Saving Kiwis Spring Newsletter

There’s no denying that doom and gloom are pretty much everywhere in the property and finance world. House prices are dropping and sharemarkets are getting hammered, with out-of-control inflation and high interest rates creating financial havoc in New Zealand and around the world. No investments are safe, and the markets are trying to understand when we might find the bottom.
This newsletter talks about what’s happening with inflation, interest rates and the property market, so read on if this is of interest to you!

The rise of inflation

In economic terms inflation is the boogeyman, with rapidly increasing prices causing all sorts of problems for economies. Inflation in NZ is now running at over 7%, and we have to go back 32 years (to 1990) to see similar levels.
The big issue is that no-one saw this coming. We all knew Covid was causing inflation due to the supply chain issues, but a little over 12 months ago the Reserve Bank (RBNZ) was predicting inflation to be at the upper end of the acceptable 1%–3% band they aim to operate in. But inflationary pressure is coming from everywhere, with transport, food and labour costs going through the roof, and now the falling NZ dollar is making everything we buy from overseas more expensive. It’s a perfect inflation storm.
We’re not alone. In Australia inflation is over 6%, in the US, it’s over 8%, and in the UK, over 9%. Most countries are ramping up interest rates to control inflation – higher interest rates mean people have less money to spend, which helps reduce inflation – but there’s a fine line between controlling inflation and forcing an economy into recession.
The reality for NZ is that we won’t be able to handle high interest rates for extended periods, so if inflation does not start to ease over 2023 then the RBNZ may be forced to live with inflation above their 3% target for another year or two.
Some will argue that an economic clean-up is what the country needs, but the consequence of this is people losing their homes and businesses and that’s where a balanced view of economics and humanity needs to be taken. I’d be very surprised if the RBNZ didn’t soften in the face of sustained inflation, especially given many parts of the economy are still recovering from the damage caused by Covid.

What does all of this mean for interest rates?

As we’ve all seen, jumping inflation means jumping interest rates. The Official Cash Rate has moved up from 0.25% in September to 3.50% and is expected to get to around 5.0%.
Two-year rates were under 2.50% a little over a year ago. They are now around 5.50% and will go over the 6% mark over the next few months. While this will cause some mortgage pain in 2023, if rates start to drop near the end of the year or are expected to drop in early 2024, then the damage will be short-lived.
However, if 2-year rates stay above 6% into 2024 then there will be more serious consequences for house prices and the economy. As already noted, I doubt the RBNZ will let this happen, unless inflation is really out of control.
Now for all those people out there kicking themselves for not taking 5-year rates last year – please don’t! Nobody saw this coming, and this would be the first time in most of the last 10 to 15 years that 1- to 3-year fixed rates have not had the best outcome.
Our recommendation for fixed rates now is to select the 1 or 2-year rates. Take the 1-year rate if you want the lowest rate now and want to take your chances in a year’s time, or the slightly higher 2-year rate for more certainty, as that rate will see you through the worst of this cycle. 

What does this mean for property prices?

Property prices around the country have already taken a big hit; most areas are down around 15%–20% from their peaks. More price falls are to come in 2023, but these should be more moderate as interest rates peak and buyers start to believe the market is close to the bottom.
Investors, who have been sitting on the sidelines for some time based on the high prices and difficult borrowing conditions, will begin to re-enter the market looking for bargains and preparing for the next cycle. Rental yields will continue to improve as prices fall, which will make long-term property investment increasingly attractive.
My personal opinion is the market will reach the bottom in the second half of 2023. This will trigger more sales activity, and, assuming the interest rates outlook settles down, we’ll start to return to a normal market. There will likely be some pent-up demand for all the buyers who have been sitting on the sidelines during the current volatile times.
House prices are unlikely to jump significantly, as interest rates will not be dropping down to the 2% or 3% that created the price bubble of recent years. This next property cycle is likely to see lower capital gains than the last couple of cycles, as the market has shifted and people are increasingly happy with townhouses and apartments. Therefore, it will be easier to build more houses to meet population growth.

A little bit about Westpac

We’ve been recommending Westpac due to the Redraw feature on their table mortgages. 
If you make a lump sum repayment or extra regular payments, then your loan remembers the limit and allows you to redraw the difference between the limit and the balance owing without requiring bank approval.
It’s not transactional like a revolving credit or offset facility, but a few emails are enough to redraw the funds. The bonus with this product is that you can have lending on fixed rates.
This product proved very helpful in the last year when rates jumped up so quickly many borrowers maxed out on their borrowing. Give us a call or drop us an email if you’d like to know more.

Referral Competition 

Congratulations to Reg Prasad, winner of the $1,000 prize for the last referral competition. Well done, Reg, and thanks for the referral.
We’ve now started another competition, which will run until 28th February 2023. 
Any referral counts, as does using our services for new lending or a refix. Tell your friends and family about us, that would be very much appreciated.

All the very best for you and yours for the rest of 2022.
Kind regards from the Saving Kiwis team, Nick, Kurt and Deb!

Nick McCorkindale   
Mortgage Advisor
(09) 5353 620    0274 404 230

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