ANALYSIS: Last week, I discussed the high probability of a round of fixed mortgage rate increases in the near future because of a big jump in fixed borrowing costs for banks. At the time of writing, only one bank had lifted fixed rates by around 0.25%, apart from a new discount to the two-year rate.
It is in the two-year term that most people are showing a strong borrowing preference, and that is where banks have tended to offer their best rates for much of this year. The new discounting of this two-year rate is one way in which we can tell that activity in the residential real estate market is surprising banks on the weak side.
Will that change now that Labour has promised not to remove investor interest expense deductibility again should they win the election? Not really.
The move is welcome, given that the sharp drop-off in investor demand for property since 2022 risks creating a shortage and putting upward pressure on rents – something that’s definitely not underway at the moment.
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But the latest results of the monthly investor survey I run with the Property Consortium suggest that interest expense deductibility is a concern for just over one in 10 respondents. Plenty of other things are occupying investors’ minds.
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For instance, 15% say they have concerns about rising council rates and 13% cite insurance costs. Just under 10% say they are worried about house prices falling. This is interesting.
Many people are convinced that most investors are in it to accrue tax-free capital gain. But the risk of falling prices matters little to the 72% of investors who say they plan to hold their property for at least five years or never sell it.
So, taking the many other areas of concern into consideration, will Labour’s promise bring investors back into the market? Only at the margin. A net 30% of landlords in my monthly survey report that they are having difficulties finding the sort of tenants they would like.
The costs of running a rental business continue to rise, prospects for price rises (to the extent they matter) are minimal in the immediate future, construction levels are rising, population growth is below normal, and a change in government could still bring other changes targeting investors.
Independent economist Tony Alexander: “There is strength in our economy, but popular debate remains centred around the idea we are stuck in a rut and going backwards.” Photo / Fiona Goodall
Throw in the strong upside risk to interest rates in New Zealand as the pace of growth in our economy accelerates and the housing outlook remains one where the field is likely to stay wide open for young buyers.
On another matter, the data released last week showing New Zealand’s economy has grown 1.8% over the past year illustrates how many people’s perception of the world has since Covid differed from reality.
Our economy is growing, job numbers are up 1.1% annually, a well-above-average net proportion of businesses plan to hire more people, the tourism and export education sectors are growing firmly, farm incomes are rising, and the construction sector has started a good cyclical upturn.
There is strength in our economy, but popular debate remains centred around the idea we are stuck in a rut and going backwards. In terms of per capita income, we are, because that is what you get when productivity falls 4% over four years, as has happened recently.
But opportunities for people to better their incomes abound and will improve as the labour market strengthens through 2027. Be careful not to fall into the trap of thinking New Zealand is munted just because numerous lobby groups and social media pundits all across the political spectrum preach doom.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
