Investor Newsletter – June 2023
2023 as an election year, has brought about heightened uncertainty for businesses and investors, particularly because of the strong correction we’re currently experiencing in the property market. Add to that, persistently high inflation rates driving the fastest OCR hiking regime in New Zealand’s history, a tight labour market, and a net migration influx at levels no one predicted, and it’s hard to describe the economic outlook as anything but murky.
Last month, we were pleasantly surprised when annual inflation came in at 6.7% for the end of March, below the expected 7.0%. Nonetheless, upward pressure on inflation remains a concern with the impending repair costs from Cyclone Gabrielle, increased government spending announced in the budget, and 2023 net migration expectations going from +30,000 up to +100,000, all in play.
As anticipated, the Reserve Bank raised the Official Cash Rate (OCR) by 0.25% to reach 5.50% this month, the expected peak they had previously projected. However, many doubt that the measures taken so far are sufficient to ensure a convincing turnaround in inflation. Consequently, we expect another one or two further hikes in the OCR in the upcoming months and expect the OCR to remain at or above current levels for the remainder of the year.
Currently, banks are offering floating lending rates ranging from 8.00% to 9.00%, while 12- month Term Deposit rates sit between 5.50% and 6.00%. The Reserve Bank’s top priority has clearly been curbing inflation, nevertheless, there is a growing concern that they may have gone too far already. It typically takes 12 to 14 months for a rate hike to have its full effect on the economy, and only time will tell, but every hike from here increases the probability of NZ fast tracking into a recession.
As a consequence of the declining market, property acquisition and development activity have slowed down. In spite of this, demand for non-bank lending remains sound, as traditional banks sit on the side lines and opt out of loans they would have readily funded a year ago.
With property funding out of favour with banks, non-bank lenders with bank-funded loan books are also under pressure to reduce their debt, which reduces their funds available to on-lend.
So, what does this mean for Alpha? As property values continue to decline, it is crucial that we remain vigilant in our loan assessments and maintain a conservative approach to loan- to-value ratios (LVR). Currently, our LVR appetite remains at 50% or lower, unless there are compelling mitigating factors or sufficient collateral security.
We have also placed a greater emphasis on evaluating the overall financial strength of borrowers and guarantors. We are prioritising loans where borrowers can demonstrate their ability to service interest payments from their own resources. Given the current environment, we reasonably anticipate a higher incidence of short-term loan extensions and rollovers instead of loan repayments.
Ensuring a competitive return for our investors is of utmost importance, especially in this high inflation environment which is eroding the value of investor savings. We continuously review our interest rates to strike a balance between providing competitive returns and adjusting to market conditions.
In our previous newsletter, we were lending at interest rates of 9.50% to 10.00%. With changes in the OCR and our assessment of competitor rates and demand, we are currently offering loans at interest rates ranging from 10.50% to 11.00%. We will remain adaptable in our rate adjustments to align with the prevailing market conditions.
June 2023 Investor Feedback Survey
This month marks the return of our annual Investor Survey. Stay tuned for it next week in your inbox. Every submission will be entered into the draw to win a $1000 Flight Centre travel voucher.
The survey is an opportunity to share your thoughts on Alpha First, including what we are doing well and where you think we could improve.
Your feedback is invaluable to us as we strive to provide the best service possible. We thank you in advance for taking the time to provide your input.
We are always available to answer any questions you have about your loans or any other matter, so please do not hesitate to visit our Cambridge office in person, or contact us by email, or phone on 0800 555 621.
Kind regards Olivia Fraser
Director, Alpha First Mortgage Investments