Mortgage Affordability, WInter 2010
Two areas we are talking about here, Affordability and Banks easing up at high LVR's. Specifically 90% advances much easier so maybe.... With Mortgages more affordable and 90% advances becoming easier, now is a great time to buy...
This is my take on a couple of recent articles, however what most ‘pundits’ seem to miss is that property should always be a long term investment and everyone actually does need somewhere to live!
Mortgage affordability is set to improve through July/August as average two year mortgage rates have dropped slightly so house prices are expected to remain stable.
The national average house price rose 0.7 per cent to NZ$352,500 in June from May, which is down around $8,000 from the record high in March.
Our Affordability Report measures affordability nationally and regionally, taking into account house prices, interest rates and incomes.
Affordability improved significantly in Auckland, Northland and Queenstown as house prices dropped, but worsened in Christchurch where prices rose.
Southland, Otago and Manawatu/Wanganui were in the best position whilst the Central Otago Lakes region continues to be the least affordable.
Levels of affordability hit in early 2007, near the peak of the housing boom, were at their worst as interest rates were a lot higher too. People still bought and sold property!
In other words now is a pretty good time to buy.
Nationally affordability has eased with a mixture of July fixed mortgage rates having dropped and house prices being subdued. These falls in rates are not a result of global price cutting, more local Banks cutting margins.
The Reserve Bank lifted the Official Cash Rate to 2.75 per cent from 2.5 per cent on June 10 and economists expect it to increase it again to 3 per cent on July 29.
Many home owners are still on fixed mortgages, but an increasing number are choosing to float given floating rates at just under 6 per cent are still cheaper than longer term fixed rates at around 7 per cent. Due to reducing medium term fixed rates and the possibility of rising floating rates a lot of people are mixing floating and fixed.
The average 2 year fixed mortgage rate, which has been among the most popular with borrowers in recent years, was flat at 7.19% in June. Since the end of June the average two year fixed rate has dropped to 6.98%, this reduces the monthly cost but not by much.
House sales volumes flattened off in the last three months of 2009 and early 2010 as first home buyers and rental investors stayed away. The OCR hike in June and the May 20th budget moves to remove depreciation as a taxable expense for property investors has seen house sales drop a further 20 per cent during May and June. The reality of the Budget is that 90% of Investors will pay less than $40 a week more in tax and most of this will be passed on in rent hikes. The number of sales is expected to remain flat until Spring so Buyers actively looking can expect to do a ‘deal’. I always advise getting a pre-approval first, this adds to the bargaining power later on.
Affordability is hardest in Auckland, Wellington, Christchurch, Hamilton and Tauranga for those on a single income, but homebuyers in smaller provincial cities will find home ownership much more affordable.
On a positive note I’ve noticed the Banks are easing criteria, particularly in high 80% plus loans, its all depends on track record and servicing. In the last month or so nearly a third of my business has come from the UK or Australia, so maybe they know something……….
Finally regulation was proposed for the Mortgage and Insurance industry, that has now changed (it will NOT be regulated!) but I will be sitting my exams soon to add to those gained in Europe, I still feel its good knowing you are working with a qualified Professional!
Kind regards
Jeff Royle
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The "More Money In Your Pocket" Budget
The 2010 Budget today included the most significant Tax reform in 25 years and here's how it affects the New Zealand property market.
The two key areas in this Budget are:
- The reduction of Income Tax rates that will improve the Servicing Calculators that most Banks use, should mean a bit more flexibility in Lending. For those in the upper income brackets, the differences could be significant and so will be reflected in more activity in property over $700,000.
- New Zealand is the most tax friendly nation anywhere in relation to Investment Property and this continues after this Budget.
- No Stamp Duty
- No Capital Gains Tax for genuine Investors
- Losses can still be off-set against income although Depreciation levels on the building have been cut
- Depreciation levels have not been reduced for Chattels
- The only real change in losses being offset is where that offset triggers a benefit, such as Working for Families
To see how the Budget affects you click here www.taxguide.govt.nz
On balance this Budget is in line will all expectations and means that many people 'sitting on the fence' can now push forward with their investment plans.
