The Property Boom We Didn’t See Coming

December 10, 2020

Predictions by economic commentators were that COVID-19 would push the world’s economy into its deepest downturn since the 1930’s Depression, with house prices following close behind. That gloomy outlook has thankfully not come to pass. We talk to Prendos Valuations Director Gordon Edginton about the property market’s unexpected resilience.

When the Global Financial Crisis hit 10 years ago, worldwide house prices fell by 10% or more. However, despite the unprecedented pandemic in 2020, the property market has continued to rise – and it’s a trend not just confined to New Zealand.

“I was reading a piece recently in the Economist,” says Gordon, “and what really surprised me was that the boom we’re seeing in New Zealand has been mirrored in most middle and high income countries around the world. In Germany, house prices are 11% higher than this time last year, in the US they’re up 5%, and Britain has hit an all-time high. South Korea and some parts of China have also seen rapid growth and have had to put a halt on property lending processes.”

Here in New Zealand, property prices have risen by 16% since this time last year. Auckland’s median price recently hit a record high of $1m and sales volumes went through the roof to over 3,200 in October.

“Anything close to 3,000 sales per month is ‘boom’ territory for Auckland. In the boom years of 2014-16 we were consistently averaging 3,000 sales a month – so we’re certainly back there. Auction clearance rates have also improved dramatically since 2019, and days to sell have dropped to 30 – well below the 10 year average of 34.”

So what has caused this unexpected property explosion? Gordon says it primarily comes down to the incredibly low interest rate environment. In New Zealand, the Reserve Bank has slashed the OCR to 0.25% and temporarily removed LVRs in an attempt to curb the impact of the pandemic. This has seen interest rates drop to around 2.5% – stimulating a wave of borrowing that has been poured into real estate.

“It’s all about money availability. If you make money available at such low interest rates then all it can really do is stimulate the property market – primarily residential assets which are seen as the least risky asset class. Home owners, investors and first time buyers are able to take out big loans and keep their monthly repayments affordable. Plus, with interest rates expected to stay low and potentially go lower still, investors have the confidence to keep borrowing and buying.

“In the States you can borrow money at 2.9% over a 30 year term – imagine that! In New Zealand you can only fix for about 2 or 3 years, but it means property is now within reach of many more people. What it’s done is pull this massive tsunami of money that’s looking for a home, into real estate.”

As well as making monthly mortgage repayments more affordable, the low interest rates have seen returns on alternative ‘safe’ investments fall to very low levels. Money sitting in a term deposit may now yield just 1%, whereas an investment in property will yield close to 4% on rental income alone – before factoring in the prospect of capital gain.

“Globally, investors are facing near zero returns from holding money in the bank or as cash – that money will want to find a home that offers a better return, and real estate has been one of those asset classes that delivers this, albeit with slightly more risk. It gives you the dual return of capital gain and rent, plus Kiwis love that ‘bricks and mortar’ feel of real estate.”

But there are other reasons the New Zealand property market is fizzing. Strong migration gains prior to lockdown; overseas travel being halted, with that saved money now being channeled into property; job losses not being as severe as predicted; and the economy doing better than expected.

“We had a massive migration surge just prior to and in the initial parts of lockdown, where huge numbers of kiwis returned home. That has since slowed – I think the stats showed we had a negative outflow of 30 people in September 2020 – but apparently there are a quarter of a million kiwis still wanting to return home to live. Once travel restrictions are lifted a bit there’s potentially many from other parts of the world who might want to come and live in our nice safe country – so we could be expecting another tsunami of migration gain in a year or two.”

With people’s overseas travel plans halted, many are choosing to put their money into renovations or building projects – with consents in Auckland at their highest levels for many years.

“Because we’re not travelling, we’re spending our money here: travelling round New Zealand, doing a renovation, buying a rental or starting a building project. I think we were almost at a record number of building consents before COVID hit, and things haven’t really slowed at all. A lot of these consents are for multi-unit housing – terraced houses and apartments priced in the ‘relatively cheap’ price bracket of $600-700k – which I see as a really positive result of the Auckland Unitary Plan. It’s brought far more affordable options to the market. Yes, they’re on small plots of land and they might not be quite where you want to live, but they’re a nice product at an affordable price level.”

And it’s not just Auckland that’s booming – the market appears very strong across the board.

“The Wellington/Kapiti region is going gangbusters, Bay of Plenty is surging and Hamilton is equally as strong. The only potential troublesome spot was Queenstown, but even that has turned a corner.”

The Impending Impact of LVR Rules*

The opinion of most commentators is that the current rate of property price rises is not sustainable. Gordon agrees, and says it’s time for the Reserve Bank to step in.

“The removal of loan to value ratios (LVRs) has certainly had a dramatic effect on investors’ ability to buy in Auckland. The market had previously been in a very flat phase following the ruling in July 2016 that investors needed a 40% deposit on any property purchase. Now that’s been removed, the market has again taken off again, further primed by the incredibly low interest rates. The Reserve Bank has talked about reintroducing LVR rules in March 2021, but I believe they need to do something sooner.”

The big banks seem to be on the same wavelength, with BNZ recently joining ASB and ANZ in moving to introduce loan to value ratios ahead of the Reserve Bank rules.

“As of 7 December 2020, BNZ requires a minimum 30% deposit from residential property investors, which means all four major banks in this country have their investor lending policies back to where they were pre-COVID. The Reserve Bank is yet to make a decision on bringing LVR rules forward, but there’s a lot of pressure for them to do so sooner than March.

“Raising the LVR back to at least 40% for investors will certainly have an effect on prices. The question is whether it will just be for investors, or across the market – which would really kill first home buyers, an area we want to keep active.”

First home buyers are currently holding their ground in the hot housing market, with many tapping into their Kiwisaver accounts to take advantage of low interest rates.

“Nationally, the market share of first home buyers in 2020 is around 24% – well above the average of 21% and surpassing the previous 2006-07 peaks of 23%. In many New Zealand cities, the cost of owning and servicing a mortgage is actually lower than paying rent, so it makes sense. Borrowers have had a windfall seeing their debt servicing costs fall by about 20% from pre-COVID levels, with interest rates dropping a full percent to around 2.5%.”

All in all, the New Zealand market has proven remarkably resilient. It seems that it takes more than ‘the deepest downturn since the Depression’ to shake the housing market’s foundations.

“It’s quite astonishing how resilient the market has been. It’s amazed everybody. There is more confidence and optimism emerging every day, and I just can’t see that stopping in the short term. As the promise of a vaccine becomes a reality, investors will have even more confidence to get out and buy an asset. New Zealand has been shown to be a global safe haven, and no doubt we will have thousands queuing at our borders. The prospects for the real estate market are actually looking very rosy indeed.”

*Since the publishing of this article, the Reserve Bank has confirmed it will raise LVRs back to their former levels of 20% for home buyers and 30% for investors, as of 1 March 2021. At these levels, Gordon says, the change is unlikely to have a huge impact on investors but will instead affect first home buyers, who may struggle to pull together the required deposit for their first home. To have the required impact, Gordon believes the LVR should sit at 40% for investors only.

For all your Property Valuation needs please feel free to contact us on 0800 PRENDOS or email [email protected].

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