Time to get real - Listed Real Estate, Rate Hikes and Real Returns
While listed real estate returns may struggle early in central bank interest rate cycles, historically they have performed better as rate hike cycles mature
REITs have the potential to offset the impact of higher borrowing costs with higher rents over time
Investing in REITs is not just about generating real income but also long-term, low volatility capital growth
Real Estate Investment Trusts - Quality over quantity?
Real Estate Investment Trusts (REITs) have delivered an attractive return relative to their lower volatility over the longer term
The quality of New Zealand property returns has improved over the last 10 years with a higher weighting to industrial assets
New Zealand REIT dividend distributions are now more sustainable, with most dividends now based on conservative available funds from operations definition rather than accounting definitions
ASB increased all its fixed mortgage rates yesterday, including the highly popular one year rate by 0.36% to 2.55%. We expect other major banks to follow, likely marking the end of a multi-year decline in New Zealand mortgage rates.
Many households will soon be exposed to these rates as almost 80% of outstanding mortgages are either floating (12%) or fixed for less than one year (65%).
Further increases in mortgage rates are likely as the economic expansion supports a removal of monetary policy stimulus and higher bank funding costs.
We think households in aggregate can manage higher rates. Debt servicing costs are historically low and there is some evidence that mortgage holders are currently paying off a greater proportion of principal, implying a buffer to rising rates.
Housing affordability continues to be a major challenge for many households. Initiatives to increase supply and to manage risks to the financial system have helped to contain house price rises, but they have not been able to hold the market back from strong price gains across the country. Our analysis had suggested that house prices could keep rising in the near term, supported by falling mortgage rates and a buoyant economy. However, risks of price declines are growing. The coronavirus outbreak has elevated the risks.
The drivers of strong price gains over recent years have been positive migration, falling mortgage rates and strength in the jobs market. We see limited scope for these factors to add to housing market strength over the medium term. Coronavirus could be a catalyst for weaker prices if the economic impact is significant and unemployment increases.
Prior to COVID-19 we had considered whether a housing market bubble might exist. We judged that this was not the case, although some traditional features of bubbles are apparent.
Recently announced policy responses from the Reserve Bank of New Zealand and our Government are meaningful and we expect them to mitigate risks to a considerable degree. The key issues for housing will be the jobs market and whether any mortgage payment flexibility is forthcoming.
