Part One

SOURCE NZ Herald
4.00AM Monday February 11, 2008
By Maria Scott

4:00AM Monday February 11, 2008
By Maria Scott

Don’t expect Alan Bollard to announce a steep drop in the cash rate. Photo / Mark Mitchell

These must be troubling times for many property investors. Those reared on a diet of freely available credit and low - for New Zealand - interest rates are facing credit rationing and stubbornly high borrowing costs.

Banks have become cautious about lending as a result of the international credit crunch and there are fewer lenders overall because of the collapses among local finance companies.

William Cairns, of mortgage bank Cairns Lockie, says the contraction in the finance company sector has caused problems for developers, in particular. Some of the hardest hit are those subdividing land; anything from five to six sections up to the big boys. “That market is very, very hard.”

Finance has also been choked off for apartment complex developments and small commercial projects. Cairns says he is also hearing that developers are seeing borrowing facilities withdrawn, typically where a project has run beyond deadline, where once they would be have been rolled over as a matter of course. In these cases, borrowers may be forced to sell.

Until a couple of months ago, says Cairns, borrowers assumed that interest rates would rise and then drop off. But now borrowers are facing the prospect of high rates for many months.

Floating mortgage rates are nudging beyond 10.5 per cent, depending on the lender, and even some shorter-term fixed rates have topped 10 per cent. There have been some reductions in fixed rate mortgages recently, especially over five years, in response to the lower costs of funding internationally. But economists do not expect the official rate in New Zealand to fall steeply and sharply, as it has in the United States, because of the inflationary pressures that remain in the local economy. The domestic economy is the main influence on the cost of floating and short-term fixed rates.

“People now know that with an election coming up and maybe tax cuts, interest rates are not going to drop in the short term,” says Cairns.

Investors with large portfolios of debt usually have a range of loans maturing over different terms.

Mortgage broker Sue Tierney, who is also president of the Auckland Property Investors’ Association (APIA), says: “We don’t like it but we get used to it.”

But sustained high rates are making it more difficult for investors to make their numbers add up. Rents have begun to rise after a prolonged period of virtual stagnation but they are still not at the levels they should be at, says Tierney, compared with the cost of home ownership. Even with the tax losses allowable on the cost of running a property investment portfolio, yields have become too low for investors to see much value in adding to their portfolios.

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