We Thought You Should Know…
It helps to understand a little of what’s happening in your outside world, to run your inside world a little better. There’s so much ‘noise’ with traditional media outlets so it’s hard to know what’s actually real – Here are two changes happening soon that we think you should know about, as it could affect the way you run your household – financially speaking.
The property market will correct…nationally.
I believe that by the end of this year we’ll see very solid evidence of a housing market change – we’re seeing early evidence of this but I’m talking about something a bit meatier. Now I can spend a bit of time speculating as to what the triggers are for this, or I can just call out a pattern that’s been well observed for over 50 years = every 10 years with a 7 on the end of it things change direction: The optimist turns pessimist; businesses contract instead of expand; your promised promotion turns into the dreaded redundancy; the big city experiences high net migration and outside regions observe a net loss in population. It’s a season that’s all, and right now as winter rolls on in, it’s hard to imagine that in just 9 months we could be in the throes of a steamy hot summer. It’s hard to imagine this is coming when things are still rosy, but it will change.
I’ve been saying very loudly and rather controversially for about 5 years, that nationally, as soon as Auckland slows down, the rest of the country will experience negative house price inflation big time. What you’re seeing now is the tip of the iceberg.
For several years first home buyers and young families ‘exited’ Auckland to get a better lifestyle. During the same period their baby boomer parents cashed out of Takapuna, Parnell and Ponsonby to free up capital in time for retirement. Now they’re out, it’s really hard if they ever wanted back in – Hopefully if the economy changes direction they can still find good employment outside of the city (and for their parents good medical attention for later on). I personally think living outside of Auckland would be an absolute dream – so much nicer than Auckland (and I love Auckland!) – The risk with property outside of Auckland lie in the assumption that house prices behave the same throughout NZ – they just don’t, and we’re about to see this confirmed.
So if you’re thinking you can sell a property anywhere outside of Auckland for good money in the next few years – think again. All housing markets outside of the Auckland area are a derivative of the Auckland market – when Auckland does well, shortly after the holiday homes, and regional areas do extremely well. If Auckland catches a wee cold however, the rest of the country could catch Creutzfeldt–Jakob disease (remember mad cow?!).
So what’s the take home from this? If you think house prices are crazy now in Auckland– just wait. If you can, you should buy a property in Auckland (or another one if you can), as close to the city or good transport routes as you can. If you’re thinking of selling to escape the rat race, just hang in there for 1-2 years first, and then make a decision.
The OCR (official cash rate) is a distraction.
No longer is the OCR going to be an accurate predictor of where interest rates are going – so why do bank economists refer to it when discussing housing interest rates? The real story is this: Banks are being pressured by the ‘Reserve Bank’, and their parent banks, to increase margin and decrease credit growth. On top of this they’re scrambling for cheap funds, both offshore and at home. What does this mean? When you want money next time around for that renovation you’re half way through, it could get rather tricky. When you decide to resign and become a contractor, it could get rather tricky too. The current mortgage servicing costs, could also cost a lot more when your cheap ‘teaser rate’ of 4.05% expires. This is no problem if you have surplus income at the moment and are adequately insured personally, but what happens if things are tight already?
For a while we’ve been trying to encourage borrowers to convert to a 5 year fixed rate and if you’ve taken head of this, then good on ya! If not, you should do some modelling now on how it could look and feel like when your mortgage rate increases by about 1%. Longer term we see things settling down and even longer I’d still suggest that interest rates could converge to 0%, but in the next 3-5 years I really don’t think anyone knows what’s going to happen. Having said all that though, it shouldn’t be about speculating on where rates are going to go, it’s actually about risk management.
So what should you do? Have the discussion with your adviser now about how to break and fix long – your thrifty nature may battle with your cautious nature here, but this is important if you want to get ready for what is potentially right around the corner. Another ‘prepping’ idea is to start saving the equivalent of what the difference in interest rates will be – try to ‘feel the weight’ if you like of the world to potentially come. When we meet with our clients regularly we do this for free, so if you’re one of them get in contact soon if we haven’t already spoken – we can talk about this, and other strategies that may work well for you.