Interest rates cooling the market

It would appear that interest rates are going to rise earlier than we expected, even from a few months ago. The only factor likely to delay this occurring is the high level of the NZ dollar and the difficulty this is placing on exporters.

As mortgage interest charges are usually the largest expense for property investors this can have a large impact on your ability to grow your portfolio or even hold onto your existing properties. Increasing interest rates, along with falling affordability and reduced immigration levels, are likely to be the catalyst for property prices cooling off.

We are currently at the early stages of a slowdown in the property market, however it is possible that price increases could go on for another year. The movement of property prices when entering a boom phase is very much like a freight train taking off. It takes a while to get momentum going, but once this has been achieved it is very difficult to slow it down.

Remember that New Zealand is not just one big market and the area where your rental property is located may already have peaked. Be sure that you know what is happening in your local markets of interest by keeping up to date with sales statistics and keeping in contact with good real estate agents. Many locations have experienced very strong growth over the past 18 months or so, and the degree of this growth is likely to have a bearing on when the market is likely to have peaked. If the market has risen to a high degree, say 25% or more, over the past year, then there is a good chance it may have done its dash.

If it looks like the market you are investing in may have peaked, look to buy properties where you can add value. By doing this you will increase your equity and help protect yourself should prices actually fall.

When analysing property you are looking to purchase, always allow for a two percentage point increase in interest rates and make sure this wouldn’t mean you had to sell. When the market does turn, as it always does, you want to be in a position to benefit from those investors who have not considered potential market changes and are forced to sell their properties.