For a full breakdown on the Budget click here www.tvnz.co.nz
For independent advice on Property lending, please call me on 0508 477324
Hope you found this helpful and remain, as I do, positive about the future of the NZ property market.
Regards
Jeff Royle
Mortgage approvals getting easier
Lending continues to be tight with all Banks although I notice some thawing recently in the high LVR market with more Banks now allowing over 80%, with strings. As always it pays to use a broker for these types of mortgages as there is a huge difference in the way the Banks price. Some charge large Mortgage Insurance premiums whilst others load the interest rate to reflect the risk.
For people with any form of poor credit, however caused, the Banks are not interested. Same goes for those unable to prove all income. The non-Bank sector used to cater for this but now there are only a couple of Lenders left and a few finance companies in the market, albeit at lower LVR's and higher rates. I have settled more loans this year in this sector so far than in the whole of 2009. Construction loans are also on the up as sections become more affordable.
House prices are within 5% of the peak in many areas, that's good as far as the owner is concerned, no so for the buyer! What has changed dramatically is the volume of transactions which is really low and no sign of improving soon. Too many properties on the market chasing too few buyers. This in part goes back to the first paragraph as many potential Buyers cannot obtain finance so creating a backlog of people wanting to purchase, after all we all have to live somewhere either paying rent or paying off a mortgage!
Investment property is a real dilemma at present. The Government sparked a major panic in February by announcing possible tax changes and despite all the efforts of those 'in the know' this market is practically dead at present as people wait on the fence until after May 20th Budget Day. What we do know is that there will be no Capital Gains Tax and no Stamp Duty and by most reckoning the worst case is an extra $45 per week in costs for the Owner, these will simply be passed on to the Tenant. No matter what happens New Zealand will still be the most property investor friendly place on Earth.
With the property and mortgage market continuing to evolve it pays to keep in touch with what's going on regularly, anytime you want to speak about a mortgage or just a comment on the market, please either Skype or pick up the toll free phone 0508 477324, I'm here to help!
Look forward to helping out.
Jeff Royle
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Tax Changes... what Tax Changes?
John Key 9 February 2010 "In particular, we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for taxing residential investment properties. These decisions were taken after detailed consideration of the pros and cons."
"Since there is only a certain amount of land, and it can't be moved overseas, a land tax appeals to economists as an efficient way to raise revenue. However, a land tax is effectively a lump-sum tax on people who own land at the time the tax is introduced, would only fall on people who hold their wealth in one particular form, and would create cash flow problems for many landowners, especially those with lower incomes.
An RFRM is another tax that, while having some conceptual appeal, would also create cash flow problems for taxpayers. A property owner could have a very sizeable tax bill each year under an RFRM, but little or no ability to pay it, except by putting up rents.
A comprehensive capital gains tax extends the tax net and is highly progressive. However in the Government's view it would make the tax system more complex to administer and comply with, and may encourage taxpayers to hold on to assets longer simply to avoid tax.
These new taxes are therefore off the table.
However the Government does believe there is a gap in the current tax system around property investments where income is being derived but, in aggregate, no tax is being paid - in fact the Government is actually losing revenue in this sector.
We will therefore be making changes to the way property is taxed, which will result in increased Government revenue and more fairness for taxpayers. These changes will be announced in the Budget.
The Government is also carefully considering a modest increase in the rate of GST, to no more than 15 percent."
What does this actually mean?
- No land tax
- No Capital gains tax
- No risk free return for taxing residential investment property
- Tax losses deductibility. This is where the main changes are proposed, note there is no mention of restricting tax losses on LAQC's. Reduce Building depreciation from 3% to 0%. Depreciation loading of 20% to be removed. Quarantine rental losses and restrict tax losses to $10,000
- Tax cuts across all income groups
- GST to go up to 15%
John Key has indicated that if he takes away certain benefits , then there is some give back in terms of personal tax cuts. The net cashflow effect would be compensated, if you lose some tax losses you will gain from personal tax cuts.
However what level of tax losses that will be affected is still uncertain until the budget is released in May 2010. What it does mean though is that New Zealand, even after May 2010 will be one of the lowest property taxed Countries in the world.
