The Reserve Bank’s recent OCR cut from 1.75% to 1.5% has inevitably flowed on to lower mortgage rates, which should result in a small boost to the flagging property market. And, with a further drop to 1.25% expected later this year, a low interest rate environment seems well and truly cemented. While this is good news for borrowers, Gordon says it’s not so favourable for those with money in simple investments like bank term deposits and bonds.
“Low interest rates will see investors continue to chase better returns in housing and commercial property. Property returns (rental yield and capital gain) far outstrip those from bank deposits. A Capital Gains Tax is no longer on the political agenda and the bright line test hasn’t been extended as many thought would happen – so any gain is tax free if held for over five years. The uncertainty that was weighing on investment decisions is gone, which means Real Estate will continue to be the number one choice of investment.”
But don’t expect any rush to buy from investors just yet. Affordability constraints and cautious bank lending practices are limiting the ability of many would-be investors or first home buyers. With Auckland price growth currently stalled and values starting to soften, buyers remain wary and reluctant to commit. Testament to this, Gordon says, is the fact that Auckland’s monthly sales volumes remain very low – around 1,750 per month – and days to sell have extended to beyond 40.
“Auckland’s median price has sat at around $850,000 for the last two years and there’s no sign of an upturn approaching. In reality, prices are weakening a little – particularly in the lower cost areas of South and West Auckland.”
In these regions, the recent boom in construction and subdivision activity has meant a considerable lift in new housing and vacant sites available. Developers are being forced to offer very competitive pricing to achieve a sale, with section prices in some of the new greenfield subdivisions dropping by as much as 10-15% since 2017.
The impact of strong migration
The Reserve Bank and most economic commentators have forecasted slowing population growth for some time, but it’s yet to materialise. In contrast to the Government’s goal of fewer migrants, permanent and long-term (PLT) net immigration has risen again this year – now at 64,000 net PLT arrivals, close to mid 2016 peaks. If these gains persist we’ll see stronger domestic demand, population growth and more pressure on housing.
“The ongoing tightness in the labour market means continued demand for skilled immigrant workers,” Gordon says. “Without some more serious Government intervention and with our economy still tracking in a positive direction, with GDP of 2% plus, I see migration inflows remaining high and sitting well above their long term average.”
So what does this mean for the mid-term economic outlook? Gordon says sustained housing demand is looking good.
“Migration-led population growth accounts for around two thirds of national GDP growth, and past housing price booms have coincided with large immigration numbers. An extra 300,000 people have been added to our economy over the past few years, so it’s no surprise this has led the growth seen in the housing market.”
“That said, it’s perplexing that the property market is not currently ‘on fire’ given these conditions. This could be because of tight bank lending practices, Government policy changes or new regulations making buyers very wary; as well as the foreign buyer ban – which has supressed demand from non-residents. This is being felt in the CBD apartment market as well as the luxury end of the market where foreign buyers were helping to underpin demand.”
Property speculation and ‘flipping’ has all but disappeared in the last two years too, thanks largely to the five year bright line test on investment property.
“In effect, it’s a de facto capital gains tax for shorter term gains and has helped curtail speculative demand. The property cycle was already in a slowdown phase, but the five year extension certainly helped stop the trend of buying and on-selling quickly for profit.”
Development in Auckland is becoming less economic, thanks to high land prices, increased building costs, tight availability of finance and the excessively long and slow consenting process. On top of that, the potential risk of the end product’s price being lower than predicted has eroded profits and put many projects on ice.
“Tough bank lending criteria and the requirement for a high level of presales or large capital injection has made raising finance for projects difficult. The re-emergence of second tier lenders is helping fill this gap, but their finance costs are onerous. Builders and developers are hesitant to commit to new projects when their expectations of selling are low and buyers are worrying about falling prices. Banks, too, will have lower expectations of presales and therefore more reluctance to lend.”
On the bright side for developers, the Auckland Unitary Plan has ‘up-zoned’ large areas for more intensive development. Conventional suburban sites that were previously subdivided into just two lots are now seeing terraced housing of six or more units.
Overall, Gordon sees the current market state as positive, and believes the Reserve Bank’s LVR restrictions and OCR cuts are having the required effect.
“Auckland’s market moves in cycles – moderately predictable to around a ten year ebb and flow, but with varying length to the up and downward phases. The last peak was late 2016 and, following introduction of the LVR restrictions with a 40% deposit requirement for investors, the market has stalled. However all other influences on the market remain positive – falling interest rates; high inward migration; low unemployment; and a sound economy with stable growth.”
“The LVR restrictions coupled with tighter bank lending criteria can only be seen as a resounding success in curbing market activity and stopping rapid price escalation. The most recent property boom had lasted for four and a half years so a correction was well overdue.”
“I’m predicting more of the same for the next two years, then another rise in line with the America’s Cup. But don’t expect the next upward cycle to be as strong as the last, as high prices and affordability issues will keep a lid on any large surge.”