The NZ Property Market Podcast
Brought to you by cotality, formerly CoreLogic. Each week co-hosts Nick Goodall and Kelvin Davidson will bring you all the latest news, stats and insight to keep you up to date with everything to do with the NZ residential property market. Including sales volumes, house price indices, buyer activity, interest rates, loan-to-value ratio restrictions and all of the macro economic factors that influence our largest asset class. Contact us on twitter @NickGoodall_CL or @KDavidson_CL
The NZ Property Market Podcast
MPS review and investor focus
Send us a question/idea/opinion direct via text message!
Number one on today's agenda is the Reserve Bank's monetary policy statement and the implications of the unchanged official cash rate. We break down the jargon and sift through layers of GDP, labour market, house prices, and inflation projections, leaving no stone unturned. We also reveal the potential for a rate rise and the nitty-gritty of the decision-making process. Moreover, we plunge headfirst into July's property market report, dissecting the role of first-home buyers, the 'wait and see' approach of investors, and the patchy nature of the market.
Particular focus is given into the impact of deductibility on property investment and housing affordability with Kelvin working through an in-depth example. Additionally, we cast a spotlight on regional variations in house prices and their influence on affordability.
Lastly we also preview the mortgage lending figures for July and the potential after-effects of the Reserve Bank's loosening of the LVRs on investors and first home buyers.
Sign up for news and insights or contact on LinkedIn, Twitter @NickGoodall_CL or @KDavidson_CL and email nick.goodall@cotality.co.nz or kelvin.davidson@cotality.co.nz
Kia ora and welcome to the New Zealand Property Market Podcast brought to you by CoreLogic, produced by Agence TV, on 21 August 2023. I'm here to research and get good old and join our Chief Economist, Kelvin Davidson. Kelvin, how are you, mate? How was your weekend?
Kelvin:Yeah, pretty good. My wife was away with her work so I was solo parenting, which brings us challenges, but it's getting just slightly easier as the kids get older, so no complaints. We had a sensational day of weather, yesterday being Sunday no wind pretty rare for Christchurch and good, warm temperatures, so yeah, it felt like spring. Some of the deaf adults are out, so it was pretty good. There's a good mood going on, so we're taking along the right not too much sport really in terms of keeping an eye on that, but not going too badly. So yeah, we're taking over all right.
Nick:How are you? Yeah, all good mate. Yeah well, actually, interestingly enough, kind of a flipside for me. I suppose I've been through plenty of travel, so living at home, doing all the solo parenting, and with that travel I think I've almost got a few shout outs. Actually, the team at Professionals I was down in Queenstown with the Professionals Group last Thursday and especially Baron, who's actually based in Fiji with the Professionals Group. So great to have a yarn with him and hear about what's going on in the broader Fiji situation. So, thanks very much for that yarn, baron, and certainly hopefully I'll get the Fiji some stage and be able to catch up over there.
Nick:Also Dana Frank and the rest of the Property Institute of New Zealand members in the Hawkes Bay region who attended my presentation on Friday night. Good to yarn with them and have a bit of banter afterwards to over-rebear. So great to meet you guys and have a bit of a yarn. And then also the attendees of the BETA conference which was on Saturday morning and Hastings Sorry I couldn't stay any longer. I did have to try and drive home as soon as possible Saturday to get back and see the family and also play my final football game of the season. So, yeah, good couple of days traveling, really really good to hear what's going on across the country and also in Fiji. Yeah, really really good couple of days, but certainly quite happy to have the old feet under the desk for the rest of this week anyway. So that's been good, mate, nice one.
Kelvin:Yeah, I was simply busy last week and hopefully we won't be adding Fiji to our Property Market Analysis anytime soon. It would be extra bit of workload, but yeah, it'd be interesting to hear what's going on there.
Nick:Well, not the analysis, because I did have to say what's the data quality and like capture, like Maybe not the analysis, but certainly happy to add it to the work trips anyway, mate. So we'll see. And then from the pairing side as well, back on board today. And then my youngest. She can't go a day here because she's got the tail end of some conjunctivitis, so she's allowed to take care. So she's around with me. Maybe you might even be able to hear in the background now I've got her watching the tablet but she's singing along to it, so hopefully she's not too effectively background as well.
