Residential property investment has had a wonderful upward ride for a number of years but eventually, economic reality kicks in and property takes a breather just like other investment asset classes.
In our largest cities, house prices are no longer following a uniform trend and we are seeing significant price variations between suburbs. In many instances, prices have moved sideways and even downwards in many suburbs. In many of the provincial centres, house prices rose due to people exiting cities such as Auckland where for many, it is now unaffordable to live. However, provincial house price growth is now slowing and even stopping.
NZ economists are not predicting big falls in house prices, such as what is happening in parts of Australia. However, there is an emerging consensus that the heady days of massive price increases year after year are now long gone. We are likely to see a few years of sideways or very small increase in values - more in line with inflation than in line with what previously was driven to a degree by speculation.
In the words of Gordon Egglington from Prendos, “Sustained housing demand is looking good.” Residential house prices are being helped by:
- Incredibly low mortgage rates - many are now below 4%;
- A capital gains tax is no longer on the political agenda and the bright line test has not been extended as many thought it would (so any gain is tax free if held for over five years);
- There is still a shortfall in housing in Auckland and immigration (although slowing) is still strong.
However, its currently taking longer to sell a house than it did 12 months ago, and prices are not rising dramatically despite the positive signs. The real estate industry attributes this to:
- Tight bank lending practices where high levels of equity are required, and banks are reluctant to provide bridging finance;
- Government policy changes or new regulations are making buyers wary;
- A foreign buyer ban, which has supressed demand from non-residents;
- Property speculation and ‘flipping’ has all but disappeared in the last two years;
- A growing awareness that property insurance costs may become very expensive in some areas and this reduces the ability to borrow; and
- Development in Auckland is becoming less economic thanks to high land prices, increased building costs, tight finance and an excessively long building consent process.
In today’s market, unless a purchaser is cashed up, it is becoming difficult to purchase a house, so houses sit for sale with many coming to view during open days but few able to buy on auction day.
To summarise, the fundamentals for housing price growth look good but we are going through a period of price adjustment so expect house prices to range between -3 to+3% for a few years to come.