A number of property investors are choosing to suffer the short-term pain of fixing their mortgage rates for a year in anticipation of interest rates easing, according to a new survey.
The latest Crockers-Tony Alexander Investor Insight found that of the 274 residential property investors polled, 62% preferred to lock in a one-year fixed term over longer options.
Tony Alexander said the result reflected expectations that monetary policy would loosen over the next year and continued the fall in the average fixing term preferred by borrowers, RNZ reported.
“I think there’s a growing realisation that with the economy potentially going into recession, inflationary pressures definitely will eventually fall away and that means the Reserve Bank will be cutting interest rates, probably strongly, through 2024-2025,” Alexander said.
“So, an increasing proportion of borrowers will be looking to take advantage of the falls in rates, when they eventually come along and, of course, the only way to do that is either float or fix for one, maybe towards the two-year area.”
The Reserve Bank will meet next month for another cash rate review after it delivered a jumbo-sized interest rate hike of 75 basis points in November in an effort to curb inflation.
Inflation remained steady at 7.2% for the three months ended December, which has some analysts predicting a softer rate hike of 50bp or 25bp, while others have stood firm on expecting another 75bp bump.
Fixing mortgages for a year could be a gamble, Alexander said, but so could fixing for a longer term.
“No matter what you do, it’s always a gamble,” he said. “If you go and fix for five years, you get the certainty of knowing a rate for five years, but you’re gambling that there’s not going to suddenly be a big fall in the short-term interest rates over that period of time.
“The risk, of course, with fixing for one year is if inflation were to suddenly bump back up again and the Reserve Bank has to raise interest rates higher than current expectations much later on this year.
“That’s not the prevalent view, but there’s always the risk of something like that.”
As construction costs skyrocket, property investors are turning away from new build homes, and are instead investing in existing properties.
Some 62% of the respondents who planned to buy another property in the next year said they would opt for an existing property, while a further 26% said they would invest in a new build – that’s 4% below the survey’s average, RNZ reported.
According to the latest Stats NZ data, construction prices climbed 14.1% in the year to December, indicating an increase in the costs of both material and labour costs and that building a home was becoming more expensive.
The average fixing term preferred by property investors had been trending downwards over the past few years, Alexander said, but the response also reflected the pressures faced by the construction sector.
“I think people have been reading the tea leaves there in terms of difficulties for a lot of builders getting staff, materials, the prices of the materials, and there’s been no shortage of media articles about projects going wrong and property developers and builders going under,” he said.
“I think there’s a general air of caution that has appeared there for those looking to make a purchase. With regard to the new build sector, it’s not a massive decline by any means, but I think it’s more of a pullback towards long-term reality.”
Alexander said it also reflected the rise in the number of listings of existing properties on the market, offering investors more choices.
The survey had a smaller response pool due to the holiday period, but, despite this, there were signs that the initial concerns around surging interest rates and a recession had eased, Alexander said.
“For instance, the net proportion of investors saying they were thinking about buying something again, that was sitting at about plus 1% in the survey,” he said. “Before Nov. 23, when the Reserve Bank increased the official cash rate by the record three quarters of a percent, lifted their prediction for the peak from 4.1% to 5.5%, it fell away to about minus 5%.
“Now, it’s recovered to zero, with as many saying they want to buy as sell. It’s not back into positive territory – investors aren’t saying the worst is over and everything’s going to be OK, but it is a small piece of evidence of some of the shock value from the Reserve Bank just starting to ease at the margin.”
According to January’s Investors Insight, a net 2% of property investors reported that it was easy for them to find good tenants. That was the first positive development in the category since June last year.
Alexander said it was unclear what drove that result, but immigration may have played a part.
“It’s interesting, in the context of the previous six surveys there was a negative result, basically the investors saying it was getting harder and harder to get good tenants,” he told RNZ. “Maybe what’s happening here really is that with the net migration numbers turning around, there’s a few more people becoming available to pick and choose from.”