Ring-fencing, law reform: What will it take to slow investors down?

Wednesday, 12 December 2018

First-home buyers are almost a third of the market in Wellington.

It will take a major market change to make property investors lose their enthusiasm for the market, one analyst says.

CoreLogic has released new data that shows 25 per cent of residential purchases across New Zealand in November were made by mortgaged property investors.

Analyst Kelvin Davidson said it continued a trend of property investors increasing their market share over the past year.

Their numbers fell in late 2016 and into 2017 after the loan-to-value restrictions were tweaked to require banks to ask for a 40 per cent deposit for investor lending. Those restrictions have since been relaxed. Investors will need 30 per cent from January.

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But other restrictions have come into force - the Government has introduced a bill that would ring-fence tax losses on rental properties, and reform to the Residential Tenancies Act will give tenants more rights. It has also clearly signalled its desire for a capital gains tax.

Davidson said you might expect that to slow investor activity. But that had not yet happened.

'The proof, however, is in the Christmas pudding, and to us it illustrates that true long-term investors, as opposed to speculators, are still confident that they can make their plans work even though costs may be slightly higher and (net) yields slightly lower,' Davidson said.

Investors were particularly active in Dunedin, he said.

He said it was not clear what sort of change it would take to alter the market.

'I'm not sure anything would make much of a dent in the short term – Kiwis still like, and understand, and trust property investments, you can leverage up, unlike shares, and the alternatives are thin on the ground - term deposit rates are low).

'That said, probably the biggest risk to investors would be an actual downturn in prices. For now investors are happy to stay on with low yields, provided that capital gains are accruing, or at least that values aren't falling. But that mentality may shift if they started to see values falling, and that of course would trigger even bigger falls, as more properties started to be listed. However, I see wider-spread price falls as pretty unlikely for now, given low interest rates and very low unemployment.'

First home-buyers are also still keen to buy, the data shows. Nationally, their share of the market continues to hover at multi-year highs of about 23 per cent but they are 30 per cent of the Wellington market and 25 per cent of Auckland's.

'First-home buyers have been a key part of the wider strength of demand in the capital over the past few years, and completed sales have not been replenished by enough new listings,' Davidson said.

'This has meant that the stock of property on the market has been low, with prices naturally rising. Finally, it's also worth highlighting first-home buyers in Auckland. There, they account for 25 per cent of the market, despite an average property value of $1.05 million in our biggest city. This goes to show just how strong the resolve of first-home buyers to get on the ladder really is, helped along for example by access to KiwiSaver for a deposit, as well as a willingness to change their expectations on quality/location.'