By David Hargreaves
"Well... Should we or shouldn't we?"
That's the question wannabe first home buyers pose to themselves when faced with having to borrow stress-inducing amounts of money to get a place to call their own.
The question is pretty sharply pitched at the moment because the housing market looks very uncertain and indeed the whole global economic situation is in varying states of turmoil. As ever, I don't offer a view on what people should do because I'm not a financial adviser. And it's fair to say, there's no 'one-size-fits-all' answer and much would depend on how individuals managed their own finances and how they structured things.
As I have recently opined, the FHBs in recent times don't appear to have been put off by the potentially wobbly (particularly Auckland) housing market and are in there in numbers and borrowing some hefty amounts of money.
And these trends are continuing.
The latest month's figures on lending by borrower type show that the FHBs are still borrowing up, while separately, the RBNZ's Sector Credit figures for February showed that overall growth in the the amount of mortgage money outstanding increased to 6.2% for the 12 months to February, up from 6.1% in the year to January.
These figures have remained remarkably robust really. More so than I should imagine most economists expected.
The annual growth rate in total mortgages outstanding peaked in this housing cycle at 9.3% in November 2016 and then began a rapid decline, falling to under 6% by the end of 2017. Yet while this rate of growth might have been expected to slow, it hasn't. Instead in more recent months it has been creeping up.
And with the RBNZ having loosened the limits on high loan to value ratio (LVR) lending from the start of this year and now with the RBNZ's new 'super-dove' stance that suggests the next Official Cash Rate move is more likely to be down, it will be interesting indeed to see whether the growth in mortgage lending moves up further.
Ah, yes, the crux of the matter. The RBNZ says the next move in the OCR is more likely to be down. That's already been enough to see some of the banks reacting with lower mortgage rate offers. More of that in a moment.
How seriously are we to take the RBNZ at their word that the OCR may be dropped? I think very seriously - otherwise why say something at all? That's particularly so when the comments were made in one of the bank's 'one-pager' OCR decisions rather than in the full Monetary Policy Statement (MPS) in which such comments could be explained more fully. The next OCR decision on May 8 will be released along with a full MPS. If the RBNZ had not considered there to be some urgency in changing its monetary policy stance then the assumption is it would have waited till May before shifting its forecasts.
So, I think we can assume, as many economists have, that the RBNZ will drop the OCR and it will be sooner rather than later. I reckon they will do it in May and follow with another cut in August. If so, that would see the OCR, the underpinning benchmark of our interest rate structure, sitting at just 1.25%. My goodness, that would be low.
As mentioned, there's already been some reaction in the marketplace. Notably Kiwibank launched a 'special' five-year rate on fixed mortgages at just 4.29%. Note though that this is for mortgages where the amount borrowed is 80% or less than the value of the property being bought. That does need to be stressed because obviously a lot of first home buyers have to borrow in excess of 80% of the value of the property.
It's worth having another crunch of some numbers at this point, courtesy of interest.co.nz's mortgage calculator.
Talking big figures
The February lending by borrower type figures recently issued by the RBNZ showed that 16,284 loans* were taken out for a grand total of $4.798 billion in the month. That gives an average mortgage size of $294,645 among all of those taking a mortgage. Of course many mortgages will be much higher than that and many lower. But the average is an interesting start point.
The RBNZ gave 5.77% as the market average floating rate for new mortgages in February. The market average fixed rate for five years was 5.56%. Since we've talked about Kiwibank's five-year 'special' rate, we'll include in our calculations the Kiwibank 'standard' current five-year rate of 5.04%, as well as its new 4.29% special rate. All for illustrative purposes.
Our mortgage term is 30 years.
Okay, based on that $294,645 average-sized mortgage in February, we would be looking at monthly payments of $1723 on a floating mortgage and $1684 for the market average five-year fixed rate. On Kiwibank's 'standard' five-year rate we would be paying 1589 a month and on the new 4.29% 'special' rate it would cost us $1456 a month.
