Like a bear going into hibernation every year, the property market always slows during the winter months. Many of us set off for warmer climates, bolstered by two weeks of school holidays at the start of July.
There's much speculation about how the property market will fare over the coming months.
The REINZ's House Price Index shows that nationally prices have declined by 2.9% over March, April & May, with the Auckland region reducing by 4.2% over the same period.
This decline has been largely attributed to vendors adjusting price expectations at more realistic levels. Like any commodity, if the market won't meet you at your price, you’ll have to meet them at theirs. Real estate is no different.
The flipside is that more affordable property prices may stimulate sales, creating a small surge of activity as we wade through the winter. But will mortgage interest rates play ball?
Most commentators forecast OCR cuts in late 2024, although the RBNZ itself is not forecasting any potential cuts until August next year or until they are very confident inflation is under control.
As we know the New Zealand banks march to the beat of their own drum, and not the OCRs, so if the lack of real estate sales continues, we may see some interesting pricing as the banks compete for the mortgage dollar.
The next OCR review is scheduled for 10 July with most experts predicting more of the status quo.
What could this mean for the SCP loan book and investors?
A downturn in the construction sector, high mortgage rates and a lack of investors entering the property market; the cumulative downward pressures on property values suggest it’s going to be a challenging winter. So, what does this mean for SCP’s loan book, and by extension, for our investors?
Every loan that appears on our books has gone through a rigorous approval process. One of the most important components of that process – especially in a sluggish or flattening market - is an assessment of the value of the property being offered as security, and the valuation method employed.
The appropriate valuation method varies depending on location, type of property, and the loan to value ratio (LVR).
In a sluggish market, or where the underlying security falls outside a standard residential property, we may choose to lend at a lower level, reducing the LVR and ensuring there is more equity available.
A real estate agent’s appraisal is sometimes used where the LVR is lower than that typically requested for a standard property. A comparison with similar properties in the area, and a knowledge of what the market will pay, has been a reliable method to date. Along with a visual inspection of the property, real estate agents are at the sharp end of the market in their respective areas.
We can also obtain the same data as a real estate agent via a Comparative Market Analysis (CMA). SCP has access to real estate data that shows everything from the square meterage of the land to the capital value and an analysis of similar properties sold or marketed in a specified area.
Complex applications, multiple securities, construction loans or higher LVRs require a more comprehensive analysis involving significantly more details. In these cases, a registered valuer has the appropriate level of expertise, and SCP has a panel of valuers and preferred companies we know and trust to undertake these more complex valuations.
We anticipate more applications from developers who are wanting to hold their completed stock of newly finished properties until the market picks up again. An increase in renewals of similar scenarios where developers have completed the construction but wish to hold off on selling (their exit strategy) is also anticipated.
Lending to the correct LVR, coupled with the short-term nature of our loans, is what’s enabled us as a business to weather the seasonal market shifts (and economic storms) of the last 27 years. Because whatever the weather, you’re in safe hands with Southern Cross Partners.