Nick:The other thing I had last week was a trip to Auckland, so it hasn't been all work, including the World Cup semi-final Tuesday night. So certainly not complaining about all the travel I've had to do and good to see also a very well-deserved victory for the Spanish in the final last night. I actually added up how many games I made it to. In a total of six In total I made it to in person and three of them were to see Spain. So pretty lucky to see them in action. And yeah, they were impressive live and again last night, just their ball retention, their quality going forward. They were impressive throughout the whole tournament. So, other than maybe one game where they folded, it's good to pass. So yeah, very, very good. So yeah, mate, it's all been a good tournament to enjoy and, as you said otherwise, sporting starts to ramp up now with other World Cups and, I think, all Blacks back in action this week with their final pre-World Cup game and then yet all the rugby and cricket kicking in soon.
Kelvin:That's right. Yeah, should be, should be all on. But I mean you can always follow the NPC, there's always the NRL, but there's that, I guess that low on the international stuff, which Heart from the football got a, but the low on those other things. And yeah, before we roll back into it.
Nick:Yeah, exactly, yeah, good point. Tony Farr did beat the Marco on Saturday night, which is a pretty huge victory for us, but look, we better get into it. I did actually check to a few of the people and say, you know, with our podcast they're too much sport and personal chat, and most of them said it was fine. So it's okay, but we should get into things as well, and before we get a big interruption from the youngest. So let's, let's get into last week's review, mate, and of course, the number one thing we got to talk about is the Reserve Bank's monetary policy statement, which was out last Wednesday, but, more importantly, all the associated forecasts. So you wrote a note on this. Much of it you actually preempted anyway. But what did you make of the release, the detail within and some of the commentary from the reserve?
Kelvin:Yeah well, so I mean, obviously the main thing was that they left the official catcher and unchanged at five and a half Cent, that they was entirely expected, and I think there's anybody who thought anything different on that front. You know, we've seen seen inflation tail off a bit. We've seen expectations tail off a bit. Yeah, the economy is looking sort of a bit middling, so all of those things were slack in the labor market print starting to come through a little bit.
Kelvin:So there was there was no surprises that they they left the OCR and changed. I guess we had the commentary and we have a sort of Arguments as such. But where the debate, where the discussion came in, was around the projections and I'd say not so much the projections for GDP or the labor market or house prices necessarily, I mean those things they sort of they did make some changes that they didn't change too much in terms of the GDP outlook, still expecting a Mod recession coming through. Well now, q2, q or Q3, q4 of this year. You know that they had this fear that that mild recession we previously had came to an end and we're going to get back into another recession, which is potentially right now. But no real change of view there. House prices they did sort of revise up the house price view a little bit. That's that saying. Now they think prices have dropped and from here on will rise gradually.
Kelvin:But I think for me and that key thing is gradually they've still got house prices and level terms being lower In 2026. Then they were in 2021 at the peak. So you know that's still you still talking three years and house prices will be lower than where they were at the previous peak. So you know for me that that story is still in place. That's kind of what we've been talking about. So it's a person, nothing kind of new there and the labor market. They think unemployment will go up, and potentially relatively sharply, but Much more about that increased labor force and more that labor being available than job losses. So that's that's something we've been talking about for a while too, and they've kept that in place.
Kelvin:So see those things that you know there's interest in there, but it wasn't necessary anything new. Oh, and inflation coming back down as well. So they're projecting inflation to keep tailing off and reach that one to three percent target, I think in Q3 next year. So about sort of six, nine months, one until we get back to target. So it's slow progress but but getting towards that target over that horizon. So not too much changed.
Kelvin:Where that, like I say, where the discussion did come in, was around their OCR projection. They, they did just push it up a little bit and if you want to sort of get technical about it, they I think they're now sort of factoring in maybe a 30 or 40 percent chance, at least that face value, of another OCR increase. So that was just pushed up a little bit. So you can look at that and say, yeah, there's, there has been a slightly increased chance of another official cash rate increase, and that's that's what some people have been interpreting it as they also pushed back the the point at which OCR cuts start to come through. They did have them in late 2024. That perhaps slightly pushed that back to early 2025. So it's still very much a case of half longer in terms of the official cash rate and mortgage rates as well.
Kelvin:However, there was there was some other detail as well, and and they've what it looks like a bit of a technical thing. What they did was revise up their, their estimate of where the neutral OCR is. This is some kind of theoretical figure that's sort of not too hot, not too cold for the economy. It's not necessarily restraining things or not necessarily stimulating things. It's just kind of middle of the road and there's some technical stuff that goes on in the background, and the net result was that they pushed up that neutral everyone and that sort of had to be fed through to to the actual OCR.
Kelvin:So I think it's a bit of a tweak really. And Adrian or and his commentaries afterwards said he seemed to still pretty much be sticking to the line that they don't necessarily think there's any need for further OCR increases. This was a technical thing that they just had to be sort of pushed through. So yeah, I think really in terms of the OCR there was something for everyone. You know, if you think OCR might go up again, well, you could find some evidence. If you don't, well you could find some evidence for that too. And so I think it's for me.
