Ticking time bomb of interest-only home loans

Statistics from the Reserve Bank show more people are opting for an interest-only loan when buying a home.
In January, 30 per cent of loans to owner-occupiers were interest-only, but by May it had drifted up to 33 per cent.
An interest-only loan will typically have lower repayments than a principal and interest loan — because repayments only cover the interest. The downside is that payments do not reduce the amount borrowed by a single cent.

Woman with financial problems

Statistics from the Reserve Bank show  more people are opting for an interest-only loan when buying a home.
In January, 30 per cent of loans to owner-occupiers were interest-only, but by May it had drifted up to 33 per cent.
An interest-only loan will typically have lower repayments than a principal and interest loan — because repayments only cover the interest. The downside is that payments do not reduce the amount borrowed by a single cent.
All can be well until one of two things happen. Interest rates go up or the interest-only period ends and the borrower is forced into a principal and interest loan — which can add hundreds of dollars to monthly repayments and deliver a payment shock.
Borrowers on a tight budget risk not being able to make these higher payments, causing all sorts of financial stresses.
If you opted for an interest-only loan to buy your home, keep an eye on when the agreement ends and what repayments will cost if it is converted to a principal and interest loan.
Interest-only loans are popular with property investors as interest payments are tax deductible. But there is a risk if they are used to buy a home you wouldn’t otherwise be able to afford. According to the RBNZ, 28 per cent of all mortgages are interest-only.
Gone south
We learned this week  the Transport Agency has decided against a heavy rail link between Auckland CBD and the country’s largest airport. Although a light rail system is apparently being considered. Woopdee-do!
This is so short-sighted because a rail network out to the South Auckland airport would not only serve travellers, but anyone working there, as well as people living along its route working in the city. Think of the hundreds of cars it would take off the Southern Motorway.
A light rail system simply won’t be fast enough to move enough people efficiently, it will just trundle along like something out of Thomas The Tank Engine, a toy-town solution for the engine room of the country.
A world-class city with the severe congestion we face every day on the roads needs a world-class train network.
And what’s currently on offer falls well short of what we need.
Apartments
Apartment building is ramping up according to property firm CBRE. It says in 2013, less than 500 new Auckland apartments were planned but that figure jumped to 1000 during 2015. It says that up to 2500 new units could be completed this year, and that next year 4000 units are planned.
Interest rates
The ASB has raised its floating mortgage rate by 10 basis points, taking it to 5.65 per cent. The bank has not said why it raised its rate, but there are no apparent reasons — even taking Brexit into account.  KiwiBank’s floating rate is 5.45 per cent.
Among the better fixed-rate deals include ASB’s and BNZ’s 4.19 per cent for two years.
Famous home
If you are into real estate trivia, then you might be interested to know that the Philadelphia home where Oscar-winning actress Grace Kelly grew up is on the market for US$1 million (NZ$1.41 million). The home was built in 1935 and is an historical landmark.

Standards for P tests needed and solar panel owners are penalized

When police were alerted to half a tonne of methamphetamine on a beach last week it highlighted the problem New Zealand has with illegal drugs such as P.
It seems the drug is so widespread that anyone seriously contemplating buying a home needs to have it tested for P contamination — even if the property looks pristine.

 

Solar panel installation
Solar panel owners in Hawkes Bay are being asked to pay more for their power.

