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Shifting faith in property returns poses a challenge

Tuesday 27 November 2018

* Shifting faith in property returns poses a challenge for Reserve Bank ahead of report this week

Investors’ confidence in rental property providing the best investment return is fading relative to owner-occupier property returns according to the latest ASB Investor Confidence Report, coinciding with government changes relating to property moving ever closer. The report asks respondents where they think the best returns are, and as ASB’s chief economist Nick Tuffley explains, there is a noticeable cooling in the favourability of rental property compared to respondents’ own home.

“The alluring glow of rental properties is showing signs of dimming outside of Auckland. At the same time, Aucklanders’ faith in their own home providing the best return has climbed over the past six months. Aucklanders now see their own home as more likely to provide a better investment return than rental property, for only the second time since ASB started surveying about respondents’ own home from the start of 2015.

“As a result of all these shifts, in Q3 23% of nationwide respondents saw their own home as providing the best return relative to 16% seeing rental property as providing the best return. That gap of 7 percentage points has moved from just 3 percentage points at the end of 2017, and is the highest gap recorded so far,” Tuffley says.

“The downshift in rental property perceptions relative to owner-occupier property is significant because it clearly suggests that people are responding to enacted and signalled government changes on tax, rental property standards, and tenancy rights,” Tuffley says.

In Auckland especially, where it’s widely accepted the rental stock is failing to keep up with demand, perceptions that rental properties provide the best return on investment stayed steady at 20%, but were surpassed for the first time since 2016 by a respondent’s own home which was at 23%.

Outside of Auckland, the perception of rental property providing the best return has dropped from 17% of respondents to 14%, which is also a considerable slide. Expectations for respondents’ own home were relatively more buoyant, at 23% (24% previously) seeing this asset as providing the best return.

“This shift in return perceptions highlights the challenges facing the Reserve Bank New Zealand (RBNZ) this week it prepares to release its Financial Stability Report (FSR) and looks to either stick with the Loan-to-Value Ratio restrictions (LVR) status quo or make some changes,” Tuffley says.

“On one side it could ease the owner-occupier restrictions which would keep LVRs in step with the Government’s broader housing policy objective of a tilt to owner-occupiers and away from property investors. This would lead to any added credit availability being directed to those being targeted by broader government policy,” Tuffley says.

But this buyer segment is likely to respond to any restriction easing with much greater alacrity than investors. And, given the recent falls in mortgage rates and a strong start to spring house sales, there is added uncertainty about whether housing activity and debt levels will continue on their recent benign trends, implying little urgency to ease the lending restrictions now.

“There are winners and losers no matter which way the RBNZ moves on Wednesday. But whether it is owner-occupiers or property investors who benefit from any shifts, the lack of housing stock will still be a pressing matter for the Government to keep focusing its energies on,” Tuffley says.

To find out more from recent ASB reports covering a range of commentary check out the ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html

@ASBBank @ASBMarkets www.asb.co.nz

ENDS

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