Kelvin:I take a step back and say, wow, you know what, something's changed, something's done. There's kind of pluses and minuses. I think it leaves me thinking not much has changed really. There's Still some chance maybe of another OCR increase. If you're looking at in terms of risks, things are probably still slightly to the upside because we're still in inflation. They're still gonna be a concern for a while. But I just, I just don't think it's. I'm still leaning towards that view that says they don't do it again, and though we've seen dairy prices come down a lot the last sort of couple of weeks.
Kelvin:There's still those lag defects of previous monetary policy tightening in terms of people repricing from. You know you might be on a 5% mortgage rate now, that's doing a good seven. So there's still these leg defects here and this thing was it. There's a risk that the economy slows, inflation slows and that negates the need for any OCR increases. So yeah, there was a lot of them and that's a long ramble, but and there was a lot of discussion off the back of the decision. But in the end I take a step back and think well, yeah, not too much has changed. It's it's, it's still looking like we're we're at that peak for the cycle, but also don't necessarily look cuts anytime soon. So I guess, in terms of you know mortgage rate expectations, it's it's still half a longer, even if mortgage rates have stopped increasing. So yeah, that's a lot of chat to leave us probably where we started.
Nick:Yeah, I mean, I think the point probably is that you could write your response to the OCR release and the monetary policy statement Prior to it. It might have made any changes and I think they're going to be a good thing that we say the reserve banks are predictable and under what we've seen in the past, and that's only a good thing and that has been I think we talked about last week right, every kind of data set We've done at least it's come out since you know they're six week of that decision or their three month ago statements and a little full forecasts has always been pretty consistent with the other expecting and the data's kind of been, you know, a bit of a garbage way sometimes. They're pretty good but not perfect. But it's all really reinforced for me to wait and see with more data and so they just need to go. Yeah, corel would certainly see some progress, but we need more. We're really confident that we're getting in the right direction. So let's stick on this tried and true method at the moment, which is to not change things, and I think everything really would seem just reinforced that. And you know, as I always talk about the last few forecasts because it shows you what the biggest forecast was youth forecast overlaid and see that they haven't really changed too much.
Nick:Yes, there's tweets here and there. Ultimately, I think the right video, cr still a chance of going up, but we still think unlikely. And maybe the more important thing is, you're going to stay half longer. So we're rolling on to a 70% now 60.5% or whatever it is, you know to stick that to be the case in the next six months, probably 12 months-ish. You know, give or take a little bit, of course, and it's going to be some things which could make they go up or down the recession. You know, whatever happens with them from it. All these things are important and you shouldn't change things, of course, but it's going to be there about unless there's something external that changes and we'll just start to foresee those things. So that has to be the ultimate.
Nick:Now. Take here the House plus. The next forecast does change a bit more, but I think the key thing with that is that actually there's quite a lot of data that comes in in the three month period and that is enough to change their expectation and that's why previously they looked at market a little bit further around and find those points onwards Now that we've forwarded their you know essentially the track of the market and starts to look from here. That, as you mentioned, only at a slower rate because it is previously seen going along along the same rate. That's pre-pandemic, and certainly not expect that things just take off again either.
Nick:So it's worthwhile looking at that chart and putting it into context as to what the expectation is, both for the House prices and for OCR, which I think the most lessons is going to be that, the key thing they're interested in. So, yeah, look, I think it's a decent summary there and you know it's pretty usual. You know, now we look to the next one, I'm going to be some key data releases that come out when now on the next round will certainly be paying very close attention to to see how they might interpret that and others can look into their decision making as well. So, yeah, that's a decent coverage of that mate. Anything else you want to add on the reserve bank? Otherwise, I thought you could just jump into the bank that we did release the chart back last week and if you didn't have any key points to note in terms of that release, no, we could tease a bit over last week All the notable areas of interest when you're picked on by conversations you had or any other coverage that you've seen before happened.
Kelvin:I think really it was more of the same. Might sound a little bit boring, but writing that report and the data I was looking at in the charts just felt like, as I was going through, that things were repeating. We're still seeing property values bottom out. Some areas are up, some areas are down. There was more of the same.
Kelvin:Sales activity ticking along, signs of increase in some areas, signs of softness in other areas. So, yeah, sort of that patchiness, I think, was maintained in the latest report which related to July. So it's sort of more of the same in terms of, I guess, the market trying to find the floor of that type of thing. We're still seeing first-owned buyers pretty solid, in fact very solid in terms of market shares, still running at record highs. So first-owned buyers are still out there. Lots of supports, of course, financially, but also that non-financial motivation to keep buying Investors still quiet.
