12/09/2022
Liquidity in the housing market
House prices have been steadily dropping in the past months, as many factors that influence them have rapidly changed.
One of the strongest drivers of what people can pay for housing is how much it costs to borrow money, to facilitate the purchase - also known as interest rates. The issue we are now seeing is that interest rates were kept too low for too long in the wake of the Global Financial Crisis, while consumers and governments alike became addicted to cheap debt. This inflated the prices of assets like housing, the stock market etc.
In more recent times, inflation has become far too hot and wholesale interest rates had to rise to stop this, but so much money had been injected in global economies, that these increases must happen repeatedly. This increase in borrowing costs has increased so fast, house prices have yet to fall enough to re-balance the market and provide the much-needed liquidity to keep things moving.
When you borrow money to buy property, the bank has several channels it can get the capital from including customer deposits, bank capital, overseas/onshore bonds, and the Reserve Bank, who set the OCR (Overnight Cash Rate) to entice banks to either borrow or lend them money depending on the conditions. In finance just about everything is connected globally, so the US Fed making capital more expensive has a flow on effect to the rest of the world.
In NZ we can fix mortgage interest rates between 1-5 years (some outliers have existed) and the majority of Kiwi's have generally taken the 12-month rate, which tends to be the cheapest. When interest rates fall this is a solid strategy as you can then pay off more principle with the same dollar amount of repayments. However, in a rising rate environment the opposite is true - so careful consideration is required when choosing how to structure or re-fix your mortgage. This will dictate how fast you become debt free long term and how much discretionary income you have leftover once your debt payments are made.
Unfortunately, the banks have gravitated towards slick online portals that offer you rates and entice you to make these decisions on the fly, lately before the rates change on the app or website. Luckily financial advisers can still have prudent conversations with you and guide you through this process to consider factors and options you otherwise might not know about.
If you are looking at borrowing money or re-fixing your mortgage - get in touch to have a coffee or phone catch-up. I have worked in finance my entire career and will sit down with you to figure out the best way forward and help you navigate your best options for your situation and goals.
My advice is free and so is the coffee.
https://anthonysage.co.nz
