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What Lies Ahead?

What Lies Ahead?

The economic outlook is positive, property value are on the rise, and there are still plenty of opportunities for investors in 2021, writes Joanna Jefferies.

By: Joanna Jefferies

1 January 2021

No one could have predicted what 2020 would hold for the world and how different an outlook we would have just a year later. We saw the global outbreak of Covid-19 and the unprecedented move of countries around the world going into lockdown. On March 25 we went into our own level four lockdown and predictions for the future of the economy and the housing market were dire.

Amid the pandemic there were many changes to tenancies, starting with a pandemic-induced rent freeze which ended in September. Other regulatory changes came in the form of the implementation of the Healthy Homes standards and amendments to the Residential Tenancies Act. However, as expat New Zealanders flocked home few were convinced to exit the booming market, and the prices started to climb.

Less than a year later and the economic outlook for New Zealand is markedly different. It’s far more positive than expected on the back of a strong labour market, and we’ve experienced an upward trend in property values with record-breaking sales prices recorded across the country.

To get an understanding of whether we can expect more of the same in 2021, we spoke to commentators across the property industry to get an insight into what lies ahead for property investors and the opportunities this year.

Values Soar, Sales Volumes Play Catch Up

Median house prices across New Zealand increased by 19.8% from $605,000 in October 2019 to a new record median high of $725,000 in October 2020 according to the Real Estate Institute of New Zealand’s (REINZ) latest data. A whopping 5.2% of that increase occurred in the month of September and Auckland’s median house price increased by 16.3% from $860,000 at September 2019 to $1,000,000 in September 2020 (a 4.7% increase from the month prior).

Nine other regions recorded their highest ever median prices during October last year: Gisborne, Marlborough, Otago, Wellington, Manawatū/Whanganui, Northland, Bay of Plenty, Waikato and Canterbury.

Low supply appears to be one driver of the price increases, along with low interest rates and the huge backlog of frustrated buyers waiting in the wings who are fearful of missing out.

REINZ chief executive Bindi Norwell says the market doesn’t look to be slowing any time soon. “At the moment it’s looking like we will probably see continued price growth unless we can address the supply issue,” she says.

She’s unwilling to put a number on it, but economist Tony Alexander says he expects around 10-15% price growth in 2021. However, Norwell says even if the borders open in 2021, which is not predicted at the time of print, it’s unlikely to result in a second wave of huge increases in house prices.

But Alexander says the widely held belief that migrants will flood in when the borders open, is potentially increasing FOMO amongst buyers and putting pressure on the market.

“‘Once the borders open up every man and his dog will finally come to New Zealand’ – is what we’ve convinced ourselves – incorrectly, I think. And we will look to buy houses before all these expats come home.”

Commentators have suggested the Government will extend the brightline test to counter unaffordability, but Alexander says there may be measures introduced that we haven’t even considered yet, such as reducing the proportion of interest cost that can be deducted from rental income, however “it would be a big call to do that”.

Following lockdown, sales volumes were on the decline up until August, but as house prices began to rise, sales volumes followed, even in spite of the general election, which usually sees a decline in sales activity. A whopping 8,800 properties were sold in October, which is a 14.2% increase year-on-year. We haven’t seen this level of activity since May 2016, during the last housing boom. Norwell expects the strength in sales volumes to be sustained at least into the first few months of the year.

Moves To Restrain House Price Growth

Due to accelerating house prices, in December the Reserve Bank made moves to reinstate the loan-to-value ratio (LVR) restrictions at the same level as prior to the onset of Covid-19 (when a maximum of 20% of new lending was allowed at LVRs above 80% for owner occupiers, and 5% of new lending at LVRs above 70% for investors).

A final decision will be announced in February, but it’s all but certain restrictions will be put back in place for investors.

Norwell says due to the impending LVRs we may see increased market activity. “People may speed up their processes in either buying or selling property to try and get their transaction completed prior to the LVRs coming back in.”

Increased Regulation

In August last year we saw the Residential Tenancies Act amended, giving tenants better security of tenure by removing the 90-day no cause notice, and making rent increases annual only. In addition, all fixed-term tenancy agreements will now convert to periodic tenancies at the end of the fixed-term unless both parties agree otherwise.

We also saw landlords begin to upgrade their rentals in line with the new Healthy Homes standards, which introduced specific and minimum standards for heating, insulation, ventilation, moisture ingress and drainage, and draught stopping in rental properties.

The compliance date for private rentals is July 1 this year and it appears predictions that investors might sell down their portfolios due to increased regulation, were unfounded. In fact, further moves to restrain house price growth are likely. Prior to re election, the Labour Government’s manifesto promised to address unaffordability and tenants’ rights through changes to the Resource Management Act (RMA) and regulation for the property management industry.

