There’s been an increasing number of hurdles placed in front of property investors in the past couple of years.
With weaker market conditions I thought it was a good time to check in on the fundamentals to see whether it will be enough for property investors to jump back into action*.
It’s tough to get the sums to stack up at present
Given 40 per cent deposits (unless buying a new-build), low gross rental yields, higher mortgage rates (not to mention tough serviceability tests), increased compliance costs, removal of interest deductibility, and flattening rents, there are several key challenges for a would-be new investor.
With these challenges, it’s little wonder the CoreLogic Buyer Classification data shows that mortgaged multiple property owners (MPOs, including investors) are currently running at about a 21 per cent share of purchases, close to all-time lows.
Not a total disaster
That being said, the situation is not a total disaster.
Those figures still mean that one in every five deals is going to a mortgaged MPO.
Kept in context, it’s within a low overall number of transactions.
But clearly some investors are still finding value and new-builds are no doubt one of these opportunities.
Anecdotally there are relative ‘bargains’ to be picked up, with some developers looking to shift stock so they can crack on with their next project.
In the weak market, others will simply be doing deals on existing properties at discounted prices.
Cash remains king
Meanwhile, cash MPOs (yes, they do survive in any economic storm) are enjoying the weak market conditions too.
Their share of purchases has risen to a record high from around 10 per cent in late 2021 to closer to 15 per cent now.
In a market where finance is restricted and costly, it stands to reason that ‘cash is king’.
When we look at investor activity by size of portfolio, the decline in market share has tended to be a bit bigger for those with fewer properties – in other words, the ‘mums and dads’ have found the going a bit tougher than bigger landlords.
Again, that makes sense in the current market conditions, given having the resources or banking relationships for a deposit to keep buying is challenging.
Investor crystal balling
If we put ourselves in the shoes of an investor, what would be worth considering over the coming months and is it a time to buy?
The first question, for investors and buyers more broadly, is to ask when property values might bottom out?
No one knows exactly, but my working assumption is that as mortgage rates finally peak in the next few months (if they haven’t already), we may see sales activity pick up a little in the second half of the year and property values in many parts of the country find a floor.
Will National win the Election and reinstate interest deductibility?
This scenario does seem to be getting more likely as the days go by, but it’s probably still prudent to work the numbers on what we know now, and if the rules change, that’s a bonus for investors.
How will lending rules evolve?
I’m not anticipating any changes to the loan to value ratio rules (LVRs) this year, although November’s Financial Stability Report might signal a loosening in 2024, which would be when the formal caps on debt to income ratios are likely to be introduced.
The cap could be set at seven for all borrowers, with a speed limit system and new-build exemption.
You can find a handy RBNZ LVR explainer here.
Ultimately, I suspect many would-be investors are currently weighing up the need to top-up a property investment’s cashflow from other income sources over a three- to five-year horizon versus the scope for renewed capital gains over that period, which are uncertain and only ‘on paper’ until realised.
It’s by no means an easy balancing act, but one factor that will work in favour of investors are signs that net migration is back in the black – a boost for tenant demand and rents this year.