Property Investment
3 min read
Private Property – our weekly newsletter that gives you insights into what's happening in the NZ property market. Written by managing director Andrew Nicol. Sign up to receive this in your inbox every Thursday.
Let’s play a game – fact or fiction.
We’ll look at property-related news headlines to see how their statements stack up.
#1 – “Surging mortgage rates: Reserve Bank fears thousands of first-home buyers in trouble.” Newstalk ZB
What does the headline make you think?
Probably that the Reserve Bank thinks first home buyers have taken on too much debt and will need to sell up, causing house prices to fall.
Is the headline Fact or Fiction?
Fiction.
The Reserve Bank didn’t say that first home buyers were “in trouble.” Instead, they said that if interest rates rise to very high levels, some recent purchasers will face “serviceability stress.”
And that they’d need to “sharply reduce their living expenses” to continue paying their mortgage.
That makes sense. When interest rates fell, borrower's mortgage repayments decreased, so they spent more.
Now that interest rates are heading the other way, we all need to spend less.
So while some people will need to alter their spending decisions, it’s not true that there will be a rush of first home buyers selling up, as the headline suggests.
#2: “'Day of reckoning' coming for borrowers of $160 billion in housing loans after Reserve Bank hikes OCR.” NZ Herald
The headline suggests that $160 billion of loans will come under stress as borrowers fix their loans at higher interest rates.
Is it Fact or Fiction?
Fiction
Most of that $160 billion will not come under stress.
That’s because while some borrowers have taken on a lot of debt, the average mortgage is smaller than many Kiwis think.
While the average price of a New Zealand property may be just over $1.025 million (CoreLogic), the average mortgage is just over $362,000.
On top of that, 1 in 3 NZ properties doesn’t have a mortgage at all.
And of the borrowers who took out new loans over the last 12 months, over 1 in 4 have a debt-to-income ratio of 3 or less (very low).
The point here is that some borrowers will find it tough to stomach rising interest rates.
But, this group is relatively small compared to those borrowers who have owned property for years and diligently paid down their mortgages.
The article claims that Westpac predicts that house prices will fall by up to 20%.
Is it Fact or Fiction?
Fiction
That’s not what Westpac actually said in the source material.
Instead, the bank predicted a 20% drop in inflation-adjusted house prices.
A slight change in words, but a significant shift in their meaning.
A 20% drop in house prices ≠ 20% drop in inflation-adjusted house prices.
That 20% inflation-adjusted drop could be made up through a 10% drop in house prices and a touch over 10% inflation.
But the price you could sell your house for hasn’t gone down by 20%; it’s gone down by 10%.
This is an important distinction to make. No major bank is currently predicting a 20% drop in house prices.
So where am I supposed to get my information from?
The point of this email isn’t to bash the media. It’s to point out that news content is not there to help you make an informed financial decision.
It is there to be a short, sharp snapshot from one point of view or the other. And the headlines are written to stoke your emotions and get clicks.
And that’s why it is essential to pay attention to specialist investment publications that are committed to balance.
That could mean subscribing to either of the two investment magazines that are part of our group here at Opes Partners (NZ Property Investor and Informed Investor mags).
It could mean subscribing to The Property Academy Podcast.
But, you don’t just have to listen to us. You might also enjoy reading Tony’s View or tuning into the NZ Property Market Podcast from the team at CoreLogic.
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.
