It’s not about the cost of money; it’s about the availability of money!
And right now, money has become less available.
Here’s the bad news first:
– Banks have been restricted recently by how much they lend by the regulators (like the Reserve Bank of New Zealand a la LVR restrictions) and the ‘Responsible Lending Code’.
– Banks have been restricted by their shareholders via higher capital reserve requirements. They’re not keen on any more exposure to the property market as they deem it higher risk.
– Banks don’t need to lend anymore new money (credit growth) to increase profitability, they simply dial up their margins (which they are now doing).
– Unofficially, we’ve been in deflation for some time now. Interest costs are not measured with CPI so this has been missed.
Low, or negative inflation combined with historically low and persistent interest rates have indirectly led to asset (real estate) hyper-inflation.
Here’s the good news:
– Money has never been as cheap as it is now, and as we’re at the floor, now’s the time to lock in for the long term if you’re a borrower.
– There’s time for the Reserve Bank to ease off on restrictions. They should, or they could be partly responsible for the instability they are trying to prevent.
– There’s time to get ready but don’t wait until the Herald starts talking about this! Top up your mortgage now vs later; if it’s right for you, consider fixing for 4 or 5 years; make sure you’re adequately insured (especially for redundancy).
So what’s going on?
1 – Since June, the banks don’t rely on income generated from overseas people (including Kiwi’s).
2 – Banks have reduced ‘interest-only’ terms on lending – they want you to repay your lending rather than effectively ‘rent money’.
3 – Banks are far less interested in providing lending unless there’s clear evidence of purpose.
4 – ‘The Responsible Lending Code’ has raised the bar of lending eligibility in that stated expenses will be taken into account by banks rather than just income.
5 – 60% maximum lending is limit for property investors recently, and the start of capital gains tax (The Bright Line Test) was introduced last year.
Why this needs to be discussed? – Previous market corrections are usually highly correlated to a tightening phase in credit. Less credit in an economy chokes growth. Added to this effect currently is fact that inflation is not only close to 0%, it’s actually likely negative in reality (the CPI ‘basket of goods’ does not include interest costs). In deflationary environments, businesses shrink back and consumers wait for better deals, so spending decreases. This ultimately could lead to a death spiral.
First home buyers have been locked out, people trying to provide for their retirement via property investment have been vilified and locked out, yet individuals still able to access funds outside of main NZ banks (most likely from overseas) are still the most active group purchasing property.
Two things need to happen:
1 – We need the regulators to step back – Banks can get a little carried away at times yes and some regulation is needed but I think RBNZ has gone too far. Trading banks are cautious at their center, and currently they’re self-regulating. This could likely stabilize the property market on its own. At the moment however, the regulators are like a helicopter parent, ready to step in and deal to the playground bullies all too quickly without first letting them sort it out themselves – unfortunately the ‘bully’ is your best friends kid and you both know they did nothing wrong . First home buyers and property investors are not the people to target with regulation.
2 – Address the Elephant. Everyone’s too scared to address the real bully. Do you know who it is? Until we start to address the elephant in the auction rooms, we’ll punish all the wrong people. Kiwis are pretty laid back birds but when pushed too far, there could be beaks in eyeballs and worst case, the flightless bird may get on a plane and bugger off!. Our children will never be able to afford property unless you do something about it. Keep quiet and it’ll cost you when you’re kids come to you at your time of greatest vulnerability (your retirement), and ask for help in purchasing their first home for $2.5m!