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Will property investment pay off during a downturn?

For years, investing in property has been a nearly fool-proof way to make money in New Zealand, thanks to rising prices, high rents, and high demand for property. As the country begins its COVID-19 recovery, that might all change.

Although our nationwide lockdown is over – and the results are positive so far – the effects will go on for some time. Redundancies and business closures, as well as the loss of tourism and immigration, could affect demand and influence house prices. Temporary rules mean that rents are frozen, and tenants can’t be evicted easily. On the other hand, interest rates have dropped and LVR restrictions have been loosened, making property investment more affordable.

What does this mean for current or would-be property investors? While it’s not the best time to make rash decisions or risky investments, the news isn’t all bad. Some parts of the country should remain relatively unaffected by falling prices.

Here’s what to expect:

Keep an eye on property prices

In the few months since the virus reached our shores, much has been written about the possible effect on house prices. Though some have predicted a significant fall, that’s unlikely to be consistent throughout New Zealand. Some tourism-reliant areas like Queenstown and Rotorua are likely to see a drop in prices, while main centres like Auckland and Wellington will probably remain stable – although a small drop is possible.

We’re unlikely to see major price rises, which is a change for property investors. Relying on capital gains may not be a smart choice in the next few years. As always, it’s essential to keep an eye on your specific property market and make decisions based on that – not on country-wide predictions.

Dwindling demand

High demand has driven price rises over the last decade making it easy for property owners to offload properties quickly if needed. That could change for a few reasons. Job losses and loss of income mean that renters and property owners are more likely to stay put for the time being – people may be wary of moving into first homes or upsizing. Immigration will also have an impact – while we usually have around 65,000 people moving to New Zealand every year, that number will be much lower in 2020.

Reduced demand won’t make it impossible to sell property, but it could slow down the process – particularly in Auckland, which has had a higher number of offshore buyers and new migrants.

Increasing supply

Supply is another piece of the house-price puzzle. Limited housing stock has driven demand over the last few years, particularly in Auckland. While the number of houses won’t change quickly, the number available for sale may rise as a result of investors selling up their properties – particularly short-term holiday rentals in tourism-reliant areas. A large number of these properties flooding the market could contribute to falling prices in parts of New Zealand.

Changing rental rules

Just before lockdown, the government announced temporary changes to the rules around renting. Rents were frozen until September of this year – and possibly further if the legislation is extended. Landlords were also told that they could not terminate tenancies and evict tenants for three months from the beginning of lockdown.

Although these rules were introduced to protect renters and prevent people from losing their homes during a nationwide lockdown, they have also made things harder for landlords. The termination rules, in particular, mean that it’s difficult to evict tenants, even if they fail to pay rent. It’s also hard to sell unwanted properties with current tenants who are unwilling to leave.

As restrictions ease, these rules will likely be reviewed, giving investors a chance to give tenants notice and put properties on the market.

LVR and lending restrictions

LVR restrictions have been a given for the last seven years, with most lenders requiring a 30% minimum deposit from property investors. The Reserve Bank has just lifted those restrictions, but that doesn’t mean lenders will be willing to change their rules just yet. Because the COVID situation is ongoing, banks and other lenders will be taking a conservative approach to lending, to avoid over-capitalising.

Property investors should do the same – although a crisis can be an opportunity for gain, it’s also risky. You don’t want to buy a property, see it lose 10% of its value, then end up with a mortgage worth more than the value of the property.

Cautious and strategic

As the market changes in the wake of COVID-19, property may not be the failsafe investment it once was. Falling prices in some areas, increasing supply and decreasing demand, restrictions for landlords and caution from lenders – it all adds up to a complicated landscape for property investors. This doesn’t mean you have to sell up if you’re an investor, or give up on your dream of buying a rental property, it just means that you need to take a cautious, strategic approach. Do your research, keep an eye on your local market, and – most importantly – seek expert advice before you buy or sell.

Need property investment advice post-COVID? Talk to one of our investment experts today.

**These are general guidelines and are by no means a reflection of bank or lending policies