June 2021
Further to our last market report in which the recent Government rule changes for residential investment property had just come out – we now have had several months to carefully consider these changes and we report on how it has impacted the market so far.
It has been interesting to read and review the media’s reaction to these changes and also various market commentators and economists. Clearly, the Government are pulling at whichever levers they can try to artificially slow the steadily increasing market values across New Zealand and to try to stymie the ongoing passion of Kiwi’s who believe in residential property investment.
In reality, residential property and values are simply governed by the real estate cycle and the economic laws of supply and demand. Political meddling in the past has proven only to make a temporary impact on the market.
Turning the microscope on the North Shore, the median price has lifted by over 16% on average since the first Covid lockdown and in some pockets of the market this capital gain has been higher to the tune of 20%. Other provincial cities have had their year in the sun with gains of 20-30%. Whilst the market appreciation has surpassed most people’s expectations given the World’s exposure to Covid 19, one should not forget that the North Shore’s rolling 40 year compounding average per year has been around 11%. Thus buoyant conditions, but not a bushfire.
On the demand side, we have mortgage brokers and Banks that have a huge volume of pre-approvals ready to go and are flush with funds to actively lend to first home buyers striving to get on the property ladder and to lock into the record low interest rates on offer. Also, mum and dad investors remain a very active buying segment whom are looking to place their money in property to gain a more competitive return, as compared to paltry interest rate returns on fixed deposits (e.g. 0.8% per annum less tax). Ultimately the goal is to gift the property to adult children by way of early inheritance either immediately or to rent it for a few years to pick up gains and to lock into the low interest rates.
When looking at demand, a key factor is immigration. As reported in the media lately, the sheer number of Kiwis wishing to return from overseas and registering with N.Z. Immigration is stunning, let alone the huge number of wealthy individuals seeking out the safe haven of Aotearoa. Rough estimates of at least 250,000 over the space of the next 5 years is mind blowing.
Possible restrictions on the numbers coming in (as intimated by the Government lately) will no doubt be a pleasant surprise for renters or for first home buyers searching for a home and to take some pressure off straining infrastructure systems in some areas.
Auckland is no exception, historically accommodating approximately two thirds of all new arrivals to N.Z. For the last 12 months there have been in excess of 60,000 arrivals back, of which approximately 40,000 have come to Auckland. Doing a simple calculation, a well known benchmark is to divide this number by 3-4 to calculate the number of new homes required to just keep pace with immigration numbers alone. For example, 30,000 – 40,000 new arrivals into Auckland adds a demand for 10,000 homes. We are currently building around 12,000 homes, without making any serious in-roads into reducing Auckland’s amassed shortage of around 50,000 homes.
At the coal face, we have been carefully monitoring the North Shore real estate market since the Government rule changes were announced. Since then we have experienced a drop in volume of open home attendees and also a few less standing at our Auctions. Despite this reduction, we have noticed that those buyers that are attending are highly charged and are ready to act quickly when they see a good quality property which is realistically priced. There is still a steady demand also from our developers for easily developable land.
As we head into winter, seasonally we normally experience a slow down of activity as many buyers often do not wish to sell and move during the cooler months.
We have also noticed over then last month a significant drop in the number of properties being listed on the market for the North Shore region and this total is down by at least 20%, as compared to this time in 2020.
With a reducing supply in the number of properties available, this creates less choice for buyers, further accentuating their challenges. With these trends above, we cannot see the current buoyant conditions varying to any great extent over the next 3-6 months.
Naturally ongoing buyer confidence is important, where interest rates are often a key determinant in buyers decision making and in the affordability equation. The Reserve Bank Governor has indicated that the OCR and interest rates shall remain low for at least the next 12 months. The majority of economists are predicting a short burst of inflation for the balance of 2021 by virtue of shipping restrictions and lack of supply of goods (ie capacity constraints) and thereafter inflation plateauing out. If the OCR and interest rates moved upwards to the tune of 1 or 2% higher (potentially in 2-3 years), then this would play a more significant role in changing the market dynamics.
Astute investors (many whom we have managed their portfolios for a number of years) have been making contact with us since the Government rule changes and they are looking actively at changing their strategy to buy new-builds. The aim is to upgrade their portfolios with more modern properties and to exploit the current loop hole, with a five year Brightline test versus ten and ability to deduct mortgage interest.
We are always keen to discuss strategy with our long-standing investors and also to welcome new investors to the market, in order that we share our knowledge and expertise.
Please reach out, our advice is free and we would be delighted to assist you.