Prices up but volumes down
The average house price in New Zealand in December rose to $360,000, up $5,000 from November.
Although prices were up, the number of sales slowed to less than 5000. Peter McDonald, president of the REINZ said that the rise was due to a shortage of properties for sale. This is hardly surprising given the number of new properties being built (or not).
'It is concerning that less than 5000 residential properties sold in December, but the sale time of 33 days is one of the shortest for the year, which goes to show those properties sold were well sort after' Mr McDonald said today 18th January.
He also said that house prices had definitely stabalised and appeared to be gaining slightly, which can only be a positive sign. The average price was 1.4% up on November and 9.6% up on the previous 12 months (then $328,000)
The REINZ figures show 4957 houses sold in December, 655 up on December 2008 but down 640 on December 2007. In November 2009 6056 houses sold.
Despite the rise the REINZ monthly housing index actually fell 0.9% but for the previous three months rose 2.8%. Confusing as these figures are it seems that house prices in urban areas are within 5% of their peak. Some regions are faring better than others and the rural market is still quiet.
House prices are on the way up but sections continue to stagnate as a result of poor funding from the Banks. Another factor is people are adding up the section cost, cost of build and fees and the figures just dont add up to a realistic final value.
For Auckland the figures are unchanged from November in terms of price and 1646 houese sold in December compared with 2192 in November.
Roll on 2010!
Roll on 2010!
2009 will probably go down as one of the most difficult years in Mortgage and Property terms. Many Brokers shut shop and Lenders made things very difficult for those with small deposits and the self employed. Mortgagee sales reached record highs but the year ended with property prices in many areas at 2007 levels.
2010 will bring a lot of change not only in the Mortgage world but also in the Real Estate world, more on that in a while.
From a Lending perspective the market has tightened further but this week two Banks have re-entered the 90% market so the choice is getting better and so criteria should ease - it needs to! Lo Doc continues to be difficult which restricts many Self Employed people from buying. We have seen many clients this year with good deposits, great track records but because the Accountant does what he is paid to do, the Financials don't reflect the true income so the Banks say 'no'. This will ease in early 2010 with not only the Banks looking at high deposit Lo Doc business but a couple of Specialist Lenders poised to return to the market. This is good news all round. Entries at Baycorp (now Veda Advantage) also reached record highs and Mortgages for those with adverse entries can be done, at about double the interest rate charged by the Bank in the initial years. This again should change next year as more Lenders are due to re-enter the New Zealand market.
Regulation of the Mortgage Industry takes effect in October/November 2010 following Europe and Australia. Many think this will reduce further the number of Brokers but increase the level of protection for the Borrower. I for one welcome this, as a Mortgage is probably the most important financial decision we will make and it is important that the advice given is correct. This includes mortgage finance, investments and insurance.
One of the biggest changes in years in the Real Estate business took effect in November with the new REAA regulations coming into effect but there is more to come.
OCR remains at 2.5%
The Reserve Bank today held the official cash rate at 2.5% but all the talk of continuing low rates has gone.
He dropped his insistence that rates will stay low until the second half of next year saying the economy was returning to growth.
"Conditions may support beginning to remove the monetary stimulus around the middle of 2010," he said.
The central bank will have to walk a fine line over stoking economic activity without over-egging it as inflation begins to speed up ahead of Bollard's expectations and the housing market continues to show signs of emerging from the lethargy of the past 18 months.
The Reserve Bank's Expectations Survey found respondents see inflation accelerating to a 2.6% annual pace from 2.3% over the next two years. Prices unexpectedly rose in the third quarter, with the Consumer Price Index increasing to an annual 1.7%, according to government data, ahead of the 1.2% pace forecast by the RBNZ.
"Domestic inflation is proving very stubborn to unwind," ASB economist Jane Turner said in a report before the announcement. "As the local recovery has progressed, the downside risks to the inflation outlook have diminished rapidly."
Before today's statement, traders had been betting the central bank would hike the OCR by 1.63 percentage points in the next 12 months, based on the Overnight Index Swap curve. The scale of expected tightening has declined in the past month as Bollard reiterated the divergence of monetary policy between New Zealand and Australia, where rates have been rising for the past three months.
