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Gateway To Capital Gain

Gateway To Capital Gain

The Garden City is starting to bloom again for investors, writes Sally Lindsay.

By: Sally Lindsay

1 February 2022

As New Zealand’s oldest city and its second largest, Christchurch has long been a popular destination for visitors and settlers.

Known as the gateway to South Island, it is set in a sweeping bay flanked by the Pacific waters to the east and the rolling Canterbury Plains to the west.

This is an area of outstanding natural diversity, with water sports, marine life and wineries right on the city’s doorstep, and the adventurous snow pursuits of the Southern Alps just a two-hour drive away.

Set in an area of frequent seismic activity, known as the Pacific Ring of Fire, Christchurch was rocked by a powerful earthquake in February 2011, destroying much of the central urban area.

While this had a devastating impact, the speed with which Christchurch has set about rebuilding and enhancing its inner city is a shining example of triumph over adversity.

New shops, businesses and leisure initiatives are continually springing up and a co-ordinated plan for the reconstruction of buildings and infrastructure is ensuring the city emerges a stronger, greener, happier environment.

As Christchurch has recovered it has been known as the city of “low-hanging fruit” for property investors. At the same time property prices have surged and are catching up with the rest of the country. Figures from Quotable Value show the Garden City outperforming all other major centres in the three months to the end of September, with prices up 7.7%.

Of all 13 New Zealand cities, Christchurch is the second most affordable. It is still possible to buy a new property for $550,000 or $660,000.

Over the year to January prices have risen in the city’s suburbs by between 20-30%. Bryndwr had the biggest leap, up 30.4% from $590,400 in January last year to $769,950 this year. This was followed by Sydenham, up 29.7% from $418,300 to $542,650; St Martins, up 28.9% from $544,050 to $701,500; Addington, up 28.8% from $405,850 to $522,750, and St Albans up 28% from $649,000 to $830,450.

Other suburbs to leap up in value are Upper Riccarton, up 27.5%; Strowan, 27%; Riccarton, 26.8%; blue-chip Fendalton, 23.0%; Merivale 21.4% and Christchurch Central up 20.1%.

Buyer Fatigue

While prices have been rising, lending restrictions are now having an effect and may slow the market, says Jim Davis, Harcourt’s Christchurch and South Island regional manager.

Banks’ tightened criteria under the recently introduced prescriptive legislation in the Credit Contracts and Consumer Finance Act is having the biggest effect on first home buyers rather than investors, he says.

“A lot of pre-qualified buyers dropped off before Christmas, a time when the market slows down. To be fair the market hasn’t seen the real effect of the lending changes just yet and it is hard to quantify just how badly borrowers and residential property will be affected.”

He says there is also pandemic and buyer fatigue in the mix with many people missing out on a property despite attending multiple auctions.

“However, the deposit requirements for both investors and first home buyers are also hard on everyone, particularly with the trajectory of house price growth over the past year. It is, along with the tightening of lending, part and parcel of the whole process to slow down mortgage applications and subsequently house prices,” says Davis.

Mortgage applications are now taking a minimum of 15 working days, mostly longer, and that is slowing down auctions and making them uncompetitive.

“There is no logic for the government’s prescriptive lending legislation that has good borrowers being questioned by their bank about how many coffees they buy. The government has taken a sledgehammer to fix a problem that didn’t exist.”
He doesn’t expect house price rises to be as meteoric as they have been this year. “When 190,000 people a year are cycling through MIQ they all have to live somewhere. There will still be pressure on MIQ this year, if it remains in place, and this will continue to put pressure on house prices. There will still be positive capital growth but not at the same rate. Interest rates will remain low by historic standards.”
Davis says people are buying anywhere across Christchurch – they just want to get a house. While Fendalton, Merivale and Cashmere are the blue-chip suburbs where the lowest price is about $700,000 going up to $3-5 million, everywhere is in demand. “It comes down to price. There is little anywhere under $550,000.”

Traditionally the cheapest, most eastern suburbs are getting up to the $600,000 mark. New three-bedroom houses in subdivisions are on average about $750,000, but the cost of land has shot up.

