No expectation for inflation to lower soon
We recently saw inflation reach a 30-year high in New Zealand of 5.9% and economists anticipate inflation to remain at this rate for the majority of 2022. Consumer prices have risen at the fastest pace since 1990 and there have been sharp price increases in construction, petrol, food and rent.
High inflation can erode the value of savings sitting in the bank, lowers the value of pensions, and indicates we’re paying more for our basic necessities. It means many don’t have as much for discretionary spending on luxuries.
However, assets such as real estate usually keep up with inflation. In fact, CoreLogic found a 2.1% increase in house prices in January 2022, up from 1.9% in December 2021. Nationally, average house prices rose to $1.028m, and are over $1m in Porirua and Tauranga. Areas like Lower Hutt, Napier and Hastings are all approaching the $1m average house price mark.
Higher inflation means people may be looking at other avenues for their savings outside of the banks, generating interest in other investment opportunities.
However, it’s important to stay mindful during these periods. Investors hunting for better returns than the bank need to be careful with where they’re looking and who they’re investing with. If an interest rate or investment term looks too good to be true, it probably is!
Researching and understanding the product you’re investing in is vital, especially now. Make sure you’re getting sound advice from a financial adviser you trust, and don’t be afraid to get in touch with companies offering certain products to get information for yourself.
At Southern Cross Partners we continue to abide by our conservative lending approach to make sure we offer our investors sound investment opportunities. Before approving any investment and uploading them to our portal, we check for four things:
A clear exit.
Most of our investments have a 12 month term, which means we’ve got to know how our borrowers are exiting their loan within a specified time period. This could be by selling the property, consolidating other finances or moving their loan to a major bank.
Realistic repayments.
We stress test our repayment plans to see if the person taking out the loan can make their repayments with us. It’s one thing to own an expensive property, but if a borrower doesn’t have the liquidity to make their repayments, we won’t lend to them.
Conservative loan to value ratio.
A loan to value ratio is the difference between what a property is valued at and how much we are lending. This difference gives us a buffer in case the property needs to be sold unexpectedly. This is particularly important with increasing inflation and interest rates.
Conservative valuation.
Our preference is to have information from an independent valuer. But other times we may use a real estate appraisal, information from a sale and purchase agreement, rating value or a comparative market analysis (CMA). If there are multiple methods available, we always use the lowest valuation and may also take GST off the value, if required.
If you have any questions about how we make lending decisions and how the peer-to-peer process works, please don’t hesitate to call us or send us an email. You can reach us on 0800 00 58 43 or investments@scpartners.co.nz
