Keep Calm in a Cooling Market
It’s cooling off, and we’re not just talking about the weather, says Mortgage Adviser Nathan Miglani of Loan Market Paramount.
As you know, the property market has experienced a downward correction in recent months, with sales slowing and values stalling. Though not a welcome change for sellers, it’s not the end of the road, as properties that are priced correctly are still selling, including in multi-offer scenarios. It’s worth remembering that those who bought a few years ago are sitting on huge capital gains, meaning they’ve done well out of owning their home even if prices are not as overheated as they were in 2021. If the affordability is right, then selling and buying property is still a good idea!
Despite the impression you might get from the media, the state of the market is not all doom and gloom. In fact, here in New Zealand, we are currently enjoying employment levels that are at an all-time high. So why is the market cooling despite such strong employment? When I spoke to economist Tony Alexander recently, he mentioned that in New Zealand the economy is driven by property. Kiwis love to buy and sell real estate. So the slowdown we’re seeing really is primarily due to what the interest rates are doing. And, as we all know, interest rates are going up.
The current OCR (Official Cash Rate), which is the rate that banks borrow money from the Reserve Bank – adding a margin before lending to you and me – is 2 per cent at the time of writing, but this is expected to go to 3 or 3.5 per cent, meaning interest rates will continue to rise in the medium term.
Rising interest rates can have a big impact on homeowners. When you were paying $400 a week for your mortgage last year and now you’re paying $650, you’re going to feel it. I recently worked with a client who had two investment properties on a fixed-term mortgage at 2.49 per cent. When it came time to renew, the new rate was almost 5.5 per cent, meaning the interest rate had more than doubled.
For many people it’s going to be a case of riding out the next six to nine months. My advice would be to watch your spending. Cash is king in times like this and it’s important to have money in the bank. Keep calm and plan ahead, so if it looks like things are going to get tight, you’ve got time to react.
Many economists are saying they won’t be surprised to see interest rates continuing to rise for some time yet, with 6 to 6.5 per cent likely before Christmas. They believe it’s highly unlikely that interest rates will rise above 7 per cent, though, as at this point, current mortgages would simply not be affordable for most people and the government would step in.
This market direction will not continue indefinitely. Some commentators are picking that once interest rates have peaked in early 2023, they will likely settle and start to ease again in the second quarter. Personally, I think that if things continue as they are, then restrictions on LVRs (loan-to-value ratios) will go by the end of 2022. Once they’re gone, momentum will be back in the market.
I have fixed my own mortgage for 18 months to ride out this period. Alternatively, if your lending is under $450,000, you could look at splitting between one year and 18 months.
Everyone’s situation is a little bit different, so if you need help deciding what to do, please don’t hesitate to get in touch.
Years of experience mean Nathan Miglani knows how to give you the best possible chance of success if you are thinking of buying or building a property. Whether it’s a first home, next home, rental or a development, Nathan and his team are passionate about helping you through the process and they’ll find the best deal for your unique circumstances.
