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Mortgage News You Can Use
 Not that he expects it. Far from it. Central bankers "have been likened to dismal souls that take away the punch bowl just when the party is getting boisterous", he said in a recent speech. And at first glance, owners of rental properties are probably angry. The rise in the official cash rate will push up mortgage interest rates. That, in turn, will put downward pressure on house prices, which become less attractive if they are more expensive to finance. But both of those trends may actually help landlords. Let's look first at mortgage interest rates. One reason investment property has grown in popularity is that interest rates are low by historical standards. They're not, in fact, low compared with inflation - something would-be property investors should take into account. With inflation also low, the burden of mortgages won't diminish as it did in high-inflation days. (Still, people think current rates are low, and that's what counts.) As long as mortgage rates stay low, more people will buy rental property. And that's the last thing current landlords want. Already there are signs of a glut. In many places, the number of landlords looking for tenants is rising. This pushes rents down, and landlords are more likely to face periods of no rental income. While a mortgage rate rise adds to the cash flow squeeze, then, it should also discourage new entrants, who would have pushed rents down even further. What about property prices? Every landlord whose rental income barely covers expenses, or who has to contribute other income to keep the thing afloat, is counting on a big capital gain to make the investment work. Bollard's move works against price rises. But that might be good. Experts are worried that a property bubble is developing in New Zealand. "When people are buying property purely out of the expectation that its price will keep going up strongly, that is a sign that the underlying fundamentals that ultimately dominate are being forgotten," said Westpac recently. Adds Bollard, "There are elements of speculative bubble behaviour present in recent house price developments." Other countries have bigger worries. Average house prices here are 5.0 times average incomes, compared with 5.2 in the UK (although much higher in London and the southeast), 6.0 in the US and 6.1 in Australia, says Westpac. But, according to the Economist magazine, those three countries "look distinctly bubbly." And we're not all that different. BNZ chief economist Tony Alexander is now predicting small house price rises in the first half of this year, "but then over the second half the negatives start coming in thick and fast, causing house prices to fall from late in the year through part of 2005." He adds that the longer it takes for Bollard's interest rate rise to dampen house sales, "the greater will be the extra lift in prices in the first half of this year, and the greater the decline in prices from some point late this year or early in 2005." If prices fall fast, panic will set in, pushing prices down further. Landlords who think they can weather the storm may freak out and sell, possibly losing all they have put into the property and more. Even the stayers will be stressed. Bollard says his rate rise is not aimed at housing. It "was just part of the normal operation of monetary policy to ensure continuing consumer price stability." But if it quietens the property market, that's got to be good for all players. © 2004 NZCity, Mary Holm
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