New Zealand property has never been less affordable, despite record low interest rates. Rampant speculation, a severe under supply and high immigration means that housing in the lower quartile, particularly in Auckland, is selling at over $700,000.At a 20% deposit, this requires as much as $140,000 in the bank for even the most basic of dwellings. This impacts buyers’ capacity to purchase a home, of course, but even with low interest rates, servicing such large mortgages can be a stretch. New purchasers in Auckland spend as much as 51% of their monthly income on mortgage costs.
The Elliot Wave
The Elliott wave principle is used by finance traders to assess cycles and forecast trends for financial market cycles. Developed in the 1930’s by Ralph Nelson Elliot, the theory proposes that market shifts follow predictable patterns or “waves”. The Sigmond Curve, a similar model, suggests that a growth phase will inevitably be followed by a period of decline.
This wave, representing a 70-year interest rate cycle, was developed in 1981 – and it’s bang on, accurately predicting the falling rates of the benign 90’s, and finishing in 2016, with the extremely low rates that continue today. What comes next is easy to predict: the cycle will begin again and rates will increase. While the rise might not be significant, the effects will be.
Vulnerable households, weakened economy
New Zealand house price indicators – like growth in house-prices, house price-to-income ratios and house price-to-rent ratios – are very high, both internationally and historically. This heightened uncertainty makes for vulnerable home-owners. Household debt is now equivalent to around 165% of household disposable income, up from 100% in 2000 and 60% in 1990. A correction in house prices and rising interest rates would severely impact both on-paper wealth and ready cash, with more money going towards servicing debt each month.
And with leveraging and spending power going down, so too will consumption, consumer confidence and the economy.
Generation rent – long term impacts
With a short supply and increased demand, rents have been steadily rising – higher mortgage rates will amplify this as investors pass on their higher costs. Like those who own homes, renters will also see more of their monthly income go into housing, and less into discretionary spend or into savings.
Less cash to spend has a short term impact on the economy, but the inability to save could also have long term effects. Renters will stay renters as they struggle to put together the enormous, and ever-increasing sums needed for a deposit. Unless New Zealanders can be encouraged to consider investments other than property, this could have a dramatic impact as ‘Generation Rent’ reaches retirement. Socially, this will also make for a more transient, and therefore less healthy, educated and wealthy population as a whole.
What can you do to prepare for interest rates rising?
- Pay down debt as quickly as you can – if you have less owing, the impact of a rates hike will be lower.
- Teach financial literacy – while most of us bumbled along in our 20s, your kids don’t have to. Ensuring they have the knowledge to make sound financial decisions early in life will reap rewards.
- Consolidate debts – if you have a number of different loans, consolidating them can be a good way to get them sorted more quickly.
- Be realistic – if you want to buy a house, make sure you’re not aiming too high and devoting too much of your income to monthly payments.
- Talk to a qualified financial advisor – the best way to organise your finances is by talking to an expert.
Although we don’t offer mortgage or financial advice at Core Finance, we are concerned about the impact of interest rate rises. If you’re looking for ways to weather the storm, get in touch with your qualified mortgage or financial adviser now or contact us and we will put you in touch with one of our trusted advisers.