Kelvin:So it's sort of more of the same again, first-owned buyers are active and some investors just sort of just waiting and seeing, I think, is what some people will be doing out there. So, yeah, it was probably more of the same. There wasn't sort of too much headline grabbing stuff, but I think symptomatic of things just sort of trying to find that floor, I guess, and just ticking over, waiting for that sort of next trigger or signal or whatever you want to call it. So yeah, for now it's sort of just ticking over, I think.
Nick:Yeah, I think it's a fair summary again, and maybe again tied into all this, and it feels like a slightly older news really. But we did get the Rhine's RISC Institute figures for July last week as well. A lot of the stuff from there is probably tied into the chart back release. As you mentioned, you know sales volume is probably a tad weaker than we expected, and certainly from the month before. But from their index, which we know is much more reactive to recent market changes, their house price index grew for the second month in a row. So, as you say, it just reinforces that point that we've probably hit the bottom of the market. But I do like your point in your terminology around that patchiness still exists. Even in the Rhine start. It's not all one way. There's some areas still seeing a little volatility as well. So, yeah, anything else you picked up on from the RISC Institute release what are your thoughts on that?
Kelvin:Yeah, not a lot, I mean. Yeah, sales were perhaps a little bit softer than what we might have anticipated. May and June were picking up, that there's sort of a clear upwards direction of travel, that your life figures just softened off a little bit again. But again, I think it's like so patchy. It's to be expected at this kind of turning point. It's never going to be sort of a nice clean V shape where it goes straight down and straight up. It's probably not like that in the real world. So yeah, it has to be expected. And yet their pricing decks up again. There was, there was some reasonable strength shown in parts of Auckland, I think when you look at the breakdown of Auckland, those seven sort of old TAs each of them actually went up in July. So so you know it does look like Auckland's turning around a little bit. The sort of anecdotes and the social media stuff and bits and pieces you hear about Auckland does does suggest it's picked up.
Kelvin:But, yeah, still patching this. Elsewhere, A lot of the main centres are up on their index, but other parts of the country are down. So yeah, I think it's all consistent. There's still challenges, but also, I guess, just that mindset shifting around a bit.
Nick:So yeah, wait for the next one. Yeah, I think we've spoken about this. Right is that we do expect the main centres to really bounce back sooner than the rest. I think I saw some media coverage where you were quoted talking about the strength of, like the likely strength of, auckland's coming back. You know Wellington, we know, has come down so far that it might also bounce back sooner.
Nick:From an affordability perspective, christchurch still looks pretty relative to the attractive and on top of that you know the strong migration data and rents starting to increase and people go to those main centres first. I suppose those are some of the reasons why we expect that. Then, from a listings perspective in Auckland, we know it's probably even more weak in Auckland in terms of total stock on market than other parts. So it kind of all makes sense. We're seeing this reaction. It's just interesting to see it all kind of play out in the data as well. Do you want to touch on those migration data figures as well, mate? They were on there for June and overall you'd say what slowing migration, but still very high. And then I thought we could look at the lending data that was earned bank release from from a DTI perspective, but give us those migration figures, seeing as that's sort of tied into those main things that rebound.
Kelvin:Yeah, so net migration yeah, it's good way of putting it. It's slowing, at least when you look at it on a month-on-month basis, but now there's volatility in there too, so it's hard to say there's a really clear trend for migration, but still, when you add it up over 12 months, it's very, very high.
Kelvin:So the June figure itself was 5,000. That's arrivals minus departures. Now 5,000 is still pretty high. If you go back a few months, I think it was in the tens of thousands in a single month. So it has slowed off a bit from there, but 5,000 is still pretty high. You times that by 12, and you've got 60,000 on an annual basis. So 5,000 is still pretty strong.
Kelvin:In June, when you add up the last 12 months, it was actually 87,000, which is the second highest we've ever had. There was the peak, just I think it was sort of March, maybe the year to March 2020 or the year to April 2020, whatever. It was just prior to COVID. That was the all-time record. I think it was about 90,000. So this figure, the latest figure of 87, is pretty high. There's no getting away from it and these people have to live somewhere. It's boosting property demand for whatever type of property, whether it's rented or it'll purchase, so that 87,000 has returning Kiwis in it too. So they're not potentially buying a house. Other new migrants to the country might be renting, but either way, 87,000 people have to live somewhere and it's quite a few extra dwellings. So I think that's generally going to be contributing to the downturn coming to an end. That's just something more people in the country. So as.
