House of correction
Property investment has become increasingly unpopular due to lending restrictions, low rental yields, fear of interest-rate rises and the threat of price drops similar to those in Australia.
The trend to owning residential investment property appears to be running out of puff. Auckland house prices are flat after years of galloping increases; more and more houses are being passed in at auction and the Reserve Bank of New Zealand is now easing up on lending restrictions intended to curb the buyer mania that was translating into risk for the financial system.
Perceptions about the strength of returns from investment property are waning, according both to research by ASB Bank and in the reports coming out of the real-estate sector. This week, real estate company Barfoot & Thompson confirmed a dramatic increase in Auckland residential properties being passed in at auction in recent weeks.
On average, about 30% of Auckland properties are being sold at auction, whereas 12 months ago, it was about 50% and “in the peak days was as high as 85% under the hammer”, managing director Peter Thompson told 1 News.
Research for ASB about investment perceptions, completed in September, found “the alluring glow of rental properties is showing signs of dimming outside of Auckland”, says ASB chief economist Nick Tuffley. For their part, Aucklanders believe their own home is more likely to give them their best investment return versus a rental property for only the second time since 2015, when the survey began. The online questionnaire by Research Now, of 786 people nationwide, found 23% believe their own home offers their best investment return, while investment property was favoured by 16%. The sevenpoint gap has widened from three points between own home and rental property since the end of last year and is the widest yet recorded in what is, admittedly, a relatively small set of data spanning less than four years.
However, that doesn’t mean rental property investment is out of favour altogether. It is still perceived as offering
better returns than KiwiSaver, which took 13% of the vote for most preferred investment type. Despite KiwiSaver delivering annual returns of 5-10% in recent years, the retirement savings scheme has only recently overtaken bank term deposits as a preferred investment, says ASB senior wealth economist Chris Tennent-Brown. However, he believes a range of policy changes, both announced and anticipated, are “chipping away” at confidence in residential property investment.
Among factors weighing on investors in the residential property market is reduced demand, owing to the ban on foreign investors purchasing any but new homes. Already, the Government has banned sales of existing homes to all foreigners other than Australian and Singaporean citizens and extended the “bright-line test” so that capital-gains tax can be applied to the sale of a house that is sold within five years of purchase. It is also moving against letting fees, raising standards for warmth and dryness in rental properties through the Healthy Homes Guarantee Act, and is revamping the Residential Tenancies Act to create a more level playing field in tenants’ favour.
BAILING OUT
Although Government attempts to increase the amount of affordable housing, with KiwiBuild and more state-house construction, appears to be having little to no effect on property values, they could, assuming those policies start gaining momentum.
Some landlords are reportedly selling up rather than facing up to the new responsibilities or to losing the ability to evict tenants without cause. The desire to get out may be highest in regions where property is most expensive and rental yields are, accordingly, low.
Rental yields on properties in Auckland were rarely above 5% and routinely below 4% in the year to June, according to interest.co.nz. If we had tax changes that ringfenced income (to prevent using losses on rental property to offset tax payable on other earnings) or a capital-gains tax, low rental yields on investment property would be even less acceptable, Tennent-Brown says.
The Reserve Bank’s latest decision to loosen its loan-to-valuation ratio (LVR) restrictions makes life a little easier for property investors, with up to 5% of loans to investors being allowed to have deposits of less than 30%, instead of the previous 35% threshold. Tuffley described that move as “surprising”, since the central bank might have been expected to leave curbs on property investors in place while loosening restrictions on owner-occupiers.
However, housing commentators aren’t expecting this small change will make much difference to the mood among investors in residential property, largely thanks to the other regulatory and tax barriers that are looming. “Appetite (among property investors) is probably much weaker anyway,” says Tuffley.
LVRs had already contributed to less lending for residential property investment. Two years ago, 26% of bank lending was on investment property, but that had fallen to 21% in September, according to RBNZ figures, while own-home lending has grown from 12% to 17%.
FOLLOWING AUSTRALIA DOWN
The rapid slide in real-estate values in Sydney and Melbourne may also have some impact on residential property investment sentiment. “New Zealand residential property-price movements tend to broadly track those in Australia,” the ASB said in an economic note on November 26, with Sydney giving a stronger lead on Auckland house prices than Melbourne. Sydney house prices are about 7.5% below June 2017 peaks, while Melbourne prices are about 5% below.
New Zealand house prices tend to respond to Australian house-price movements, with a peak impact after about six months. And there are similar factors contributing to the recent lull in house prices, including stretched affordability, slowing investor demand and r educed demand from foreign buyers given restrictions on purchases of established dwellings.
However, the ASB reports significant enough differences between the two economies not to assume a direct correlation. Although there have been modest falls in Auckland house prices since the start of the year, to date, New Zealand house prices are still going up, albeit modestly.
New Zealand continues to experience strong, if slowing, net inward migration at the same time as building new houses too slowly to meet demand, both of which push up prices. Although Australian-owned banks operating in New Zealand may become more cautious about lending on real estate on both sides of the Tasman, a key factor is the movement of interest rates.
The New Zealand housing market is sensitive to higher interest rates, but for now, the Reserve Bank is forecasting no change to its benchmark Official Cash Rate until late 2020, and mortgage interest rates have fallen recently.
Although very high debt loadings on some recently purchased homes may place borrowers under stress when mortgage interest rates rise, that threat is only dimly on the horizon for current borrowers.