A NEW TRANSPARENCY IN PROPERTY SALES!
The Real Estate Agents Authority (www.reaa.govt.nz) came into force on the 17th November, ensuring Real Estate Agents are now accountable. But what exactly has changed in relation to buying and selling property?
In the past, the whole Real Estate Industry has been self regulated.
17th November was when it became regulated by the Government.
The following schedule lists the Old and New rules as best I can, highlighting key differences for both Seller and Buyer and showing the keyword to be Disclosure - a good thing for everyone.
Old. Self Regulated.
New. Goverment Regulated with some RE involvement.
Old. Only Agent licensed with Salespeople covered by Agent license.
New. Agent, Branch Manager and Salespeople all need to be licensed and they MUST carry this with them whilst on duty. All have individual responsibility for their actions and the Agent has collective responsibility.
Old. Complaints heard by REINZ only.
New. Complaints heard by REAA and REINZ. In the first instance complaints should be made to the Agent.
Old. Membership of the REINZ compulsory.
New. Not compulsory.
Old. Professional Indemnity Insurance not compulsory.
New. As before but with fines in the $10,000 plus range, most are expected to take this up. Expect costs to be passed on though.
Old. Minimal qualifications although beefed up in 2008.
New. Existing RE people can Granfather their qualification over but if trained before 2008 they must resit the new exam if they leave one Employer/Agent and not start with a new one immediately. New entry qualifications much tougher.
Old. Apart for the Listing Agreement and Sale & Purchase Agreement very little documentation required for either Seller or Buyer.
New. 3 new documents. REAA Professional Conduct and Clinet Care (must be carried by RE people at all times whilst on duty). NZ Residential Property Agency Agreements Guide (for Sellers) and NZ Residential Property Sale & Purchase Agreements Guide (for Buyers). Seller must sign to say received and Buyer must also prior to entering into any S&P Agreement. Overseas Sellers and Buyers can receive by e-mail and e-mail confirmation.
Old. When Listing no requirement to evidence research when determining a Selling Price.
New. Full disclosure as to how the Selling Price has been calculated although a Seller can choose any Selling Price they wish, with a signed disclaimer.
Old. Listing time around 20 minutes.
New. Expect around 90 minutes to allow for Seller disclosure and recording of a much more comprehensive New Listing Agreement. Sellers are required to disclose all and any known defects in the property and the Agent records these.
Old. Agent not required to disclose amount of Advertising included in the Listing Agreement or disclose any discounts they may enjoy.
New. Full disclosure as to what advertising, where and when. For paid Advertising no mark ups allowed and full disclosure as to any discount received. A $ value for the Commission is also required, not just a %.
Old. Exclusives could be virtually endless.
New. Exclusives now maximum 90 days which can be extended by mutual consent. Most Agents expected to issue a Relisting Agreement although no such document is in the Regulation.
Old. Buyers Agents although rare in NZ still paid for by the Seller. No formal structure in place.
New. Buyers Agents formalised and need to be licensed. Agreements in writing and details of fees and charges clearly laid out. Paid for by the Buyer and the Agent cannot act for Buyer and Seller in same transaction.
Old. For Buyers no documentaion at all apart from a Sale & Purchase Agreement.
New. NZ Residential Property S & P Agreements Guide must be given to the Buyer and signed for before any S & P Agreement drawn up. If already received then sign to say so.
Old. No requirement for Agent to advise Seller or Buyer to seek legal advice before signing S & P Agreement.
New. Now a requirement to advise although both Seller and Buyer may decline.
Old. Commission paid after 10 days from unconditional contract or earlier if early release document signed.
New. Now 10 working days.
Sorry this has taken a while to read, theres a lot in the new regulation and it goes a long way to addressing issues. Complaints procedures are now clearly defined and a Seller MUST disclose known faults with the property. However it is still vital that as a Buyer you check everything yourself and not rely on the Seller or Agent. Many Banks are now insisting on Registered Valuations, Building Inspections and Watertightness Reports....maybe as a Buyer you need to as well.
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