Property Investment
3 min read
Author: Andrew Nicol
Managing Director, 20+ Years' Experience Investing In Property, Author & Host
A lot has happened over the last 3 weeks.
The OCR came out. We had the budget. Now, starting on July 1st, weāll also have debt-to-income ratios.
A lot of investors have asked what it means for house prices and their portfolios. Here are the numbers ā
The debt-to-income ratios will stop some people from borrowing. The banks will say ānoā.
If people canāt borrow as much, then house prices shouldnāt go up as fast, especially during the boom times.
Thatās because a lot of the āriskerā high DTI lending mainly happens in the boom times when interest rates are low.
So the Reserve Bankās new rules will even out the house price growth. Theyāll make the housing market more consistent. Thatās a good thing.
The impact is that we shouldnāt see the big booms and busts that weāve had over the last 4 years. Again, thatās a good thing.
House prices will still go up. Itāll just happen more smoothly.
Look at this graph. It shows house prices in countries that have implemented DTIs. What do you see?
In all three cases, house prices have continued to climb after DTIs came in.
The Reserve Bank thinks that NZ property prices will go up by about 5% a year over the long term.
And remember, the Reserve Bank is setting the rules. Just two weeks ago, they released a new house price forecast.
It suggests that house prices would go up by 5.4% next year (2025) and 5.8% the year after (2026).
House prices will still go up.
Itāll just happen more smoothly. Maybe youāll see house prices go up by 5% per year, rather than the 6-7% that happened in the past.
That doesnāt worry me. Itās what Iāve been telling investors to plan on for years.
The DTIs will have no impact when they come in on July 1st.
Itās not the debt-to-income ratios that will stop people from getting a mortgage. Itās the high interest rates.
The banks are already scrutinising mortgage applications at a 9%-ish interest rate.
Effectively, you canāt get a mortgage higher than 5Ā - 5.5x your income anyway. And the new rules are 6x your income for homebuyers and 7x for investors.
So, the DTIs are set above whatās currently happening.
Take a look at this graph. All types of borrowers are well below the Reserve Bankās limits.
Weāre basically driving at 50k an hour in a 100k zone. The rules will have no impact.
So whatās the point of the new rules? Theyāre really here to stop the rush of lending that happened during Covid from happening again.
The last big question many investors have is: āHow many properties can I buy?ā
The Reserve Bank has put out some estimates.
Letās say you own 1 investment property today.
If the DTIs didnāt come in, the Reserve Bank thinks you can buy another 5 investment properties over the next 10 years.
With DTIs, that number goes down to 3 more.
So, these rules will slow some investors down. But not all investors will hurt the same.
New Builds are exempt. So, if you buy a New Build you get to stick with the old rules.
That means that if you want to build a property portfolio faster, New Builds could be the way to go.
The Reserve Bankās estimates suggest you could grow a property portfolio almost x2 as quickly.
Got another question about DTIs? Hit reply and let me know. Iāll answer it on the Property Academy Podcast.
Managing Director, 20+ Years' Experience Investing In Property, Author & Host
Andrew Nicol, Managing Director at Opes Partners, is a seasoned financial adviser and property investment expert with 20+ years of experience. With 40 investment properties, he hosts the Property Academy Podcast, co-authored 'Wealth Plan' with Ed Mcknight, and has helped 1,894 Kiwis achieve financial security through property investment.
This article is for your general information. Itās not financial advice. See here for details about ourĀ Financial Advice Provider Disclosure.Ā So Opes isnāt telling you what to do with your own money.Ā
Weāve made every effort to make sure the information is accurate. But we occasionally get the odd fact wrong. Make sure you do your own research or talk to a financial adviser before making any investment decisions.
You might like to use us or another financial adviser