“Investors are still buying if the house suits their investing criteria. However, the government has put pressure on investors and it is taking some out of the market and hence the rental pool is shrinking as the homes mainly go to first home buyers. It is a perfect storm at the moment.”

The rental market in Christchurch is tight and has been for the past 18 months, says Ray White Morris & Co’s operations manager Katrina Green.

The market changed after the first lockdown in 2020 when there was a significant upswing in demand and it has just carried on. “A few weeks ago there were only 100 properties advertised for rent across the whole city – a huge drop from hundreds before the lockdown. Waimakariri District, a growing area, had just 53 homes for rent,” says Green.

Viewing Booked Out

Allied to the shortage is the number of landlords selling up. Ray White Morris & Co’s rental property portfolio loses one or two properties a week from landlords getting out of the industry who claim legislation changes over the past year have made it too hard.

“Often it’s reactive on the part of the landlord and we try to persuade them not to sell, but some have had their properties long term and just want to take the profit while prices are high. You can’t blame them.”

Any property advertised gets a huge amount of interest and viewings are booked out within four hours. Fifteen groups at a time are allowed through the property at pre-arranged viewings. Often two separate viewings are needed and properties only last a week on the market before they are rented.

“Every week I am turning down at least 20 applicants for an advertised rental. It is not that the applicants are not suitable, just that one will stand out above the others.”
Green says people try all sorts of tricks to secure a property, including offering more rent, particularly for any property under $450 a week. “We ignore those offers as we want the best tenants for the 400 rentals we have on our books.”

The average rent across the company’s portfolio ranges from $420- $450. A three-bedroom Christchurch rental attracts rent of $500-plus in the top suburbs and four or more bedrooms $700 in the seaside suburb of Sumner.

Rents across Christchurch and North Canterbury have risen on average $50 a week over the past year. Before the government’s policy changes aimed at dampening the investor market for existing homes Green says many landlords would often not raise the rent or only by $20 to $30 a year. Costs are now forefront of mind amid legislation changes, such as compliance with Healthy Homes Standards and removal of mortgage interest as a tax deduction against rental income.

Any suburb is popular for rentals, but there are little pockets in the city where there are bigger pools of rentals. St Albans, for instance, is extremely popular as it is close to the CBD, has leafy streets and plenty of older, mainly well-kept houses at reasonable rents.

Although investors are still buying in Christchurch there is not enough of them. About 80% of investors, many of them coming in from outside Canterbury, have also switched to buying or building new properties and they are less affordable for lower income families. Investors are aware of the lower 1-2% returns from new property but are prepared to forgo that for long-term capital gain.

Popular Hunting Grounds

Canterbury Property Investors’ Association president Shirley Berryman says there is little negativity from investors despite the myriad government changes to dampen the housing market. “Some have sold but most have invested for their retirement and many are taking a backseat and using this time to adjust to the new legislation,” she says.

More than 85% of investors across the country own one or two rental properties and Christchurch is no different, says Berryman.

“Investors are resilient and look at new options for carrying on their business, including buying more property, adding an additional house or bedroom to their existing rental site. They will readjust, think of new ways to add value and keep going. Some investors are looking at leasing their property to Kainga Ora and this seems a viable option – guaranteed rent and no worries about maintenance. The only downside is it takes rentals out of the private pool and exacerbates an already struggling market.”

Christchurch’s older and cheaper suburbs – Addington, Sydenham and Spreydon – have traditionally been popular hunting ground for investors. They are now becoming popular for all buyers and are shooting up in price, particularly Addington which is close to the inner city.

Many investors are now considering as their main buying criteria the quality of the property, says Berryman. However, new builds, while popular, are out of the reach of most investors as viable rentals.

Buyers frozen out of the Auckland and Wellington markets are turning to Christchurch where prices are still affordable. “While house values have risen at a fast rate over the past year they are still well behind the capital and the country’s biggest city. This has always been the case, but it’s taken until now for buyers to realise this, look at what Christchurch has to offer and take advantage of it.”

Find Out More: Investing In Christchurch

Canterbury Property Investor’s Association holds monthly meetings for investors. For more information head to: http://canterbury.nzpif.org.nz... or contact their office on 03 379 5251.