What Lies Ahead in 2024

What Lies Ahead in 2024?

As we embark on a new year, global conflicts continue to cast shadows over affected nations, impacting not only their economies but resonating globally. Inflation remains a concern, prompting efforts to regain control, particularly here in New Zealand. While some banks briefly eased medium-term rates before Christmas, the impact was limited, given few mortgage holders fix for more than 12-18 months.

Confidence returned with First Home Buyers returning to the market. We have had many reach out for education around the process with getting approvals in place. Even those not meeting the standard 20% deposit are still getting their ducks in a row to understand their current financial position and to seek other possible lending options.

Here are our key predictions for 2024:

Continued Price Growth:
Anticipate a 5-10% rebound in house prices, driven by population growth and housing shortages, despite rising interest rates.

Interest Rates Peaking:
With inflation slowly trending down, the outlook is bright for rate cuts in the later parts of 2024, however recent commentary from some bank economists suggests that the market conditions are still not right, and the RBNZ may look to increase the OCR. This is supported by the recent increase in the wholesale cost of borrowing over the past couple of weeks.
On the flip side, other bank economists are citing the financial strain that most are feeling and the overall dampening in the market and think that further increases to the OCR would be unnecessary.

Rising Rent Prices:
A change in government and the restoration of tax deductibility will likely contribute to the ongoing rise in rent prices.

Investors Returning:
The relaxation of tax rules will lure investors back into the market. Lower interest rates, increasing rents and the reintroduction of interest deductibility will make property investment more attractive.

Soon mortgage interest costs will once again be counted as an expense. Taxation for property investors is determined by their taxable profit, wherein a higher taxable profit corresponds to increased tax obligations.

The Labour government introduced rules to phase out the ability for investors to write off their mortgage interest as an expense. The new coalition government is reversing this deductibility policy and will be reinstating to 100% over a period of time. The process will start with a 60% deduction in 2023/2024, 80% the year after, and 100% in 2025/26. National plans to phase these changes in and we wait to hear the details which should kick in around
April this year. We always recommend prior to any commitment to seek legal and accounting advice.

Brightline tests are reducing from their current term of 10 years for existing properties and 5 years for new builds to 2 years across the board. This will take effect from 1st July 2024. This means that any capital gains tax will only apply to property sold after 1st July 2024 and owned for less than two years.

Debt-to-Income Ratios (DTIs):  Debt to income is currently set at 7 x income and will be reviewed at 6 x income. Interest rates have increased as well as banks tightening their lending criteria and with changes to DTI’s borrowing power will drop.

Expect the review of DTIs around June. This could make it tougher to secure a mortgage for existing rental properties. New builds will be exempt allowing you to still borrow should the bank still let you, aligning with the Reserve Bank's goal to boost housing supply. It’s a good idea to work with us to see how much you can borrow. Debt to income ratio is one calculation that the banks rely on to assess a loan application. The size of your deposit also
comes into play.

A Warning on Fixed Rates:
Considering a fixed rate? Beware of potential break costs. A penalty can be imposed on borrowers who choose to terminate and settle a fixed-term mortgage before its scheduled maturity. This situation might arise when selling a house or desiring to refinance for a more favourable deal, especially in the event of a significant drop in interest rates. Break fees are determined by the size of your mortgage and can provide a shock. While low-interest rates have spared many from such fees in recent years, locking in a higher rate now could very well result in break costs if rates drop. Think carefully before committing to fixing your rates.

Should you have any questions, reach out me and the team at McCallum & Co Loan Market for advice and help with navigating through the lending landscape, we are here to help!

*This article aims to offer a brief overview of the issues related to the covered topics as at February 2024. It does not claim to be exhaustive or offer tailored advice.

Becs McCallum
Senior Financial Advisor
021 379 919
becs.mccallum@loanmarket.co.nz
McCallum & Co. – Loan Market NZ