The world is watching the New Zealand property market as Auckland is labeled ‘canary in a coal mine’
International investors are increasingly watching the New Zealand property market for signs of trouble and an indicator of things to come, with an Australian financial services firm calling Auckland a “canary in the coal mine”.
High mortgage debt relative to income, house price increases that have outpaced all other countries surveyed, and the Reserve Bank’s aggressive measures to fight inflation have made New Zealand’s property market the one to watch, according to several analysts both nationally and across Tasman.
Auckland’s unfortunate label came from Barrenjoey, an Australian company providing information to banks and investors.
The firm’s research focused on debt-to-income ratios (DTIs) and found that nearly two-fifths of Kiwi’s recent home loans were lent at ratios considered high risk and discounted by other countries, including the United Kingdom and Ireland.
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DTI ratios are calculated by dividing a borrower’s total debt by their gross income, and are a measure of how indebted a client is, and therefore their risk if the cost of servicing their mortgage increases.
Debt to income ratios
The likes of Ireland and the UK have DTI caps between three and a half times and four and a half times income. In New Zealand, customers with a DTI of more than six account for 39% of recent borrowing, Barrenjoey found after analyzing Reserve Bank data.
Auckland was higher, with 51% of recent borrowers having taken out home loans from DTI out of six, and a fifth borrowed from DTI out of eight.
Mint Asset Management senior analyst Michael Kenealy said the canary analogy was “pretty dire”, but said Australian and international investors have been watching the New Zealand property market since the country led the way. rising prices during the pandemic.
He describes house price increases in New Zealand as “astronomical compared to most other developing countries”.
These moves were measured by Australian banking firm Macquarie, which found that in the two years since the end of 2019, property prices in New Zealand have increased by 45%, compared to increases around 25% to 30% in Australia, Canada, the United Kingdom, the United States, Germany, Sweden and the Netherlands.
Macquarie chief economist Justin Fabo said investors were also watching New Zealand as the Reserve Bank had been the “most aggressive central bank yet in the advanced economy” in raising interest rates. interest in fighting inflation.
“Investors are watching to see how sensitive housing and the wider New Zealand economy are to rising interest rates, particularly in the face of high debt-to-income and house price-to-income ratios” , did he declare.
Fabo suggested that one of the reasons for the rise in New Zealand property prices during the pandemic was the Reserve Bank’s temporary relaxation of high loan-to-value restrictions on investor borrowing. .
The drop in prices is expected to reach double-digit percentages
Fabo said house prices in New Zealand had already fallen by around 4% in the four months to March, and he assumed prices would continue to fall for some time, with the overall percentage drop likely being two digits.
According to Macquarie, the main price risk was rising interest rates.
“Fixed mortgage rates have already increased by 250 basis points or more. This significantly reduces the average New Zealand household’s ‘ability to pay’ for housing,” Fabo said.
He expected weak house prices to feed through to consumer spending.
“We suspect there will be a point where falling house prices, falling consumer spending and likely rising unemployment will at least cause a pause in RBNZ policy tightening,” he said. he declared.
“It’s unlikely before the end of this year.”
Investors question the sustainability of property prices
Kenealy said the 30% rise in property prices last year would make investors wonder if prices were sustainable, especially with rising interest rates and a possible decline in the population a once the border reopened.
He also shared Barrenjoey’s concerns, describing the amount of debt-intensive loans as “pretty scary”.
As the cost of living rises and interest rates rise, Kenealy said many recent buyers will begin to struggle.
To put it into context, an extra 1% on a $600,000 loan would mean about $80 more per week in interest charges, he said.
He said that sum was calculated using ASB’s mortgage calculator, over a 25-year term that had gone from 3.75% to 4.75%.
With the reduction in loan principal taken into account, this calculator suggested that fortnightly payments would drop from $1,424 to $1,578, or $154 per fortnight.
Kenealy wondered if the Reserve Bank could impose similar DTIs in the UK at this stage, without causing a stock market crash.
Possible “bubble-dynamics” created
From Kenealy’s perspective, the pandemic may have incubated ‘bubble dynamics’ in housing, as prices soared as interest rates were at record highs, confidence was high after the country managed to fend off Covid, people had plenty of spare money because they had been confined by the closures, and FOMO (fear of missing out) led many people to borrow large sums.
However, he doubted there would be a crash, with the two main reasons for selling a home under duress – unemployment and divorce – unlikely to rise.
“It’s very easy to get bearish and panic a bit that the end of the world is near on these things, but I don’t think that’s really fair.”
Real estate investor Graeme Fowler said carrying a DTI as high as six was no concern with mortgage interest rates around 2%, but once they hit 4% people might going into a financial crisis, unless they increase their income or somehow reduce their debt.
To put debt into perspective, Fowler said that in the 1980s the standard DTI was around two, but interest rates were also much higher. Reserve Bank data on DTI changes only goes back to 2017.
Fowler said those with high DTIs should focus on reducing their loan principal as quickly as possible, to reduce the amount of interest they would have to pay.
He believed that banks, like many foreign lenders, would voluntarily impose a limit on DTIs for owners and investors in the near future.