After a prolonged period of unprecedented house price growth, the recently introduced loan-to-value-ratio (LVR) restrictions imposed by the Reserve Bank of New Zealand (RBNZ) appear to be stabilising the country’s property market.
RBNZ data shows that total residential lending in the three months from November 2016 to January 2017 was down 5 per cent on the same period 12 months ago, which suggests the market is cooling.
A cooling property market may seem foreign to some homeowners and investors who are used to double digit growth but it has its benefits. Here’s why:
It stabilises house prices
While those that own property like to see the value of their asset increasing, the truth is, if property prices increase too much in a short period of time, it can make the market more volatile.
With debt to income levels currently at record highs, a stemming of property growth reduces the risk that property prices will suffer an over-correction. While investors like to enjoy high-returns, they typically like to avoid suffering losses even more.
Investors will diversify their portfolios
With lower capital gains on offer in the big cities compared to recent years, some investors may choose to diversify their portfolios and buy in New Zealand’s smaller country towns and cities.
Houses also cost less in the smaller towns, and with investors now requiring a 40 per cent deposit, the lower prices in these areas are likely to make investing here more achievable.
On the other hand, investors may also look to other forms of investment, such as term deposits.
First home buyers won’t feel as ‘squeezed out’
As some investors look for other ways to increase their wealth, first home buyers may be able to get a foot on the property ladder.
While it is still relatively early days, we can see that first home buyers are taking up part of the slack left by investors.
RBNZ data shows that since the new LVRs were introduced the portion of first home buyers that made up total mortgage lending has been around 14 per cent, this is compared to January 2015 when first home buyers made up just 10 per cent. FHBs will be encouraged this number is moving in the right direction.
Homeowners can focus on paying down debt
The idea of property price growth slowing makes selling your home or upgrading less appealing, so many home owners will see the next few years as an opportunity to sit tight and pay down debt.
With interest rates still at historical lows, there has never been a better time to reduce your mortgage. If you want to talk a mortgage broker about your options in the current market, you can find your nearest Mike Pero Mortgage Broker here.