AUCKLAND – 20 December 2023 – New Zealand’s property market and its funding requirements are in for a challenging year: those looking for bridging finance or wholesale investors seeking attractive returns secured by first ranking mortgages over New Zealand Real Estate must identify ways to reduce risk in 2024. Finbase, New Zealand’s only real estate-led, first mortgage lending firm, considered what the new year may hold for mortgage lending. They deliver a picture of what’s happening in New Zealand’s property market, focusing on changes in interest rates, property prices, and investor sentiment and behaviour.
In 2023 the market demonstrated its ability to adapt and remain stable despite global and local economic challenges. Pernell Callaghan, Managing Director, Finbase says, “Expect a mix of careful optimism from buyers and new approaches from property investors and sellers. Everyone is keeping a keen eye on the OCR, inflation, how people will manage debt, and how readily mortgagees will be able to recover funds lent to mortgagors.”
Finbase’s top five predictions for New Zealand’s property market will help both lenders and borrowers understand and navigate the market in 2024. These insights are designed for anyone seeking to finance a property project or find the capital needed to complete one.
The Official Cash Rate (OCR) Will Drop
According to Finbase, the OCR is likely to decrease following the April review, as recent data reveals a GDP contraction of 0.3%, subtly indicating a recession. Inflation rates are predicted to stabilize at or below 5%, offering room for further interest rate cuts. “This adjustment is all but certain, and it will reflect a strategic response to the current economic landscape,” says Callaghan.
Modest Growth in Property Prices Amidst Economic Recovery
With the easing of the OCR, consumer confidence in property investment is likely to grow. However, Finbase forecasts a restrained property price increase of 5-7% across 2024. “While the market shows signs of recovery, the actual financial gains for property investors will be marginal when considering the increase in the costs of rates, insurance, and maintenance,” notes Callaghan.
Stricter Debt Servicing Requirements Will Impact Investors
Debt servicing remains a significant hurdle for prospective property investors, especially in the bank lending sector. “Net cash flows for investors are weak, often tipping into the negative,” explains Callaghan. “Those in need of funding, especially those unable to gain it from banks, will look to other sources. To mitigate risk, businesses who provide alternative access to streams of capital, such as first mortgage lending, will need to focus their due diligence on both the borrower and the realisable underlying value of the security,” says Callaghan.
Focus on Cash-Flow Generating Assets
Investors increasingly recognise the value of, and have a desire for, investments that generate steady cash flow, as opposed taking on more risk in the property market. They will divest from their property portfolios, a departure from the pre-2022 focus on capital gains.
Refinancing Trends and Fixed Rate Projections
Finbase has already observed a significant refinancing trend among investors seeking to downsize their property portfolios, particularly those with main bank lending. Banks are increasingly demanding full repayment from property sales. Additionally, Finbase predicts that the main bank one year fixed rates will be around 6.7-6.9% by December 2024.
“Since net yields and growth in property are not matching alternative investments like private debt, NZX 50, and S&P 500, we’re seeing larger commercial property investors scaling down. In a scenario where bank financing becomes cheaper and more accessible, we might see a sharp rise in property prices, but that seems very unlikely in 2024,” concludes Callaghan.