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These must be troubling times for many property investors. Those reared on a diet of freely available credit and low - for New Zealand - interest rates are facing credit rationing and stubbornly high borrowing costs.
Banks have become cautious about lending as a result of the international credit crunch and there are fewer lenders overall because of the collapses among local finance companies.
William Cairns, of mortgage bank Cairns Lockie, says the contraction in the finance company sector has caused problems for developers, in particular. Some of the hardest hit are those subdividing land; anything from five to six sections up to the big boys. "That market is very, very hard."
Finance has also been choked off for apartment complex developments and small commercial projects. Cairns says he is also hearing that developers are seeing borrowing facilities withdrawn, typically where a project has run beyond deadline, where once they would be have been rolled over as a matter of course. In these cases, borrowers may be forced to sell.
Until a couple of months ago, says Cairns, borrowers assumed that interest rates would rise and then drop off. But now borrowers are facing the prospect of high rates for many months.
Floating mortgage rates are nudging beyond 10.5 per cent, depending on the lender, and even some shorter-term fixed rates have topped 10 per cent. There have been some reductions in fixed rate mortgages recently, especially over five years, in response to the lower costs of funding internationally. But economists do not expect the official rate in New Zealand to fall steeply and sharply, as it has in the United States, because of the inflationary pressures that remain in the local economy. The domestic economy is the main influence on the cost of floating and short-term fixed rates.
"People now know that with an election coming up and maybe tax cuts, interest rates are not going to drop in the short term," says Cairns.
Investors with large portfolios of debt usually have a range of loans maturing over different terms.
Mortgage broker Sue Tierney, who is also president of the Auckland Property Investors' Association (APIA), says: "We don't like it but we get used to it."
But sustained high rates are making it more difficult for investors to make their numbers add up. Rents have begun to rise after a prolonged period of virtual stagnation but they are still not at the levels they should be at, says Tierney, compared with the cost of home ownership. Even with the tax losses allowable on the cost of running a property investment portfolio, yields have become too low for investors to see much value in adding to their portfolios.
It has become more difficult to meet the banks' lending criteria, which tend to be set against floating rates, rather than the cheaper fixed rates.
"So it is hard to prove that you can genuinely afford [the loan] as so much more reliance is put on the investor's personal income."
Investors are sitting tight. "Fewer people are trying to be out there because they can't even see the numbers working."
Wellington-based mortgage broker Finlay Abbot recently saw an experienced investor client who was "all fired up" to buy but who left the meeting considering how he would avoid having to sell.
"We worked out that his interest expense was going to increase by $25,000 in the next 12 months based on existing debt rolling off its current rates and re-pricing significantly higher.
"I have many experienced investors now 'sitting on their hands' waiting for the fundamentals to change or to purchase from a vendor who is in trouble at a knock-down price. So, for my experienced investors, not being a vendor in the next two to three years is essential."
Abbot advises: "For those raising new funding, if the yield does not work then don't do it. That's what analysing investments is all about.
"In Wellington, rentals are very firm and the fundamentals are solid with a good demand versus supply equation but basing a purchase on a currently poor yield on the belief in capital growth for the next two to three years will be misguided in my opinion. It is time to be very, very careful indeed."
Tierney says investors who are feeling the pinch should look at how they are managing their properties to ensure they are drawing maximum income from them. Many property investors are not charging high enough rents.
"They don't want to hassle the tenants but they are not looking at what it is really costing them."
Investors also need to look at how they are accounting for their expenses and that they are claiming the tax refunds on expenses that they are entitled to.Avoid panic selling because of mortgage strain, says Tierney. If necessary, find an alternative source of income to help meet the cost.
Investors might consider selling one property out of a portfolio to raise funds. "The easiest way to improve debt-to-equity is really to sell an asset."
As the rental market firms, make the most of the potential to increase rents by ensuring your properties are tidy. "Even if it is a matter of painting the letter box and trimming the edges."
As for the term of new finance, brokers and economists are generally steering borrowers away from five-year fixed rates. Market specialists prefer two- and three-year terms in the belief that it will be possible to refinance from these at lower rates.
Another option, as spelt out in ANZ's most recent briefing for property investors, is to spread finance across a range of terms: 25 per cent over one year, 50 per cent over three years, and 25 per cent over five years.
* Maria Scott is a Christchurch journalist who specialises in personal finance.
