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Window Of Opportunity

New Zealand’s property market is on a sedate rise and the outlook for 2020 is bright, but there are some storm clouds on the horiazon, reports Miriam Bell.

By: Miriam Bell

1 January 2020

It’s always a risky business crystal ball gazing. There’s serious pressure to deliver dramatic predictions, ones that herald substantial change. Property market forecasts are primed for that. And the ups (of spectacular price growth) and downs (of strict government and regulatory policies) seen in New Zealand’s market in recent years have gone hand in hand with that.

So coming into 2020, what can property investors expect? In 2019, they gained a reprieve from the threat of a capital gains tax, adjusted to the arrival of the Healthy Homes minimum standards and then began to see a flow of noticeably strong property market data in the final months of the year. Do these developments mean, as some commentators have suggested, that not just a recovery but another boom, with accompanying price spikes, is on the way?

We suspected the truth might be somewhat more complicated – especially for investors who are now facing a swathe of tenancy law reform proposals which are causing serious concerns. To get to the bottom of the story for our annual summer forecast, we sat down and interviewed a wide range of property sector participants. Here’s our take on what the experts had to say about the year ahead.

Not A Surge, But A Rise

What a difference a year can make. This time last year popular speculation about the market revolved around the premise that New Zealand could follow Australia’s path and head down, with crash predictions running strong. This year the reverse prediction is true, with much talk of hefty price growth and a resurgent market.

As it happens, our interviewees were unanimous in the view that the outlook for the market overall in 2020 is significantly brighter than it has been in recent years. Kiwibank chief economist Jarrod Kerr says life is returning to the market. The driver for this is that a major shortage of housing stock remains, particularly in Auckland. “But migrants are moving into Auckland while locals are leaving for the regions, and this is driving up the prices outside of the main centres. That supply/ demand imbalance is critical.”

The upshot? He anticipates 4-5% price growth nationally, with 3-4% growth in the Auckland region and, depending on the region, there could continue to be double digit growth as people move away from Auckland.

CoreLogic senior property economist Kelvin Davidson is also picking a busier market in 2020, thanks to a decent economy, low unemployment and opportunities in the lending environment. Sales activity is likely to be higher than this year and some price growth is on the cards, he says.

“But the market won’t surge away, rather it will rise moderately. Say there were 75,000 sales in 2019, in 2020 we might see 77,000 to 78,000. Likewise, 2019 will see price growth of about 3% nationwide, but in 2020 we’ll maybe see 5%.

“Breaking that down, many provincial markets are seeing good growth and doing well, while the main cities areblikely to stay relatively flat. But if Auckland goes from being 2% down to seeing 1% growth – and it looks like it will – that has quite a big impact on the national average.”

But the fact there are still affordability issues at play and that the country is in the midst of a building boom, which means supply is starting to come on board, will constrain prices.

Bagrie Economics managing director Cameron Bagrie agrees the market is improving and will continue to do so, at least for the first part of 2020. “It’s not going to take off to the races. My view is that we’ll see a pretty moderate uptick.”

He too points to housing affordability, compounded by the ongoing housing shortage, as a big reason for this. There’s a broad base of demand for housing and it’s simply not being met, he says. “That’s because the construction sector is tapped out and at capacity. Yet house pricesbare moving up in excess of increases in supply so the market is becoming more unaffordable.”

This will stop the market from taking off. Overall, the experts feel the market will keep ticking along nicely, with strong regional growth and more stability in the main centres, supported by an accommodating lending environment.

Davidson says 2020 should be a bright spot. “Property tends to be scuppered when people lose jobs and there isn’t a real threat of that. But there are storm clouds gathering towards the end of 2020.”

Accessible Lending

Some of those storm clouds relate to the lending environment. At the time of writing, the Reserve Bank was due to announce its new capital adequacy requirements for the banks. While it was not known then what the requirements would be, it was expected they would put restraints on the market.

Regardless of what the Reserve Bank ends up announcing, banks will have to hold more capital. Bagrie says the impact on the market depends on the banks’ response to them.

“What worries me is there could be some biffo between the Reserve Bank and the banks and borrowers could get stuck in the middle. We need to make sure on all sides that the cost of these things doesn’t become expensive. We could see tightening in areas considered to have high risk rates, like property investment.”

In Davidson’s view, the requirements could lead to mortgage rates being up to 1% higher than they would otherwise have been. “But I think we’ve probably reached a floor for mortgage rates anyway and, odds are, we’re unlikely to see much real effect until late 2020. So there’s a lending window there for a year or so more.”

That’s good news for investors because the lending environment is currently far more accessible than it has been for some time.

While the Reserve Bank did not loosen the loan-to-value ratios (LVRs) in November, as many hoped they would, mortgage rates are at historic lows and the economists interviewed all say they will remain low for a long time.

Further, many banks’ have eased their serviceability tests which makes a big difference for borrowers. Mortgage Supply Company director David Windler says they are seeing a slight loosening of lending and people are able to get more bang for their borrowing buck. Going forward, mortgage rates will remain reasonably steady. “In terms of servicing criteria, there may be some more movement, but not much.”

‘If the market starts strengthening earlier in 2020, it’s unlikely the Reserve Bank will ease the LVRs as it would put more heat into the market’ DAVID WINDLER

the biggie for how the lending environment pans out in the future. “Banks may take back their margins to allow for profit. These may lead to a bottoming out. We could see a small drop in the OCR and, potentially, a disconnect between the OCR and fixed rates.”

