It’s easy to be pessimistic on the state of the property market at the moment. Interest rates are higher than many new property owners have ever seen. Household budgets are stretched. And that dreaded ‘recession’ word is everywhere. But there are many reasons why a more optimistic outlook on the market is warranted, says Prendos Valuations Director Matthew Edginton.
Whether or not we want it, Auckland might be much closer to another strong run in property prices than most are saying. Granted, the short term is shaky, as listing numbers continue to rise and buyers are being very selective. But here are a few reasons why it might be a very different story by the end of 2024.
Pent up property demand
Investors and movers have been sidelined for quite some time due to high rates, tight credit and lack of listings. But it’s unlikely Kiwis have suddenly gotten over their property obsession in the last two years just because of an interest rates cycle. Which means property investors are still there, they are just waiting for the right environment to come surging back.
Rents are on the up
We’ve seen significant rental growth over the last two years – rents are up over 8% in Auckland in 2023, well above the long-term average of 4.5%.
What’s more, the prospects for further rental growth look good due to high net migration. There was a net inflow of 111,000 migrants to the country for the year to March 2024. Most of that migration lands in Auckland and most will be looking for rental accommodation.
On top of that, Building Consent numbers have dropped sharply. This means there will be fewer new homes coming to market over the next couple of years. The effects of more renters with fewer available rental properties are obvious.
Despite rental growth, Auckland rents as a percentage of household income are at their most affordable in the last 20 years – a surprising fact from Corelogic’s housing affordability report. Because growth in wages has also been so strong, the percentage of average gross income required to pay the average Auckland weekly rental has fallen to 19%, down from its range of 21% – 23% over the last two decades.
This means the ceiling for rental growth has not yet been reached. There is a limit to how high residential rents can get, which is tied to the income of renters. Contrary to what the new government tells us, there isn’t much evidence that rents are tied to landlord costs. Long-term rental growth tracks income growth pretty closely. So, with rent as a percentage of income at the lowest level in 20 years, there is room for more upside in rents.
The Government has come to the party
The Brightline test has been cut back to two years, interest deductibility is being reinstated and tenancy laws are being adjusted to make it easier to find good tenants. The message to investors is clear – residential property investment is safe again. On a related note, LVRs are set to loosen and credit rules have been relaxed, so it’s becoming easier to get approved for borrowing.
Yields are their most attractive in many years
Rising rents and declining prices equals much healthier looking yields for investors. Average gross yields in Auckland bottomed at a ludicrously low 2.5% at the peak of the market in 2021 (what were we thinking?) They’re now back to around 3.4%. Still not great, but you have to go all the way back to 2015 to find higher average yields on Auckland property.
With a 3.4% yield, you need interest rates at around 5.7% or lower for the rent to cover the interest payments. This doesn’t account for other costs, so it’s not entirely accurate, but you get the idea. We’re not that far away from the average Auckland investment property breaking even.
The missing ingredient is lower interest rates
Despite everything above, it is tough to make the sums work for anyone considering an investment property, upsizing or getting into the market for the first time in Auckland. Interest rates need to start falling before any real momentum is likely to take hold of the market.
The good news is, any talk of rates going higher has died out. They’re going to come down. Unfortunately, we don’t know when. My guess is, rates will be cut earlier and more aggressively than the Reserve Bank tells us. They will keep parroting the “higher for longer” line for as long as they can but at some point, as they always do, they will cut aggressively.
When rates drop, there will be a two-fold impact on the property market.
First – mortgage repayments become cheaper. For investors, the rent gets closer to covering the mortgage payments, or maybe even leaves a bit left over at the end. And movers can afford the payments on that bigger/newer/flasher home they’ve been putting off.
Second – returns on other fixed income investments get worse. Those bonds that would-be property investors flocked to as they spiked to 5%+ are no longer available at those levels. Suddenly, the rental yield, plus tax-free long-term capital growth offered by residential property, starts to look much more attractive.
A good time to buy?
To those looking to get into the market, your timing appears to be pretty good. Listings are up, you’ve got more choice than in recent times and you’re competing against a smaller pool of other buyers. Most investors aren’t buying again – yet. Most movers are delaying their decision and staying put. But I think both groups will be back, in relatively short order, and the question is, do you really want to be competing with them?
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