Kelvin:I say there's volatility in these numbers. It's the net result of two big numbers, so you can have a big swing in the net number as well, but yeah, still pretty strong for now. And then debt to income ratios. These are a key data set for me. I'm keeping a really close eye on them. They didn't actually do much in the latest set of results. So these relate to the three-month period April to June. They're actually monthly figures but the Reserve Bank only reports them every three months for some reason. Not quite sure why, but they cover April to June.
Kelvin:In June itself, only about 9% of investors took out a loan with a debt to income ratio of seven or more, which is kind of my stabber where the DTI limit might be set. You kind of read between the lines of the Reserve Bank stuff suggests that could be set at seven. So that's the kind of figure I work off. About 9% of investors had a loan above that in terms of a DTI, only about 1% of first-time buyers. Now if you go back a year or two, first-time buyers and owner occupiers have always been a bit lower. Go back a year or two and investors are up at sort of 30 or 35% of loans above that DTI of seven. So it has come down a lot. As I say, the April to June numbers were sort of nothing much changed. It's been in there for a while and that's just reflecting a number of things. But really high interest rates is the key thing. As mortgage rates have gone up, you simply can't service as much debt out of a given income. So the ratio of DTI comes down. So yeah, the numbers are still just ticking along.
Kelvin:Obviously really important because of what the Reserve Bank's thinking and doing behind the scenes in terms of potential rules on these DTIs. Chatted to a few people within the banks last week and it still seems like they're definitely still preparing for it, the Reserve Bank, and making them go through their processes getting this all set up. Whether there's an official rule here that comes in in March, april, where we still don't know, maybe it's later in the year. But certainly the feeling from those people in the banks was it would be strange to make them do all this work and then not impose them. That was kind of the thinking. So whether they're imposed March, april, not sure. Whether it's later in the year, not sure, but it still seems like it's coming now.
Kelvin:We've always said, because those high DTIs have come down anyway, it's not so much about this cycle, much more about getting ahead of the game and the next time when interest rates come down. It's about reducing those financial stability risks that come about through big mortgages. So it's about that next cycle tying house prices to incomes, and really what it does in effect is limit how many properties someone can own at a certain point in time. So yeah, for now the numbers are kind of ticking along. I don't think the Reserve Bank could necessarily be too concerned about these numbers, but they're still pushing ahead with the rules behind the scenes with a view to bring them in sometime next year potentially, and trying to get ahead of the game for that next cycle. So yeah, that's where we're at on those things.
Nick:Yeah, there's just a couple of things I wanted to really drive home, and that is, as you said, it's so hard to borrow excessive amounts with the interest rates where they're at, and I thought a really good illustration of this was the way you did just looking at general top up that an investor would require to do on their property, given standard mortgage rates, standard payments and the amount of rent that the general are going to get. I know there's real averages or median, so they're not perfect. But one of the points you're making there was, you know, if you reinstated interest deductibility, for example, of course it's going to improve their position. They can claim some of the costs that they have to pay in interest rates. Interest costs claim that back at the end of the year tax return. So of course that means more money in their pocket, which means it's more profitable or certainly less loss leading than otherwise. But the key thing from your calculation was that it wasn't going to take the average investment from negative top ups into positives in terms of cash flow, and the top ups are still required. It just would be less so on a regular basis for those that have a deductibility reinstated, for example, if you have the same investment and it was a new build so you can write off your interest costs. So those are sort of the good way of evaluating the difference between a new build and existing property, because the different rules apply.
Nick:I wonder if you want to take us through some of the high level calculations. I did include the table and those figures on the insight and the monthly video this month, which is now live as well. So worthwhile checking that out. But of course there's a bit of work done behind the scenes that I only can add as a footnote to the video. But the reason I think this is important I'll take this through the calculations in a sec is that, given we're positive to the election, there does remain this question especially when I'm out there talking to people about whether changing government could lead to some changes in property investment restrictions and regulations around this. And while that might be true in terms of reinstating the interest deductibility and maybe shorting the Brightline test, it's also unlikely to affect the DTIs.
Nick:So there's a couple of things that play here I think that are really important to note. The DTIs Reserve Bank could bring them in today if they wanted to. At the moment they're just allowing the banks to get set up in the background. So that's what's going on. For DTIs. I still expect them to come in, even if we had a change in government. I'm sure the National Lead Government or any government that comes in if they wanted to repeal Reserve Bank's ability to restrict any of our DTIs, I guess they could do so. But it would be quite a laborious process to go through and I'm just not sure beyond that priority list for the old first 100 days that they're in play. So I don't see DTIs not happening in March or April. I'm sure there's a situation where it could be the case, but because they're unlikely to be binding, I think it'll be a pretty standard one to go through. Banks will be prepared, reserve Banks told them and that's fine.
