Early indicators show a shift in the forces weighing against residential property demand, with the potential to revitalise investor interest in the national housing market. Bayleys asks, are we about to see investors return with a vengeance?
Over the last 12 months, residential property investors nationwide have taken a passive stance, watching economic conditions tighten as mortgage lending rates rose, policy became increasingly punitive, and capital gain on assets slowly eroded.
However, the tide is beginning to turn on the forces weighing against residential demand, with mortgage lending rates stabilising, migration returning to pre-pandemic levels and average weekly rental values on the rise.
Recent data suggests the housing market is stabilising faster than expected, aided by the Reserve Bank’s announcement in its May Monetary Policy Statement (MPS) that the Official Cash Rate (OCR) has peaked at 5.5 percent.
At the same time, the image of New Zealand’s population has turned rapidly, with negative growth giving way to net migration inflows which exceed pre-pandemic levels and contribute meaningfully to housing demand.
Challenges impacting the building and construction sector are expected to persist for a year or so more, leading commentators to note the supply-demand imbalance has returned, with the potential to increase competition for house sales and rental properties.
The small yet meaningful anecdotes sing from a similar song sheet playing across Australia.
Taking the lead by relaxing border restrictions and enacting plans to attract skilled migrant workers several months before we did, the country is now experiencing a sharp surge in net migration, which has caused rents to rise sharply, particularly in metropolitan areas, including Sydney, Brisbane and Melbourne.
Bayleys’ residential property managers are watching events in Australia closely and now expect a familiar tale at home as the net inflow of new Kiwis continues its convincing correlation with a surge in average weekly rents.
While mortgage lending rates have risen steadily over the past 18 months, they are now showing signs of passing peak inflation, with buyers encouraged by a more certain path forward.
Add to this more attractive residential pricing and the limited feeling that prices are yet to fall further, and the picture looks convincingly brighter for residential investors doing their sums for the months ahead.
The narrative of a chronic undersupply of housing in regional areas gave way to the past year’s disruptive weather events, with communities from Northland to the East Coast of the North Island, down to the Wairarapa and the tip of the South left devastated by failing infrastructure and homes destroyed by flooding.
This has exacerbated the housing supply-demand imbalance, which is once again gaining momentum as more people arrive in the country, ultimately dispersing in search of regional opportunities.
Market reports show tenant demand is currently outstripping supply in several key areas, including Auckland, Bay of Plenty, Canterbury and the Queenstown-Lakes District, which could present significant opportunities for well-capitalised investors over the next 12 months.
WHERE TO FROM HERE?
While rental housing and the investment landscape are shaping up to be a key election issue this October, residential investors adjusting their portfolios may find opportunities in a combination of rapid net migration and the slowdown in construction activity. Historically, population growth is a crucial contributor to housing demand, and will likely impact rental values and improve the yield proposition for residential property investors.
In addition, residential investors can currently deduct 50 percent of their interest payments as a taxable expense on existing properties purchased before 2021. If elected, a National Government would repeal this legislation, once again allowing investors to claim 100 percent of these interest payments, in a move expected to spur heightened activity in the residential investment market.
New-build properties remain a particularly attractive exception to current rules and a critical investment opportunity for the months ahead. Further supporting the financial equation for investors, the RBNZ has recently greenlit a relaxation in Loan-to-Value Ratio (LVR) restrictions, allowing banks to allocate an extra five percent of residential investment lending to highly-geared investors.
This comes at the same time mortgage brokers continue to report a relaxing attitude in credit assessments from financial institutions and results from independent economist Tony Alexander’s recent Mortgage Advisor’s Survey, which found that investor enquiries have risen for the first time since January 2021.
While we wait to see the true picture play out over the next several months, early indicators show change is a’ coming, and various factors are blending together to provide a brighter picture for residential investors as we head into the year’s second half.