When police were alerted to half a tonne of methamphetamine on a beach last week it highlighted the problem New Zealand has with illegal drugs such as P.
It seems the drug is so widespread that anyone seriously contemplating buying a home  needs to have it tested for P contamination — even if the property looks pristine.
Unfortunately, there are no guidelines or rules that companies testing for drug contamination need to follow. Home buyers risk paying lots of money for potentially questionable test results and advice on making an infected home safe to live in.
Harcourts’ CEO Chris Kennedy wants the government to set standards for the methamphetamine-testing industry.
He says: “Testers and cleaners have differing views on the severity of contamination and the methods for decontamination.
“We need some standards put into place to protect consumers and the government needs to take the lead on this.”
Kennedy says that just as the leaky building problem has made hiring a qualified building inspector essential, the P scourge should make methamphetamine testing mandatory. Tests should be done before the contract is signed.
If a real estate agent knows a property is contaminated, they are required to tell you.
The blame game
The three-year Auckland Housing Accord, which ends in September, is falling short with a little more than 30,000 housing consents issued or sections created. The figure is well short of the 39,000 target, which Housing Minister Nick Smith says is unlikely to be met.
Smith appears to blame the slack performance on anything he can think to name, from shortages of labour and equipment to concrete firms wanting three weeks’ notice to pour a slab. The only thing he didn’t mention was the supply of structural steel.
Auckland needs 13,000 consents a year to match demand and in the full year to March there were 9566 consents (unfortunately, people can’t live in a “consent”).
Surely, with all these consents pouring in, someone could see what would happen next?
As for the 154 Special Housing Areas, where consents can be fast-tracked … just 1010 homes have so far been built. The reason? Land owners are making more money sitting on the land than developing it.
Meanwhile, more than 68,400 migrants entered the country in the year to May – breaking all records. Based on the current trend, Half of these will want to live in Auckland. Although Treasury says A quarter of arrivals are New Zealand citizens coming returning home.

Home loan warning
Treasury Secretary Gabriel Makhlouf is worried Aucklanders are taking on too much debt as a direct result of   high  property prices.

Speaking at the Committee for Auckland Group Summit he  said  Housing debt is   the largest component of  the  country’s $246 billion of household debt. On average households are spending 163% of  disposable income, the  figure is set to rise and  is already higher  than  that leading up to the GFC of 2008.

Treasury is  worried  that a drop in people’s income, perhaps due to job losses,  or a rise in interest rates – which I don’t think we will  see for another year or two –  may  cause  some  people  to struggle to meet mortgage repayments.

The risk is that if too many people find themselves backed in to a corner financially , repossessions will starts and house prices will fall – sending people into negative equity.

High house prices he says is also preventing people from moving to Auckland to find work. Wages have not risen anywhere near the rate or rents or house prices. High accommodation costs also impacts the government as  rent subsidies rise.

Crossed wires
I often wonder why the building code doesn’t include solar panels being fitted to new homes in suitable areas of the country.
With so much sunshine we could be among the greenest countries on the planet with homes generating a high percentage of the power they need.
We’d all benefit if it were part of the code, which has been changed before to include radical things such as double glazing and insulation.
But what’s this? In Hawkes Bay those with the foresight to invest in solar power  generation  are being penalised by lines firm Unison Networks. The firm — via some twisted logic — has figured that people with solar panels should pay more to be connected to the grid.
By this rationale, if I walk home tonight, Auckland Transport should charge me more the next time I catch a bus.
Next week, more lessons from the North Korean School of Business.

Banks make it tougher for foreign home buyers in New Zealand

Westpac led the charge last week by refusing to recognize the overseas income of foreign wanting a home loan.

Westpac led the charge last week by refusing to recognise the overseas income of foreign home-buyers wanting a loan. The ASB, ANZ and BNZ quickly followed suit. In broad terms, the change means people without New Zealand citizenship or permanent residency can’t rely on their foreign income when making a mortgage application.

Make no mistake, banks are answerable to their shareholders, need to make a profit, and will not be turning business away on a whim.

In reality the amount of business lost is negligible, and many foreign buyers pay with cash, but it’s great PR. Nevertheless, the Government’s banker may have scored a brownie point for being first off the rank.

In my view the banks have plenty to answer for when it comes to house price inflation.

Had the banks opted to lend a bit less, and restricted loans to four or five times a borrower’s annual income then we wouldn’t have such inflated house prices today.

