside of property because cash returns on assets will average much lower in a permanently lower interest rates environment.

People are going to have to consciously plan to reduce their wealth far earlier in retirement than they would have been thinking. That is, starting in their 60s rather than their 80s. This is a big change not yet being discussed in New Zealand, but the implications are strong.

Capital gain
Money kept in a bank delivers zero capital gain. In fact, after inflation the wealth will decline, with further reductions caused by taxation of earnings. Property however delivers a capital gain which over the past 28 years has averaged 6.8% per annum across the whole country. Going forward that average is likely to be closer to 5.5% given that we have ended a period of structural declines in interest rates and growth in house supply is better now than over the past three decades and likely to remain relatively high. This capital gain is likely to continue in retirement, and that becomes important to people who still seem to place value on passing something on to the next generation and maybe the one after that as well.

 

Anticipated mild capital gain in retirement will assuage concerns about wealth declining as people age. Facilitating drawdown of this capital and retaining the ongoing gains will require much deeper development of the reverse mortgage sector, to the point where the interest rates charged do not prove such a persuasive argument against pursuing that course as is the case now.

Falling prices
The upshot of relevance for the next few years is that investors will continue to favour property, and they will continue to favour it even when the brightline test is inevitably extended from the current five years to at least seven years and probably ten years. Personally, I had expected such an extension to already have occurred by now and the move does look overdue.

Will the government go further than that to try and contain the pace of house price increases? Probably, but they will not make any change large enough to cause prices to go down. Falling prices might please a few first home buyers. But banks will lift deposit requirements if prices are falling, taking home purchase even further out of reach to those young buyers.

Plus, falling prices will hardly be greeted positively by recent young buyers. And all other property owners will feel some disquiet about their wealth declining. Therefore, all the government will ever try to do is slow the pace of price increase, not reverse it. In fact, the Prime Minister has already noted that she will be taking into consideration this term the desires of the over 400,000 people who switched in the most recent general election from National to Labour.

These people are probably property owners and the PM will want to retain as many as possible come the 2023 election.

Rent
Could the government tinker with the ability to deduct interest payments from rent before calculating taxable profit from property investment? That would be an extremely big move and if they did it would probably be spread out over a number of years. There is a risk that such a move would cause selling by investors which has never happened in the past in response to other moves which reduce landlord returns, such as ring-fencing. But the big, big problem for the government is that the average occupancy of a rented property is higher than an owned one, and if the home ownership rate were to rise as some investors sell, more people would find themselves unable to secure accommodation.Rents would rise and there would be even more pressure on the state housing list which has already tripled in size over the past three years.

Over the coming months we are likely to see both Treasury and the Reserve Bank offer insight into measures which might go some way toward slowing the pace of average house price increase in coming years. But in our new environment of extremely low interest rates, an expected migration boom once the borders reopen, and a coming shift in how people perceive their technique for funding retirement spending, any changes made are unlikely to do more than mildly ease the average pace of house price gain rather than reverse it.

By Tony Alexander

International Finance Awards 2020

So proud to be recognised with this prestigious award.

We would love to thank our loyal clients all over the world for their nominations.

International Finance Awards 2020

The year 2020 is where we really stood by and showcased our client for life philosophy, the culture cornerstone of the Super City Team. Our focus with the events that followed COVID19, was to nurture and guide our clients through the adverse financial situation they found themselves in with the nationwide ‘lockdown’ in New Zealand. This was a devastating time for business owners who could not operate and also the multitude of quick fire redundancies.

 

Assisting our clients through this time required us to work day and night for weeks on end, but being there for our clients during this difficult emotional time is something we will never forget, with bonds and relationships forged even stronger than before. The on-going management of our clients mortgages is our passion, through life’s ebbs and flows. Thank you so much, we are very blessed.
Joel Oliver, Managing Director, SuperCity Mortgages

YOUR PERSONAL INSURANCES

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Recently, with the current environment, people are reaching out and telling us they’re worried about a number of things.

Giving you peace of mind

Our clients have said they are:

      1. Stressed about their financial circumstances.
      2. Concerned around potential changes in their personal health.
      3. Uncertain if their existing insurance fits their current needs, or anxious because they’re financially exposed with no cover.

      Don’t suppose any of these are an issue for you? Part of looking after you is to make sure your lending commitments can be supported in the event your circumstances change. Jaime and the SuperCity Insurance team have been busy helping clients with financial modelling.

    • Clients are often telling us they have more clarity on where they’re at right now because the team can show them a visual snapshot of their world over Zoom. The team model out scenarios that might be a concern for clients, such as ‘what if my income drops?’, and explore ways to help reduce debt and work on building and protecting their lifetime cashflows. Check out their Financial Modelling Demo. If you would like some help, please contact Jaime directly.

Jaime James
Managing Director, Principle Insurance Adviser
M 021 527 069
E jaime@supercityinsurance.co.nz
Level 26, PwC Tower, 188 Quay Street, Auckland 1010

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Have a great day and we look forward to helping you achieve your financial goals and plans.

SUPERCITY MARKET UPDATE ARCHIVE

Up-to-date market news.

See our archives to catch up on previous issues.
Market changes DEC 2020
How fast might prices rise on average in the coming year?

although November will still likely show a sharp price increase, for December onward monthly price gains below the 3.5% of October and 2.6% of September are likely.

read more
Market changes Oct 2020
25 Reasons why house prices are rising

Treasury warn that house prices might fall 7% from their current levels. But chances are they are much too pessimistic and the recent rise in prices will continue.

read more
Market changes August 2020
Keeping you up-to-date
with market changes

We have been closely monitoring
the impact of COVID-19 on the
New Zealand property and mortgage
market again, where things are
moving fast.

read more

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Explore our previous updates here Market Update Archive