Nick:But the other side of this is going back to the interest deductibility side of things. Yes, we might well see that changed, because the government could do that essentially overnight. I guess would be easier in terms of changing those regulations. But then the point being, how much impact to the market would that actually have? And that's where your calculations come into play, because what will make things better for investments? I don't think it's suddenly going to remove all the restrictions on the market in terms of how tough it is with higher interest rates at the level of prices that they're at, and of course that leads into the affordability pressures that we talk about all the time for either an owner or an investor, and how you can justify making that purchase. So that's the reason I want to tease out that difference. Can you just take us through those calculations you made and the key insights and then we'll take a look at here what's coming up this week? Calvin.
Kelvin:Yeah for sure, yeah. So I mean, there's nothing to rocket science here. I don't think you know Anybody can sort of put in a purchase price and what a rental you might be and sort of figure out what heritual flows through.
Kelvin:But you know you take out the price paid and invest to my buying a property. At least, say 750,000 as a ballpark figure. You know what the deposit is. Let's say it's 35%. That gives you mortgage. You can put on a rental yield, or in other words how much rental income they want to get off that property.
Kelvin:You know yields at the moment are pretty low. You could go for sort of three, three and a half percent, something like that. That gives you a rental income. Then you have to factor in your costs. You've got your mortgage. You know mortgage rate at seven percent means that mortgage interest at the moment is pretty high. You know, if you're only paying interest only on that, if you, if you pay 750,000, you put in a 35 percent deposit, your, your mortgage is going to be around that sort of 487,000 mark. If you're paying seven percent interest on that mortgage going in, interestingly, your mortgage payment Each year we'll be about 34 grand. Now keep in mind you're your rental income off that particular property might only be around 26,000. So there's a running cash loss straight up the about sort of $8,000 between.
Kelvin:How much rent you're getting and how much you're paying on your mortgage.
Kelvin:So there's a sort of cash loss straight away. Then you've got a factor in your rates maintenance, insurance, management costs. If you use a property manager, all those things add up as well. No, differ in the country, of course, and differ by property. Yeah, obviously. But you know you quickly get into a situation where where the losses on these things, and the top ups therefore, are quite substantial.
Kelvin:So now this is for an existing property. Let's say we had that 35% deposit as opposed to a new build. You know the top up in those in that situation could be $450 a week. You know, in terms of cash flow, to keep that thing going. Now if you switch to a new build, and so you keep everything else the same, including the deposit, which I'll come back to, but if you switch to a new bill, leave everything else the same, you're, you can claim that mortgage interest deduction, so your tax is a bit more favorable. Your top up per week might be $350. So you know it goes from $450 to $350. So it's, it's a bit less.
Kelvin:Of course you know everyone would prefer to have an extra hundred dollars a week, but it doesn't switch it from a big loss into some kind of profit, it's. It's still a pretty big cash flow loss and and this has always been the model you know, it's always been about being prepared to accept a bit of a last week on week to get some capital going down the track. So I think, yeah, you're right, it doesn't. It doesn't transform things when, yes, everyone would like to have that extra hundred dollars a week, but it doesn't, suddenly shifted into a, into a positive cash flow situation. So people have to be Going in eyes open and being prepared to accept that now. Also, you can look at another situation where, actually, because of the LVR rules, you know you, you only put in 20% deposit on a new bill. Now, of course, that sounds attractive, but what's the flip side of a smaller deposit, bigger mortgage at at 7 interest rate and actually, when you put in, now, these are basic numbers, of course, but you are.
Kelvin:You factor that in, you top up on a new bill might actually be bigger because you are, yes, you're saving some tax, but you're paying a lot more because your mortgage is bigger. So actually that top up on a new bill, if you go for 20% deposit, could be bigger. So so, yeah, there's, there's. These are the Pretty basic sums, as you said, you know these are. These are averages, it's on the ground.
Kelvin:You buy individual properties, you might buy something for a bargain, you might be able to push through a higher rent. So the economics change a bit. But you know, on average, in broad terms, I don't think the reinstatement of deductibility really transforms things for a new investor. It doesn't shift it from suddenly Making a cash flow loss into it into a cash flow profit and and and this, and it might bring back some demand. For sure, some people might just switch it or that it's just a smaller loss and they're prepared to accept that and start buying again. As I say, the model always tends to be make a bit of a cash flow loss in the open for a capital gain down the track.
Kelvin:But yeah the simple numbers, but I think it does illustrate, and it could mean that I guess the reinstatement of deductibility is the sort of Opening the floodgates that some people think it might be.