Quinovic Kapiti-Mana principal Bernard Parker says 2021 will be a year of learning and a time of consolidation for property managers. “There will be a lot of work towards regulation of property managers. We are looking forward to an environment where there is consistency, predictability and a self-discipline within the industry.”

As for landlords grappling with compliance, he says they’ll go one of two ways: “Give up the ghost or hire a property manager.”

Interest Rates

Interest rate increases are always a risk for investors, but it’s widely believed that rates will stay low, and potentially trend lower, with the Reserve Bank telling the main banks to prepare for negative interest rates by December 1 last year, after it was revealed their computer systems weren’t set up to deal with them.

Whether they transpire or not, interest rates are picked to stay low, albeit Alexander predicts we’ll start to see an upward trend for longer-term fixed rates sometime in 2021.

Record Highs

Auckland Council expects to lose $1 billion in revenue due to the impact of Covid-19 over the next four years. In order to recoup some of that cost, in December it proposed to increase rates by 5% in 2021, rather than the initial 3.5% planned.

But Barfoot & Thompson’s Kiri Barfoot says increased costs such as these, along with increased compliance costs aren’t putting off buyers or sellers. “It looks like it’s going to be more of the same going forward. A lot of vendors will try and take advantage of record prices being recorded especially in the first part of the year before the new LVRs.”

Supply simply isn’t keeping up with demand and it shows in the latest price increases: REINZ data shows Auckland’s median house price hit a record $1,000,000 in September last year, which was up 16.3% from the same time a year before.

Rents continue rising in the Super City too, and Barfoot expects there may be a lift in rents at the start of the year, in line with the once-a-year rent hike policy now in place.

The Regions

The regions also achieved record median sale prices late last year with many experiencing around 30% value increase in the year to October. Gisborne experienced a 34.1% increase from $425,000 in October last year to $570,000; Marlborough increased 26.8% from $445,500 to $565,000; Otago 22.7% from $532,000 to $652,500; and Wellington 20.8%.

Nine regions outside Auckland and 28 districts around the country saw house prices reach new record medians in October, too. In Hamilton, trader Rachel Ward says that in the three months after lockdown, she couldn’t secure a single deal due to the small number of listings.

“There was nothing suitable – then the market changed. I signed five deals up and by the time I renovated them the market had done the opposite of what the economists predicted.”

2020 was a successful year for Ward and she predicts we’ll see more of the same in the Hamilton market this year. “If interest rates stay low and expats continue to return with house deposits, it will continue. I don’t see it stopping or going down.”

Deals are harder to come by than usual, but Ward’s trades show that there can be a built-in upside opportunity for investors when buying in a rising market.

Christchurch Trending Up

After years of sluggish price growth when compared to the other main centres, Christchurch is finally taking off, and represents excellent value for investors with median values hitting a high of just $526,000.

“It is absolutely rampant, really. In my 12 years it’s the strongest market I’ve ever seen,” says Ray White salesperson Lewis Donaldson.

Christchurch’s prices have lagged for years, so much so that Dunedin’s median sales price is higher than the third biggest city’s. “I’ve sold houses for $100,000 or $200,000 above GV. As an agent we’re surprised every day when we’re appraising houses and where they end up selling.”

Christchurch appears to be playing catch up with sales volumes too, and days on the market are shortening every week with only 27 days to sell at the end of 2020.

‘It is absolutely rampant, really. In my 12 years it’s the strongest market I’ve ever seen’ LEWIS DONALDSON

Donaldson says yields will likely follow and they’re already experiencing rent increases. He plans to buy in Christchurch in 2020, and like everyone looking to buy across the country this year, he’s taking the opportunity to lock in capital gains as the market moves upwards.

Opportunities For Investors

Alexander says Christchurch is long overdue for a correction upward, and the key reason why Christchurch prices were restrained may be on the cusp of changing.

“The availability of developable land in Christchurch in the pipeline is starting to dry up. The key reason why Christchurch house prices have not risen along with the rest of the country since 2014 has been that the section prices have hardly gone up. For the country as a whole they have gone up about 50% and for Canterbury only about 12%.”

Alexander says if this is the case, then it increases the chances of Christchurch playing a big catch up. Regardless of location, he says investors looking to buy this year should look at where infrastructure is planned, look at the long-term population growth and the ageing population.

He says some will take the opportunity presented by the upward leg of the property cycle: “Some investors might be looking to take advantage of the strong state of the market by offloading properties over the latter part of summer.” Equally those looking to offload properties needing an upgrade will present opportunities for buyers looking for a do-up.