Blog: The Landlord says...

The official cash rate cut is good news for borrowers. What’s more the announcement from the Reserve Bank gives home owners and property investors a clear idea of the best borrowing strategy.

The Reserve Bank, on Thursday, lowered the OCR 50 basis points to 2.5%, the lowest the rate has been since it was introduced in March 1999. It has fallen dramatically over the past year, from historical heights of 8.25%, where it sat for 12 months from July 2007, to July 2008 when Bollard’s vigorous cutting cycle began.

The key messages for borrowers to take out of the latest cut is that the rate is likely to stay at current levels until at least the end of 2010 and may even drop further before then, and that floating and short-term fixed rates are the best option at present.

“We expect to keep the OCR at or below the current level through until the later part of 2010,” Reserve Bank governor Alan Bollard said.

Since the previous OCR cut on March 12, many borrowers rushed to fix for three, four and five years in the fear long-term rates had already bottomed out. This will prove to be not such a good strategy.

It was an odd-move by many as long-term rates had risen to be near historical averages and that picture didn’t fit into the current lower rate environment.

At some stage, maybe quite soon, these rates are likely to fall.

On paper fixing for the long term may have looked attractive, but in reality it will prove to be the wrong move.
Bollard reinforced the best option for borrowers this morning, which is rolling over on six-month terms.

After a couple of weeks with no rate movement from the main banks, don’t be surprised if the banks become more aggressive, as the economy shows signs of stabilising and a push for an increase in lending begins.

Following this train of thought, banks will also have to loosen lending criteria if the level of lending is to go up.

The main banks’ current short-term rates are nearly half of what they were this time last year. Floating rates range from 5.99% with Kiwibank, to 6.49% at Westpac.

Six-month rates currently range from 5.39% at Westpac, to 5.70% at Kiwibank and ANZ/National. One-year rates are also currently well below 6%.

Since the OCR announcement the only bank to move rates is Westpac. It has cut its six-month rate 40 points to 5.39%.

To check and compare rates Click here

Making sense of what is happening to house prices has to be one of the most difficult things for home owners and investors to do.

Firstly there is a wealth of data, mainly from QV and the Real Estate Institute (REINZ), which you can use to interpret yourself. This is raw data on sales which you can use to draw your own views. We collect the REINZ data and provide some tools to track and compare what is happening here.

Over the top of that there are numerous commentators, some expert and some not.

A couple of pieces of news this week caught my attention and are helpful in understanding these two groups of information.

The first is a piece by Alistair Helm which compares and comments on the differences between QV and REINZ data. Each organisation collects and reports things differently and often they can seem to tell differing stories.

The second piece comes from BNZ chief economist Tony Alexander who summed up well in this week’s newsletter, his thoughts on some of the “commentators” who end up in the media and why they seem to have gone quiet. The key reason they have gone quiet is because the market isn’t tanking, but showing signs of recovery.

I have included some of Alexander’s views here as they are important:

“One doesn’t hear so much now from those who have been picking a 40% fall in NZ house prices. It has always been a mystery to us how one could generate such apocalyptic forecasts.

“For another individual the reason is probably that they have been predicting a property market collapse since at least 1988 when one first heard them speak.”

I agree with Alexander and suggest that people need to understand a bit about people who are making forecasts, what their experience is, but more importantly, what their motivation for commenting is too.

One can argue bank economists are always saying things to please their masters and help drum up business.

My experience is that bank economists give fair and frank assessments. They aren’t out there saying things just to help drum up business and they aren’t just glorified PR merchants.

We’re in that busy monthly period where various firms report on activity in the property market over the past month. Looking at what has been put out so far one wouldn’t be too far wrong to throw their hands up in horror and say “what’s happening?!”

Many of the reports are quite positive, including the latest from REINZ and Barfoot and Thompson, but then others like QV’s report are a bit gloomy. It is saying that house prices are down around 9% on a 12-monthly basis.

This report is worth pondering a little more for two reasons. One is that its numbers are done on a rolling three monthly average. Secondly, in this part of the cycle, where there are a lot of different trends happening, the overall average number can be a little misleading at a headline level.
When you dig into the report you will find some areas and house types are down, while others are up.

One area, outside of these reports, that is attracting interest at the moment is commercial property. As Good Returns reported this week it seems that property syndicates are making a bit of a comeback.

These syndicates are proving attractive to a range of people including those dissatisfied with the returns being offered on bank deposits. Commercial property like the syndicates on offer have returns of around 9% with monthly interest payments that are certainly appealing. But as explained here there are some issues investors need to be aware of.

The people who are putting these syndicates together seem to agree there is a window of between one year and 18-months where the conditions will be ripe for these syndicates to be established. The conditions which are helping are low interest rates, good yields and a group of existing owners who want to quit their properties for a variety of reasons.

Call me contrary. First it is great to see there is life coming back into the property market. Those of you who follow The Landlord will know that I have been suggesting for some time now that the market isn’t dead and it isn’t going to fall 30%.

There are just too many factors to suggest that there is a level of support which will keep the market and prices from crashing down.

To get a 30% fall in house prices would need an unheard of economic disaster. While it is tough out there, it’s not that bad, nor looking like being that bad.

However, I would suggest that people don’t get carried away with this little bit of positive news we have seen in the market.

Previously I have argued one of the biggest risks is unemployment. As more and more people find themselves out of work, there will be increasing downward pressure on the property market.

The other factor that I have increased my weighting on is banks and finance. It is no secret that banks and their tight, tight rules around lending are hindering the market big-time. That came through loud and clear in the Landlords.co.nz/Mike Pero survey of property investors this week.

What is also concerning is that banks just aren’t lending much. Good Returns has reviewed the latest lending numbers for the period to December 31. There are two surprising findings. Groups like ANZ National have cut their lending activities back significantly. Meanwhile, Kiwibank accounted for the large majority of new lending in the quarter.

It has done such a good job with acquiring new customers that it is now facing a service issue. It seems that it too has reached a capacity point and it will join the big banks on pulling back from new lending.

That means there aren’t a lot of places left for people to find money to buy property. This factor is likely to have a bigger impact on the market than previously thought.