Price drop

According to the Real Estate Institute, the median Auckland house price has dropped 0.9 per cent from $812,000 to $805,000 in the past month, but is up 7.9 per cent on a year ago.

Renting

If Prime Minister John Key is to be believed, Kiwis now prefer renting a home to owning one. I haven’t met a tenant who wouldn’t prefer to own a home, living as they do under the cloud of being given notice to leave and being unable to hang a picture on the wall without written permission.

I’m not sure where Mr Key got this idea from (perhaps he googled it) but, in an interview with RNZ, he claimed that reduced home ownership is a reflection of “societal changes” that include people getting married later and having children later. Or it could be that this change is a result of people spending longer saving their 20 per cent home deposit, and preferring to get settled before having children.

Interest rates

Reserve Bank Governor Graeme Wheeler woke from his slumber last week to announce no change to the OCR — which sits at 2.25 per cent. He’s now hibernating until August 11.

Meanwhile, the economy stumbles along with economists such as ASB’s Kim Mundy saying the “benign inflation outlook warrants further monetary easing”. In layman’s terms: the OCR should be cut.

Mundy is among those who expect Wheeler to cut the OCR to 2 per cent in August.

Auckland median house prices drop $10,000

Is the booming Auckland housing market about to run out of puff? It seems unlikely, but looking at figures released by Barfoot & Thompson one has to wonder.

Is the booming Auckland housing market about to run out of puff? It seems unlikely, but looking at figures released by Barfoot & Thompson one has to wonder.
According to the firm, the SuperCity’s median price for a home — a more accurate indicator than the average price — is down from $820,000 a month ago to $809,500 — a drop of 1.3 per cent. Despite this, the current Auckland median is still 7.9 per cent up on a year ago.
The lower median value is not the result of a lack of buyers, says Thompson.
“In the last two months, the number of sales has not influenced prices,” he says. “In May, turnover was high and in April turnover was low, yet for both months, prices remained relatively static or fell.”
Of all the 1306 properties sold by the firm during May, 464 changed hands for more than $1 million, and 185 sold for less than $500,000 — illustrating the dire need for lower-priced homes (if you can call half a million dollars low-priced or “affordable”).
Too many homes
Over at the BNZ, bank economist Tony Alexander says in his weekly newsletter that in two to three years from now some regions will have seen excess [home] construction compared with population growth, and that some developers and investors will suffer losses.
He says: “Auckland will plateau through the combined effects of prices simply being really, really high, mildly easing migration, higher annual supply growth, and possibly slightly higher interest rates from 2019.”
Instead of raising interest rates, he predicts the Reserve Bank will introduce more controls to reduce the supply of credit by increasing the deposit required by investors in Auckland and elsewhere, and he has a two-way bet on debt to income rules being introduced for new lending.
His advice to investors is to carry on buying — at least until 2018.  Alexander says buying in Nelson, Hamilton, Tauranga, Wellington, and Auckland is fine. But if you look elsewhere, he says, then you need to check population growth assumptions.
Christchurch
Harcourts reports that average property prices in Christchurch hit a record high of $553,000 last month. The firm says the number of properties listed for sale has dropped, which may well be a seasonal issue.
Harcourt’s CEO Chris Kennedy says sales are constantly outstripping new listings. This lack of choice means prices will rise.
Free on Monday
Free with Monday’s Herald is our quarterly Property Report. As usual you’ll see what your home is worth thanks to the latest data from QV.co.nz. Leading figures from the real estate industry share their thoughts on the current state of play and where they think the Auckland market is heading.
There are features covering the trials and tribulations of house-hunting in Auckland, as well as the pitfalls of tapping into your home’s equity.
All that and much more in Monday’s Herald.
Interest rates
There are whispers of interest rates rising to more than 5 per cent come 2019. If it comes to pass, a five-year fixed rate mortgage below the predicted rate may pay dividends.
There are still a few options around. But making a meaningful forecast in these financially turbulent times is near impossible.