By the by, when yours truly purchased his first home in 1991, it was on a high-LVR mortgage of $127,000 for 15 years on a reducing principal. (This was a fairly aggressive approach.) It is etched into my mind that the very first monthly payment was in excess of $2000 for, yes, the interest rate was over 12%. And no, I wasn't trying to do this on my own, as there was a second income stream contributing of similar size to mine!
Change, change, change
But it is interesting to look and see what a change has been wrought by the much lower interest rate structure we've seen in recent years. People can now be borrowing double what I borrowed then and paying far less. And remember, according to the RBNZ's inflation calculator, goods worth $2000 in 1991 would now cost $3400, so, based on that my $2000 mortgage payment then should equate to a $3400 monthly payment today. And lest, people think I'm writing all this with the sound of violins playing in the background, I will mention that of course mortgages with interest rates of over 20% were 'a thing' once upon a time. Wow.
Which brings us back to the FHBs. Some examples. In February there were 1353 first home buyer mortgages taken out worth collectively $485 million for mortgages that were 80% or less than the value of the house. This gave an average-sized mortgage of $358,462.
So, running the same scenario as above, on the average floating rate we'd pay $2096 a month, on the average five-year fixed we would pay $2049, on Kiwibank's 'standard' five-year we would pay $1933 and on the new 'special' Kiwibank rate we would be up for $1772 a month. That's still less than someone sitting at my computer was paying in 1991 for a mortgage only about a third the size!
And then there's the fully geared up FHBs. In February brave souls designated as FHBs fronted up to borrow $325 million for high LVR mortgages, IE borrowing more than 80% of the value of their property. There were 736 of these mortgages taken out. This works out at a heavy-duty $441,576 average sized mortgage. These guys and gals would not qualify for Kiwibank's 'special' of course, so I won't include that example. On a floating rate they would have been up for $2583 (just under $31,000 a year, which is starting to sound pretty, um, impressive). On the market average five-year fixed rate they would pay $2524 a month, and on Kiwibank's 5.04% five-year rate they would pay $2381.
Losing the plot?
The inclination might be to say that people are testing the bounds of sanity committing to such large mortgages at a time when maybe house prices could start to fall.
But there are a heck of a lot of moving parts to all this.
The interest rates are really the key. And some of these five-year fixed rates are looking pretty good. And with the ever-growing chance that the RBNZ will drop official rates soon, then mortgage rates could even get a touch lower yet. The significant point is they ain't likely to rise any time soon. And if they do, anybody locking in for five years has at least given themselves a bit of breathing space.
The other interesting point about this is what happens on the other side of the equation with interest rates. If you are trying to save for a house, you don't want to be investing your money in higher risk investments, since your time frame is presumably reasonably quite short and you can't risk dips in your principal savings. Therefore, many people are likely to hold their savings in bank interest-bearing deposits. The returns on these are not flash and likely to get less flash in the short term. So, really those saving for deposits are dependent on how much they can save, rather than what sort of returns they might be able to get to boost their nest egg.
Servicing the beast
The key thing always of course is, regardless of what happens to house prices, the ability of the individual to service a mortgage. If you know what you have to pay every month for the next five years, and you can afford it now, then you should be able to keep affording it. The things that might trip you up include disruptions to employment. And that's a serious risk if the economy really does turn down.
Increasingly though we seem to be looking at a game in which the rules have changed. Unless we do somehow see a return to the higher interest rate structures of the past, we are now in an environment in which much bigger mortgages can be tolerated.
I don't think any of this makes the "should we or shouldn't we?" decision any easier. There's just that much more to think about. The reality is, you are only going to know in five or 10 years time whether the decision you made was the right one - and even then it's really all about the individual and how they execute their decision.
To therefore answer, but not really answer, the question in the headline for this article: Whether the current situation is a trap or an opportunity for particularly the FHBs will only be borne out by time and by how each individual handles the decision they've made.
So, plenty to think about. All I would say is: Good luck people and all the best.
*This article was amended slightly after initial publication to make clear that the RBNZ 'borrower' numbers refer to the number of loans taken out. Some borrowers may take out more than one loan.