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Are Property Investors Out Of Control?

Investors’ market share has soared to 27%, CoreLogic research reveals, prompting speculation that further intervention by government and regulators might be needed to rebalance buyer activity

CoreLogic NZ’s latest Property Market & Economic Update cements evidence from a number of market indicators that investor demand has surged back to 2016 levels. Kelvin Davidson, CoreLogic’s Senior Property Economist, says there is a rising possibility that a 40% deposit requirement for investors could be officially mandated later in the year.

“CoreLogic’s Buyer Classification series shows that mortgaged investors surged to a 27% market share in the final quarter of 2020, up from 24% in Q2. This growth coincided with a 6.1% increase in property values in the quarter; a rise not seen since the three months to February 2004 at 6.6%.

“The last time that mortgaged investors had a market share near this high was 28% back in Q3 2016 when the Reserve Bank imposed a 40% deposit requirement. While we’ve already seen the Reserve Bank move to reinstate LVR speed limits at 30% from March 1st, the question is, will this be the end point? We think a move to 40% is possible if investor participation continues to push higher.”

Davidson says an extension to the current five-year hold period for the Bright-line test could be on the cards too, while the Reserve Bank has also requested the ability to use debt-to-income ratio caps if and when they deem it necessary.

“With property politics heating up and affordability pressures re-emerging, it looks likely that heightened regulation could be a key feature of the market in 2021,” says Davidson.

With this in mind, Century 21 New Zealand Owner Derryn Mayne says February is likely to be the best month to sell property this year.

Lower deposit requirements have contributed to a surge in buyers and house prices, but their end is in sight.

The Reserve Bank will this month announce its new LVR regime – set to take effect from 1 March. Pundits predict it will see 20% minimum deposit requirements for owner-occupiers and possibly even 40% for property investors.

The Century 21 leader says with property investors now making up about 27% of all buyers, putting the brakes on them will have a demonstrable impact as has been seen in the past.

“Five years ago when property investors were hit with a 40% deposit requirement, it took many of them out of the market and helped cool the jets somewhat. Combined with major tenancy law changes taking effect on 11 February, I think we’ll soon see many Kiwis pull back from buying a residential investment property,” says Mayne.

She says with REINZ reporting that the median house price in Auckland hit $1,040,000 in December, a mandatory 20% deposit requirement for first-home buyers could mean over $200,000 for a relatively humble house.

“Which young couple can walk into the bank with that kind of money in their back pocket? Unless they’ve got parents who can help them, it’s going to get very difficult for first-home buyers to secure adequate lending from March.”

Mayne says going into February buyer demand remains strong, fuelled by record low interest rates and considerably fewer properties available for sale.

However, she says another Reserve Bank policy – the mortgage holiday scheme – is coming to an end which will add pressure to tens of thousands of Kiwi families. For nearly a year many have benefitted from the scheme, but it is set to expire on 31 March.

“Banks will endeavour to work positively with their customers, but sadly there will be plenty of cases where banks or homeowners have little choice but to sell the property. If we see a noticeable rise in exit or mortgagee sales, that will only have a negative impact on overall house prices,” she says.

While REINZ’s latest sales data for December had the country’s average median house price up by 19.3% compared to a year earlier, Mayne expects property rises in 2021 to return to a more sustainable track.

“When you weigh up economic uncertainty for the year ahead, a shrinking buyer pool due to borrowing restrictions, and more Kiwis surrendering their mortgages, it’s easy to see why February may well prove to be the best time to sell in 2021.

“One thing is definitely looking likely: February is set to be the last month that many first-home purchasers and property investors can get into the market with a smaller deposit. Note to prospective sellers: Don’t miss out on these highly motivated buyers,” says Mayne.

Supply the key issue

“Supply (or lack thereof) is also a critical issue affecting the market and igniting much of the heat. This is both a shortage of available listings on the market but also a simple lack of newly constructed residential properties too,” says Davidson.

CoreLogic’s Buyer Classification data shows that first home buyers made up 23% of purchases in Q4. “Given that FHBs don’t have anything to list or sell before they buy and that very few investors aren’t selling much at present either, their continued buying presence is likely to keep the pressure on the supply/demand balance in the market.

“Looking at movers (including upgraders and downsizers), their share of purchases dipped to just 26% in Q4, an historically low level. In some cases, existing owner-occupiers are choosing to stay where they are due to already high debt levels and the extra costs associated with moving. But in other cases, people aren’t moving because they simply can’t find the ideal next property, given the tight supply of available listings. In turn, that is feeding back into an even tighter listings picture.

“Despite housing construction staying steady at recent high levels, New Zealand’s housing supply deficit following the GFC is still ultimately a key factor behind recent strong house price growth and stark lack of housing stock. In the end, government policy needs to be firmly focused on building more houses. We just need more properties,” says Davidson.

Key Facts from the CoreLogic Property Market & Economic Review:

• A key support for the recent strength in the residential property market has been the stronger than forecast performance of the economy, especially with unemployment remaining lower than anticipated. From its current level of 5.3% (up from the recent low of 4.0%), the unemployment rate may only rise by another 1% or so. Meanwhile, timely indicators such as the NZ Activity Index show that the wider economy continues to recover, and sectors such as construction are still growing steadily (despite previous fears of a collapse).

• Mortgage credit has continued to flow in the past few months after the slump in activity in April and May. The rise in activity over the second half of 2020 was so strong that it far outweighed the lockdown-related hiatus, and left the value of mortgage lending by the banks up by almost 10% for the calendar year, reaching new record highs over the final months of 2020.

• Property sales volumes also picked up strongly in the final few months of 2020 and could have been even higher still were it not for the lack of listings on the market. Combined with low mortgage rates, that lack of choice for buyers has been a key contributor to the sharp growth in property values lately.

• The CoreLogic House Price Index showed that average property values across NZ as a whole rose by 6.1% in Q4 – a figure not seen since the 6.6% rise in the three months to February 2004. Tauranga (10.2%), Wellington (8.1%), and Dunedin (6.4%) were all above that national average, with smaller areas such as Masterton and Whanganui also recording strong growth. Hamilton (4.1%) and Christchurch (3.4%) were slightly more subdued in Q4, but those growth figures were still fairly solid, especially for Christchurch (which has seen little change at all in property values for a number of years now).

“The main economic figures suggest things are progressing relatively well for NZ’s post-COVID recovery, with labour markets performing better than expected and economic activity rebounding well. Strengthening economic conditions point to continued momentum in the property market, backed by historically low interest rates which look set to stay at record lows for the year. However, after an 11% gain in housing values in 2020, growth in 2021 could be a little slower, as potential regulatory changes in the property market and affordability challenges start to take effect,” concludes Davidson.

© Scoop Media

 
 
 
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