With the recent LVR changes this is the first big property change to hit the heated market. Will this deflate the market or have no affect at all?
The Reserve Bank as implemented 60% LVR for property investors across the country. 80% LVR for own home buyers across the country as well. This is a big play by the Reserve Bank to try and slow the property market across the country.
With these changes the Reserve Bank has asked New Zealand banks to implement these new rules from the 1st of September.
However at this time of writing banks have already started implementing the new LVR rules from the 21st July.
As of 21 July, banks have said they will be at 60% LVR for investment lending on NEW applications.
If you are a property investor and already have pre-approval or at the stage of settling, banks are still honoring the old LVR rules.
The banks are also happy to talk about lending above 60% if you already hold your current home with them. Though you need to be careful as any property investor would tell you. You need to keep your investments separate to your personal home.
No matter what pre-approval you have 60% LVR will be the minimal requirement for property investors.
Saying this you still have another month and a half to find a property (if you have pre-approval) and borrow at 70%LVR.
Auckland is still a fantastic area for investors to be focused on with Hamilton and Wellington being the the other two major cities that will produce capital gains. I still believe you need to stay away from provincial centers like Rotorua, Tauranga and the like.
As property investors we now need to bear in mind that competition is going to be fierce as a lot of property investors look to do the same thing over the next couple of months.
I see the next six weeks playing out a little like September 2015 when they introduced lending restrictions. Initially, there will be a lot of property investors frantically looking to secure a deal which will cause price rises.
I believe that there will then be a softening like we saw in October and November last year before a more gradual increase or flattening of price gains.
Despite what some people are saying I do not believe that this will “pop the bubble”.
It will take something much greater than this and something from overseas I believe. Who knows when this will happen but we can be assured that at some point it will.
When “it” does happen, on one hand, according to the likes of Phil Anderson, this drop will not be a land induced bubble burst but rather a “mid-cycle slowdown” from falling paper assets (stocks etc), that will of course affect property prices, but will not be ugly like 2007.
On the other hand, you have the likes of Jim Rickards, Chris Martenson and others who are picking that the next crash is going to be particularly severe even to the point of suggesting the failure of the present financial system.
Please note though that these observers are generally extremely bullish on gold which, may I comment is akin to property in the way it behaves. I.E. they are both assets that hold up in inflationary environments when fiat currencies are failing.
Therefore, we should feel extremely confident holding good property assets that are showing sound rental cash flow. That does not mean chasing the last 1% in yield to make the deal work. Itt means taking a slightly lower yield, but having confidence that if there are mass lay offs, that our property will always be rented albeit that we may have to drop the rent a little.
We can be almost 100% confident that property in Auckland will be worth far more in years to come. Whether that be central, west, north or south Auckland.
Of course, this brings us to the idea of Japanese style deflation.
Could we go into a 1991 Japan-like bubble burst whereby asset prices decline for the next 20 years. This is possible but highly unlikely given the absolute commitment by the world’s central banks to inflate our way out of this mess.
It would be a very brave investor who would bet against their printing presses.
I still believe that we cannot go wrong over the long term with purchasing a solid property and as you know this is not just commentary. I have significant holdings and debts but I am not nervous for myself or any of our students at Wealth Ladder.
What I’am nervous about is for highly leveraged property investors in risky property assets speculating on capital gains as opposed to strategically planning for long term cash flow PLUS an expectation of capital gains.
Even if a newer property investor was to buy one property and the rent covers the interest payments of the mortgage and that investor was to pay off the principal over 30 years, it is STILL going to be a better return than these funds are going to give us.
That is before we take into account rising rents, capital gains, reducing interest payments as we pay off the loan.
It might not seem that exciting but these small numbers compound very rapidly as experienced property investors fully know.
Another point on gold, if it really does go to $10,000/ounce (presently $1,400) as a number of pundits are predicting, then what is that going to do to the value of our properties? They are both valued in fiat currency which is dropping through the floor!!
Finally, back to the local issue. We know that the OCR is highly likely to come down based on recent Reserve Bank announcements. Which is of course going to make our properties even more affordable.
In short, we are certainly heading for some “big event”. But I do not think that we should let this affect our decisions to purchase good quality rental properties that we know we can afford. I firmly believe that time will prove me to be correct.
I wish all property investors all the success.
Director of Wealth Ladder
I have been a property investor for over 13 years and have created a multi-million dollar portfolio including residential and commercial. I could go on about this but I’m not here to impress you but to impress upon you that YOU TOO can create wealth through property whether that be $100K or $5 million. I've been through the boom - bust - boom so I know what it takes to stay in the market. I live locally in Otahuhu with my wife and new baby boy. I love to help and teach people about buying well and for long term. We can all make a quick buck but the real strategy is creating long term wealth.
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