Newsletter
May 2022
Welcome to our mid-year edition of our quarterly newsletter. In this edition we are pleased to introduce leading economist, Tony Alexander. Tony will become a regular fixture providing his valuable insight regarding mortgage interest rates – expectations and borrowing strategy for Advice Knight readers.
We are seeing a very interesting and somewhat challenging economic backdrop in recent months with the combination of rising interest rates (including today’s Reserve Bank rise of 0.5% to 2%, the fifth OCR increase in 10 months), harsh lending criteria and the absence of inward migration starting to flow through to a softening housing market.
The sentiment in the media has drastically changed and this can become self-fulfilling where buyers lose confidence, preferring rather to wait on the side-lines. This reduces demand and increases time to sell - dampening vendors expectations and ultimately flows through to price. In the last week we have seen two of the leading banks forecast that prices could drop by as much as 20% over the next year which is certainly unsettling to both those that have purchased recently and for those that are planning to enter the market in the near term.
We would acknowledge that as alarming as a forecast of 20% drop in prices sound, this would only bring us back to where they were just over 12 months ago. As such the ‘crash alert flag’ is not being raised up the mast at Advice Knight HQ just yet. What we are seeing is that real buying opportunities are now presenting themselves and for well financed/cashed up buyers there are bargains to be had.
We reiterate the points made in our last newsletter regarding property being best approached as a long-term investment and stand firm that property is and will remain an excellent vehicle for long-term wealth creation. With rents rising rapidly (along with many of our base living costs), paying down your own mortgage becomes a sensible way to reduce base living costs and with higher interest rates, that payoff is improved i.e. paying down your mortgage now provides a heightened return on investment vs during periods of lower interest cost (e.g. when they were 2.19% pay-off was lower).
Mortgage Borrowing Strategy
Tony Alexander’s Quarterly Market Update for Advice Knight Clients
The Reserve Bank have taken the official cash rate up from a record low of 0.25% to 2.0% and a peak at or above 3% is likely in the next 6 – 12 months. In the financial markets the anticipation of higher short-term borrowing costs for banks has led to fixed mortgage rates rising well in advance of actual monetary policy changes and led to the likes of five year rates climbing near 3% and one year rates near 2%.
Good News in the Budget for First Home Buyers
The Government’s Budget 2022 announcement out last week provided positive changes to the First Home Loan and First Home Grant schemes administered by Kāinga Ora. This means more people now qualify for the mortgage help programmes these schemes provide. The First Home Loan allows buyers to get into a first home sooner with as little as a 5% deposit, while the first home grants can be as high as $20,000 towards the deposit (for a qualifying couple buying a new build home).
Meet the team
Final Word
When Nelson Mandela said, “The greatest glory in living lies not in never falling, but in rising every time we fall,” he was speaking about the power of persistence. More specifically, the power to get up day after day and fight all over again.
The quote applies well in an economic context too when applied to markets. Straight lines really are for geometry class – not for markets. Providing we maintain good cashflow and can hold our steel through the dips, we will enjoy the rallies to follow. A ‘discounted market’ provides opportunity to buy and can be incredibly lucrative for a savvy investor.
One way or another, every major bull market needs a major bear market. The two go together like yin and yang, gin and tonic or Labour and high taxes. Take one out of the picture and the other one no longer makes any sense.
Malcolm Knight
Director, Financial Advisor