The Reserve Bank will be keeping a close eye on both these factors, Windler says. “I think that if the market starts strengthening earlier in 2020, it’s unlikely the Reserve Bank will ease the LVRs as it would put more heat into the market.”

Tenancy Law Shake-Up

In recent years, it’s been regulatory reform that has been of most concern to investors – and which has shaped their approach to the market.

While the Government has now introduced the bulk of their housing and tax policy changes, ditching the capital gains tax proposal along the way, 2020 will see one particularly controversial set of reforms working their way through the system. Those reforms are the Government’s proposals on how it wants to rejig the Residential Tenancies Act (RTA).

REINZ chief executive Bindi Norwell says if the final changes to the RTA do remove the ability for landlords to issue 90-day notices they will definitely have an impact on the market. “More investors will leave the market as the risks of that reform for them are massive and it will affect their decision making going forward.”

Likewise, for The Property Management Company’s Karen Withers the RTA reforms are the big unknown. “From our research we know that 90-day notices are only used as a last resort.

Although we have to manage difficult tenants at times, the last thing landlords and property managers want is for properties to be sitting empty. “Additionally, the Tenancy Tribunal is already struggling and if these changes occur they will be swamped. There needs to be a full and thorough review of the 90-day notice (like every other country has undertaken). But I think the Government is trying to fix a problem that doesn’t exist.”

She is confident it will be possible to get these views across to the Government and that this will allow them to take a slightly different angle. NZ Property Investors’ Federation executive officer Andrew King has been very vocal about his concerns around the proposals, which he says are unfairly biased towards tenants.

He says if they go ahead, they will act as a big disincentive for people wanting to
provide rental property. However, their final form is far from certain yet, he points out. “I think the broader public is starting to understand our concerns about this, particularly the removal of the 90-day notice. Nobody wants badly behaving, anti-social tenants living next door to them. So people realise we are not scaremongering on this one.”

The impact of another, already instituted policy will start to play out in a more concrete fashion over the next year, King adds. And that’s the new rules around the ring-fencing of rental losses.

“It won’t impact on bigger, more established investors but it will put new people off buying rental properties – at a time when there is a big shortage of rental properties.”

It’s worth noting that a number of our interviewees felt investors might actually have a higher tolerance for policy and regulation changes than often assumed. Davidson says they can’t determine much real impact on investor patterns, from the slew of changes introduced to date. He suspects low interest rates and low returns on other types of investments have outweighed them and that, going by the past, many investors may just take them in their stride.

Property investor Lucia Xiao says there’s lots of noise about it currently, but the changes will affect newer, less confident investors, rather than astute, experienced investors. “Long-term investors should be there to buy and hold or to develop to hold. If tenant issues bother them they should employ a property manager and leave it to them.”

Main Centre Outlooks In Brief Auckland:

Affordability issues remain at play and a construction boom means new supply is coming on to the market. But recent data suggests the market has turned a corner after a period of stagnation. Prices should hold steady or grow slightly, but the falls look to be over. Verdict: Still quiet – but improving.

Wellington:

The market has been booming for a few years, but conditions look weaker now. Supply shortage and affordability issues are at play. But higher prices have meant more listings so there’s more buyer choice. Verdict: It will keep trucking along, but softer times lie ahead.

Christchurch:

This is a market moving to a different beat. Due to the earthquake rebuild, there is sufficient supply. For buyers, it’s affordable and there’s plenty of choice. Verdict: Stable with solid long-term prospects but quiet in the short term.

Dunedin:

A buoyant market with no loss of momentum likely. Can’t see that changing. Supply is tight and there’s lots of infrastructure building and development going on. Verdict: Further growth is likely.

Tauranga:

Has similar pressures to Auckland. Prices are high and there’s affordability issues. The market is tough for local buyers, while out-of-town buyers do have an impact. Verdict: Growth caps at play, limited movement expected.

Investor Opportunities Remain

Indeed, policy changes that deter some potential investors from entering the market could open up opportunities for investors with a greater appetite for risk. That’s because the rental property supply shortage is a real problem and it’s not going away.

King says private landlords provide about 85% of the country’s rental property, but the shortage means more are desperately needed. “If investors do start selling up, or not entering the rental market, that situation will only be exacerbated. And that creates opportunities.”

Additionally, if the rental property shortage continues to increase, it will have a big effect on rents, he says. “Incomes have increased by about 4%. Given that and the pressure on rental supply, I think we’ll see rents increase strongly.”

Increased rents can help out investor yields too. Norwell says that yields have been sitting around 4.5% in Auckland, with Wellington performing better. “But with APEC and a number of new film and television productions in Auckland, rents and yields are likely to go up there. In Wellington, yields aren’t going up at the same rate as property values so the same potential is not there.”

Current issues might be playing on the margins of investors’ minds, Kerr says. “Some investors will be spooked by the changes, but it’s hard to know where else they would put their money. The return in property with relation to risk makes it a good option still. And there are always opportunities.”

Xiao agrees, saying she plans to continue investing in Auckland, especially Central Auckland. “Going forward, people should ignore the noise around them. Investors should just focus on their goals and the properties they are buying.

They should simply go for location and a good site that allows them to add value and where the numbers add up.” The final word goes to King. He says one important thing for investors to remember is not to compare this property cycle to the ones New

Zealand has seen before. “It’s not possible to rely on what has happened in the past. So it’s important to keep up with what is happening and what the trends are because there are so many unknowns.” ■

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