More pain to come from forced sales

Homeowners are being warned to brace for higher mortgage rates as new figures show the tough economic conditions over the past 12 months have cost more than 3000 Kiwis their property dream.

Figures released to the Sunday Star-Times by property and land information company Terralink show that last year a record 3024 properties were put up for mortgagee sale because their owners could no longer meet their loan obligations. That is more than double the number of mortgagee sales recorded in 2008 (1303) and a 500% increase on the number recorded in 2007 (475).

In Auckland alone there were nearly as many mortgagee sales last year as there were across the whole country in 2008. And an expert says it may be some time before the rate of mortgagee sales starts to fall.

The mortgagee sales figures are significant because they give an insight into how household budgets are tolerating factors such as unemployment and interest rates.

And with economists warning interest rates are likely to rise in the latter half of this year, there may be more pain to come for under-seige property owners.

ASB chief economist Nick Tuffley said first-home buyers or anyone increasing their borrowings should take into account that inevitably mortgage rates would go higher.

While interest rates were currently low (floating rates start at 5.75%), they would rise when the Reserve Bank started lifting the official cash rate, which it was expected to do in June, leading to a sharp pick-up in debt-servicing costs for those with floating mortgages.

Last month's review of the OCR resulted in no change to the record low 2.5% rate that has been in place since April 2009, when the central bank made a cut in response to the recession. But Reserve Bank governor Alan Bollard repeated his December prediction that the bank would begin to raise the OCR around the middle of this year, as long as the economy continues to recover.

Median house prices have doubled in the past 10 years and now stand at $350,000. While residential property sales dipped last month again after a period of recovery, real estate experts believe sales will pick up now the government has signalled it has no plans to change the property tax rules.

Earlier this month Prime Minister John Key ruled out a number of moves recommended by the Tax Working Group that would have put pressure on property investors. He said National had no plans to introduce a comprehensive capital gains tax, land tax or a new tax on residential investment properties.

Terralink managing director Mike Donald said investors and development companies were the first to see their properties put up for mortgagee sales last year, but as the recession deepened and unemployment rose, individual property owners too increasingly felt the pinch and were forced to sell.

Donald said the worst affected areas were Auckland and Canterbury (see graphic).

September was the worst month for mortgagee sales, with 343 recorded – the highest monthly tally since records started being kept in 1994.

"Property owners are hurting; there were over 50 forced sales every week last year. A mortgagee sale is often the last resort after a whole chain of events such as a job loss, loss of investments, or reduced cashflow in small businesses. That's why we expect it will be many, many months until the number of mortgagee sales drop to pre-recession numbers."

PULLING THE PLUG ON MEN OF THE LAND

Two brothers' dreams of owning and running a large-scale sheep and beef farming operation in the central North Island are in tatters with both their farms now up for receivership sale.

David and Gavin Drake bought their adjoining Taihape farms, Pohunui and Rosemerryn, when the farming sector was booming and planned to make their living off the land.

But the downturn in the rural economy and the global credit crunch hit almost immediately after they bought, leaving them struggling to repay the money they had borrowed.

The brothers are among the thousands of Kiwis who have been forced to sell their homes, farms or investment properties because they can no longer cover their debts.

"It's bloody hard on you physically and emotionally," David Drake told the Sunday Star-Times.

"People have been great but it's bloody hard to keep your chin up." He said he and his brother had been working hard with the finance company for the past six to eight months to get themselves out of financial trouble but the finance company had decided it was time to pull the plug and had placed the farms into receivership.

While the brothers have been running the two farms as a joint venture, the properties are being marketed individually by Bayleys Real Estate, on behalf of receivers McDonald Vague.

- © Fairfax NZ News