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Mortgage Advice Blog

Get the latest news and tips about mortgage finance and the property market. Scott Miller, mortgage broker from Advanced Mortgage Solutions comments on housing and lending.

~Property comments from the BNZ

Published by Scott Miller on Thursday, August 20, 2009 in
Blog

I am pleased to report that the housing market continues to improve. Not only are the traditional well informed property investors in the market but the long awaited return of first home buyers is making a real difference to the numbers of properties being purchased, if anything the problem facing the market at the moment is not having enough stock to go around. This in turn is one of the reasons why we are seeing house prices increase.

 The mainstream banks are slowly beginning to relax their lending policies, and although these policies are not reaching the relaxed levels we witnessed in 2007, they are certainly better an 6 months ago.

 A number of mainstream lenders will now consider lending above 80% LVR for the right kind of property and applicant. This however is still bettered by the 95% LVR products that is available to Advanced Mortgage Solutions clients that fit criteria.

 As always if you would like to know more please click here to enquire further.

 TIP OF THE MONTH:

 This month’s tips come courtesy of recent comment released by Tony Alexander from BNZ. Please read on to hear his thoughts on interest rates and where he sees the housing market going.

INTEREST RATES

Given the way the data have fallen over the past week it remains reasonable to continue to expect
wholesale interest rates to slowly drift higher in coming months.

 Early this week we learnt two important things. First, as discussed in depth in our Housing section, house prices are now officially rising again in New Zealand. They gained 1% in July and 2.2% in the three months to July. The time taken to sell a dwelling is now the best compared with average since late-2007, and anecdotes continue to bespeak of listings shortages. This means prices are likely to continue to creep up.

This development is important because we Kiwis pay close attention to house price movements and the gains in prices fairly much wipe out concerns some will have been having about rising unemployment being the key determinant of house price changes and everything else in the economy. As we have pointed out, the labour market lags the economy, it does not lead it. That means if you forecast the economy on the basis of what the labour market is doing you are actually looking backward rather than forward.

The other large piece of news was retail spending growing in seasonally adjusted volume terms by 0.4% during the June quarter This is still a weak result by historical standards but better than the 0.2% decline expected in the markets and the strongest result since the March quarter of 2007 (when sales ballistically soared 3.7%!).

 The data come in a week when we have also learnt that the EU economy shrank only 0.1% during the June quarter with France and Germany each growing by 0.3%. Japan also grew 0.9% during the June quarter. The results add up to further support for the global recovery story therefore further upward pressure on share prices, growth and risky currencies like the NZD and AUD, and of course interest rates. But rate rises will not be linear. There will be substantial reversals at times as doubts occasionally appear about the strength of the economic recovery. In particular one must be wary of the impact which the unwinding of unsustainably stimulatory fiscal and monetary policies will have next year and through 2011. In fact those concerns have dominated this week with the result that after initially jumping skyward wholesale interest rates have finished today down very slightly from where they were a week ago.

 Key Forecasts

• No more monetary policy easing this cycle.

 • Medium to long term housing rates have seen their multi-year lows – stop-start rises now lie ahead. Speed unclear.

If I Were a Borrower What Would I Do?

First one needs to recognise that in these still very uncertain times one cannot take a reasonable stab at where fixed rates will be in one, two, and three years time. That means it would be risky to base one’s decision upon what to do at the moment on someone’s forecast of where things will go in the future. Just because we called it right with regard to catching the low-point for fixed rates in March does not mean we can reasonably say where those rates will be while the global crisis continues to unfold.

 The upshot of recognising such uncertainty is that one should be prepared to pay a premium for certainty in the form of a higher rate for fixing long term than short term. The question is however whether the current premium for fixing three years and beyond, when mixed with an assumption of higher rates in the future, justifies fixing medium to long term.

 First, would I take the five year fixed housing rate at 8.3%? No I would not. It is 0.2% above the average for that rate over the past five years and although we think fixed rates will average higher over the next five years than the past five, the rate looks expensive.

 Would I fix three years at 7.45%? Three weeks ago when this rate was 6.99% my answer was yes I would. But at 7.45% one is paying quite a premium above floating at 5.89% under the Total Money package, fixing 18 months at 6.09%, or fixing one year at 5.99%. For an above average risk averse person fixing at 7.45% for three years looks good in the current environment. But I would not.


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