Nick:So, um, yeah, we have to wait and see national and everyone first anyway.
Kelvin:So We'll see, yeah, exactly.
Nick:And I think you know we probably is always going to be a bit of a sentiment factor, right? So it's just about the fact that there is a change and that there is more, you know, expectation of stronger growth, given a national led government, and these changes going through along with other ones, whatever it is that you know, in itself, rather than the actual figures themselves, can help people come back, and I get that. And the other side of it, I think, is that we're not trying to say it is no value in this market. As you say the averages, you know the medians, and so they don't tell you everything. There's gonna be bargains and there's value to be had out there, but when you look at the simple statistics which we've just run through, it doesn't look all that attractive.
Nick:It doesn't look all that attractive and I think there's also harps back to you know, while, even though this has been the case, we're still seeing one in five properties be sold to a property investor who's using the mortgage to secure that purchase, and they're clearly doing so eyes wide open, either because the property type or value they're buying they they're still making it work either the top ups quite low, or they are doing it with the expectation of some Longer term capital growth. Either way, there are people out there making this work and there will continue to be people out there making this work, despite some of those figures which sound really daunting. So I think that you know I don't want to make it sound like we can be saying how is anyone buying this?
Nick:You know investment just doesn't work. Um, it's more about just showing that. You know it is difficult, but it's mostly because of high interest rates. And then it's all about where our interest rates going to, whether that might be the key influence To seeing demand increase significantly, which would see growth come back long term, or will strongly come back long term because we do expect the market to continue to grow once you know we're bouncing back. But more to your point earlier, probably to drift along a line of what's in crumb growth look like, as opposed to the old Historical six to seven percent on average per annum over a long period of time, you know, which then generally gets you to the old doubling every 10 years, which, again, we're not subscribers to.
Nick:I've always been for reasons and not just because that's what the market happens to do. So I suppose that's the key point and reason to point this out, um, not to try and say it doesn't make any sense or whatever. There's lots of other reasons you invest in property and those things all still remain true. But just to show, some of those figures are pretty stark and also the the secondary fact that, you know, interest ductibility, while it would improve things, wouldn't suddenly make the. The market is usually profitable for every single purchase, and so you're still going to see some caution out there in the market. So, yeah, that's why I want to touch on it. Um, and so I appreciate going into that detail mate. Yeah, no worries, yeah, that's absolutely.
Kelvin:That's so. That's that's the key thing. People are still buying and and maybe buying older properties to renovate, you know, the whole sort of get the cash flow up through through investing a bit of money at the start, as opposed to maybe somebody buying new build who's not doing that. It's more about that buying old thing for whatever the case. So yeah, why don't every five deals still go into a to a more original investor?
Kelvin:So some people are making it work, like, say, keep winners. It's that's still challenging. And the big thing for me is that gap, negative gap, between, uh, rental yields, which quite low, and mortgage rates, which are quite high, and and yeah, it's probably that the thing what the really would transform saying this would be would be a fall on mortgage rates. So so, yeah, deductibility to help, for sure, but it's probably not. It's maybe, maybe it's been talked up a bit too much in terms of the role of my place. We'll, we'll see.
Nick:Yeah, exactly, all good mate. Well then, coming up this week and this one's actually tied quite nicely is that we've just released our housing affordability report to the media. They will be live tomorrow, and I think this is important because it is such a key determinant of demand and therefore property value. So I don't know if you want to check us a little bit of a teaser there, but I think this has been such a crucial thing, and the key thing is we've got this affordability report. There's four different measures of affordability.
Nick:The one that we've been focusing on right now has been the portion of income required to service an 80% LVR mortgage. So it is a pretty simple definition, but it just does show you how difficult things are and that we don't expect that to improve anytime soon. That's certainly been a core part of my presentations recently, so nice to have the updated report out there looking at where things are at. It comes out every six months. So, yeah, any teaser you want to talk about that one mate, or any key headlines you think will come from the back of that, yeah.
Kelvin:I think, I expect a reasonable amount of interest in this. It's always an interesting story. The general general story is that housing affordability has continued to improve. There's no great surprises there. House prices have fallen and comes a wrap and mortgage rates have been flattening off. So things have sort of shifted in by his favour a little bit. But it started from such a stretch position that the improvement yeah I mean improvements been great but it hasn't sort of restored things to average or anything like that. I mean the thing I've been saying to a few journalists.
Kelvin:I doubt there's too many people going out and saying well, look how cheap property is, I mean it's got a bit cheaper, but it's not cheap, so that's probably the key message.
