More properties have mortgages now than 10 years ago, data shows

Sunday, 13 November 2016

New Zealanders are spurning the opportunity to pay down their debt faster in a low interest rate environment and are instead leveraging up to buy more property.

New data from property valuation firm MyValocity shows the number of mortgage-free properties around the country has dropped from 39 per cent to 35 per cent over the past decade.

Every region has seen a drop, apart from the Far North and Kawerau.

MyValocity chief executive Carmen Vicelich said the trend seemed to be due to the number of new investors entering the market.

READ MORE: ANZ boss warns about new, inexperienced investors

Her data shows at least 10,000 new landlords have bought property over the past five years, purchasing more than 26,000 residential properties between them since 2011.

She said low interest rates and New Zealanders' love of property had changed the dynamics of the market.

'Many of the baby boomer generation have owned their own property for a long time,' she said.

'They have the tenure and have also made good capital gains to be in a position to discharge their mortgage before retirement as previous generations have done. But what we are seeing is a new global trend emerging where people are choosing to stay in the market longer. Rather than discharge their mortgage, they're taking advantage of the low interest rates to leverage their increased equity and buy more property,' she said.

New Zealand households increased their mortgage debt by a net $19 billion or 9.2 per cent in the year ended August 2016 - the fastest annual growth for more than eight years.

Squirrel Mortgages chief executive John Bolton agreed there were less people paying down their debt earlier in life.

'People are definitely taking longer to pay off their mortgage. Retirees are really the only ones who are truly debt-free and even then, people are working later to achieve that given house prices are relatively high compared to incomes,' he said.

'We are also finding that younger people cashing out of Auckland and moving to the regions hasn't had much of an impact on the overall mortgage-debt ratio either as those moving typically still don't have enough equity to buy freehold elsewhere. They certainly get more bang-for-their-buck and a higher quality of life, but we have not seen a dramatic reduction in people's borrowings.'

He expects the current trend to continue. 'The most common way people pay off their mortgage is downsizing – which is typically when retiring or the kids have left home. People are working longer and tend to upgrade when they downsize so they simply aren't getting debt-free.'

He said the baby boomer generation had changed the property landscape by adopting it as their main investment for retirement.

 'Many of the baby boomer generation have invested wisely in property in the last 15 years as their equity and disposable income has increased. While that has meant many of them are working longer and still hold mortgages, in the long term they will be able to sell down some of their properties so their remaining investments generate positive cash-flow income for retirement.'

David Boyle, group manager of investor education at the Commission for Financial Capability, said it was daunting to think of people borrowing more as the interest rate cycle seemed to be coming to an end.

The Reserve Bank has indicated that there may not be any further official cash rate cuts and the banks are largely no longer passing on reductions in the OCR, anyway.

He said many people had not retained their previous mortgage payments as rates came down, which would have given them a chance to pay off their loans faster.

'They are paying less but spending more again. If people think rates are going to stay down forever and house prices always go up, that's fine, but we know that doesn't happen.'

He urged new investors to think about how they would manage if interest rates rose over the coming years. 'This may be the first time they've felt wealthy because their own properties have gone up in value as well and they are leveraging up but that can come back to bite people if they can't meet the repayments or if they are unable to get the properties tenanted.'