Friday, October 28, 2016

Frank Newman: What property investors are thinking

The ANZ Bank and the New Zealand Property Investors’ Federation (NZPIF) have released the results of their annual property investors’ survey.

The key findings are:

• Investor confidence is high. A net 69% of respondents are to buy more property and nearly 25% expect to buy within the next 12 months.

• 60% of respondents believe prices will rise by more than 6% over the year (up from 51% last year).

• Regions in the North Island outside of Auckland are expected to have the highest growth in house prices.

• Tenants damaging their property is now the greatest concern for landlords with 54% listing it as their number one problem, overtaking government regulation which was the greatest concern last year. This is due to increased risks regarding methamphetamine contamination which 38% of respondents saying it was their number one concern.

More generally, the ANZ have some cautionary comments about prices. They say,

“House sales are down nearly 10% versus a year ago and houses are taking longer to sell (though the market is still incredibly tight). Typically, house prices follow sales with a 3-6 month lag. House price inflation is already easing and we expect it to continue to do so. Given this, investors’ house price expectations look overcooked.”

In other words, investors are being too exuberant about their expectations.

They also point to the average number of days it takes to sell a property. They say,

“Nationally, the median time to sell a house rose by 3.3 days in September to 33.3 days. While this is still well below the historical average of 38 days, it is an eight month high and does suggest that while weaker sales activity is in part due to a lack of supply, softer demand may also now be contributing.”

The median days to sell have risen most dramatically in Auckland, where prices have already started to cool.

It also appears as though the Loan Value Ratio regulations introduced by the Reserve Bank are starting to take effect. The ANZ says,

“Nearly a third of investors say that the restrictions have impacted on their strategy in the past 12 months (versus 16% the year before), and nearly half of these investors said they have not bought a property they would otherwise have done. Nearly 30% say they are less likely to buy another property in the next 12 months than they would have been otherwise.”

Having said that, there remain a great number of positive impacts on the housing market so while some investors have had their wings clipped, they think property prices will continue to rise.

On the interest rate front, the ANZ expect a cut in the Official Cash Rate in November, but they do not expect this to have any impact on fixed term mortgage rates. Their preference remains 1 and 2 year fixed rate terms, but very conservative investors may consider the longer terms. They say,

“We believe longer-term rates are at their respective cycle lows too. At face value this suggests that there is value in considering them. Despite their increased cost, they do offer more certainty. From a pure cost perspective, we prefer the 1 and 2 year, but equally, we recognise that some borrowers may value certainty beyond that.”

In my view the one and two year terms make the most sense at present.

Looking at all of that information, one can’t help but get the sense that the heat is starting to come off the property market a little – but it’s more like turning an element on the stove down from a hot boil to moderate boil.

By all accounts, 2017 should be a good year for property investors. There are lots of positives: high immigration, low interest rates, a strong local economy, and a high level of confidence generally. 2017 is an election year and the government’s books are looking better than the Treasury had forecast. So its quite likely that next year’s budget will have some good news in the form of tax cuts – quite possibly a cut in the corporate tax rate from 28% to 25% and an adjustment to personal income tax rates.

The high level of confidence in the property market may well dissolve towards the end of next year as the reality of a general election looms and attention turns to the likelihood that NZ First will hold the balance of power and the uncertainties that would bring.

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