Kelvin:There could be a bit of a flat patch from here on. House prices sort of tick along and comes, tick up a little bit. Mortgage rates do flat line. I think there's probably a window here where affordability can sort of inch lower, inch better and prove a little bit over the next sort of six or 12 months. And then, you know, people might say, well, great, we can sort of get with. I've got this window here. Mortgage rates start to fall. That'll help.
Kelvin:Now, of course, if mortgage rates fall, house prices might start to rise again. So those two things sort of work in opposite directions in terms of housing affordability. So I think, yeah, there's been an improvement. It hasn't restored things to normality though, and yes, there might be a bit of a flat patch from here, but it could be as good as it gets. If you think this adjustment we've sort of been working out, for it's probably already happened. You know, from here on, housing affordability might not suddenly deteriorate again to any great degree, but it might not necessarily improve either. So so, yeah, that's that's what the story is. There's a bunch of numbers and charts for the whole country in there, but I think that's the big picture is that we're still going to have a challenge, I guess. Ultimately, we've got a bit more houses, you know, educated for growing population or elsewhere. We're going to be stuck in this loop for a while.
Nick:Yeah, exactly, and I think one simple illustration of that is to show where house prices are at today compared to pre-COVID. So we know, you know it's in the market drop. Well, 15, 100% depending on your measure. You know we're still 25% up now than we were pre-pandemic, and that just shows how expensive things are. And then you throw in interest rates and that's where it also sort of comes together as to how actually how affordable it is for someone to buy a property and then service that mortgage with the current income based on today's interest rates. And that's the key thing I think it'll come through.
Nick:And then, of course, there'll be focus on some of the regional differences. You know I was looking at Wellington. You know, of course, because it's come down much further than anywhere else. The region is only 14% higher than pre-pandemic. So that's quite a different picture than some of the other centers. And that's where we talk about.
Nick:Maybe, you know, some of the market comes back sooner in Wellington because prices come back a bit further.
Nick:So for those earning a decent income in Wellington, which we know is generally relatively high, then they can actually still service those mortgages, whereas some of the small centers may not be able to do so. So that's the thing to focus on some of those regional differences, and we can talk more about that next week as well. Last thing then, mate, before we end the podcast for today is just we're also expecting this week July mortgage lending figures, so a bit different to the stuff you were talking about earlier around DTIs, and of course that you know this will be the second month since the loosening of the LVRs from the Reserve Bank, so most of this is going to be in that breakdown right. The investors continue to make the most of that reduced deposit weekly requirement and, of course, we're a first homebuyer who didn't seem to take much more of the speed limit they were allowed in that June month. So, yeah, anything else you want to talk about preempting that one, kelvin.
Kelvin:Yeah, just the figures are out on July. I mean, yeah, figures are out for July and Thursday. I should say Definitely be watching that LVR breakdown. And the owner occupying number is still pretty tight. You know that speed limit now for like deposit lending is 15%. The latest number for June was only 6%. So big buffer there between what could be lent at a low deposit and what is actually being lent.
Kelvin:So I guess that highlights that low deposit means bigger mortgage 7% interest rates. You know there is a restraint there, even if the speed limit is a lot higher. I mean, yeah, the big, the big movers in June were certainly those, those investors with, let's say, a 37% deposit who were previously locked out suddenly find themselves back in the game. So, yeah, there'll be another figure to keep an eye on is just what happened to those people who who have a, let's say, a 37% deposit, or between 35 and 40, which was the shift in the LVRs.
Kelvin:So, yeah, be watching that number for investors and also that overall figure for owner occupies, but yeah, you wouldn't anticipate too much shift really something, because mortgage rates are still high and you know, reduced deposit equals bigger mortgage and a higher debt service payment. So I'm looking out for those on Thursday Awesome, Thank you mate, Not all good.
Nick:Well, I think that pretty much wraps us up for today. Appreciate all your thoughts. As per usual, mate. I might just close this out. There's nothing else on your mind to cover off Calvin.
Kelvin:No, no, that's all good. Loretta was nice and behaved in the background, so yeah, we're getting, we're getting through it.
Nick:I'm sure they're around were a few times monitor her a little bit of chat in the background, but no, she's been. She's been very good, so she'll have a few treats awaiting her afterwards Also, mate. Well, thanks, as per usual. As I said, certainly push to you quite a lot more than usual and put myself on mute just in case there was some background chat. But yeah, thanks very much for listening as well. Please do make sure that you subscribe to the show and feel free to get in touch. To have been good being out there talking to people and always have to give a shout out to us to get in touch with us. Just let me say thanks for much for listening. My name is Nick. He's Calvin. You've been listening to the Zeland Property Market podcast Up the Lazz.
