As interest rates have risen over the past year, New Zealand’s appetite for endlessly increasing property prices has been replaced by a fear of paying too much. Because the property market is so volatile, many investors – and potential investors – are holding back on buying.
While falling prices should make the market more accessible, rising interest rates mean borrowing is more expensive. Many are also waiting for the prices to fall further – nobody wants to pay too much and lose value as the market slumps.
With the Reserve Bank forecasting property price further falls in the coming period, what’s the outlook for investors? While there’s no fool proof formula for property purchasing, we see 2024 as the better time to invest.
Here’s why:
Price fall predictions
The housing market is already showing signs of cooling, and RBNZ has forecast ongoing falls over the coming period. The latest Monetary Policy Statement predicts that prices will start to slump from December 2022 and continue to the third quarter of 2024. Although decreases are expected, they won’t be severe.
Although it’s difficult to know exactly where prices will land, 2024 will likely end a two-year decline. Investors will have watched market changes over that time, giving them a better sense of price levels.
Riding out interest rate fluctuations
Average mortgage interest rates have increased from 3.17% in January 2021 to 5.56% in June 2022. The change has been driven by inflation and corresponding changes to the official cash rate (OCR). The Reserve Bank increased the OCR by 50 points three times this year. The rate is now set at 3.0%, with forecasts showing it could rise to almost 4% or may be 4%+.
Rising interest rates mean higher mortgage repayments for owners – particularly recent and first-home buyers, who tend to have higher debt levels and less flexibility in their budgets. On the other hand, investors have more tools to help them ride out mortgage rate rollercoasters. They have more income from their properties along with significant assets and equity. These factors can make it easier for them to adjust repayments or deal with rising costs.
Emigration and declining demand
Part of the reason for the projected fall in prices is falling demand. Prices have been buoyed over the past two years by an influx of New Zealanders driven home by the COVID-19 pandemic. Those Kiwis were eager to snap up housing, leading to a spike in demand and a corresponding price jump.
Now, the reverse is underway. Although the pandemic isn’t completely over, most countries have reduced or eliminated restrictions, travel is almost back to normal, and border restrictions have eased. As a result, more people are leaving New Zealand, reducing the overall demand for housing. And, as we have seen, reduced demand means lower prices across the board – and more opportunities for savvy investors.
Building is booming
The building boom is happening right before our eyes, with new properties – particularly multi-dwelling developments – springing up all over the country. The boom has been fuelled by intense demand for housing, particularly in urban areas, along with changes to the consent process that make building easier.
As more properties are built, the housing stock should get closer to our population level, increasing supply and reducing prices even further. It’s not great news for homeowners wanting to sell – but good news for investors looking for a deal.
Rising costs for investors
Inflation is driving up the cost of almost everything – from fuel and food to household goods. These increases impact everyone, including property investors. Other factors are increasing landlords’ expenses: the loss of tax deductions on rental property loans, rising council rates and the cost of meeting new healthy homes requirements.
Although these factors are negative for investors as a group, they could provide a way in for would-be property investors. Some investors will likely put their properties on the market to cut loses or realise some ready cash. With living costs continuing upward, 2023 and 2024 could see some investors bowing out of the market – and the resulting influx of properties means newer investors have opportunities to buy.
Stability, availability, opportunity
We haven’t associated stability with the housing market in decades. Prices have risen so steeply that it’s been almost impossible to make predictions about the peak or decide on the best time to buy. Now that demand has slowed and the market appears to be cooling, we could see stability emerge. Although there’s still no way to predict the future accurately , increasing inflation and interest rates, the building boom and rising emigration mean that prices are likely to trend downward in the near future at least.
For investors keen to get into the market, these signs are positive. In 18 months to two years, house prices and interest rates may stabilise. Some investors are likely to be leaving the market, which, along with the building boom, could increase the amount of housing stock available. It all adds up to a market that’s likely to be a lot friendlier and less risky for would-be investors. If that sounds like you, 2024 could be your year to make the leap.
Need expert advice about property investment? Talk to the team at Global Finance on 09 2555500 or info@www.globalfinance.co.nz
**These are general guidelines and are by no means a reflection of bank or lending policies