Blog: The Landlord says...

A little reported piece of news in the past week is something which looks good for landlords, and maybe not so good for tenants.

That is the reporting back of the Residential Tenancies Bill to Parliament. Now this bill is the bible which both sides of the housing market have to obey. The current act is more than two decades old and there has been lots of talk of changes to it in recent years.

I suspect many tenants will have wished Labour had made more haste with this project as they would have ended up with a better outcome than they are now facing.

Landlords on the other hand are pretty happy that National is now running the show on this one, as the bill put back in the house over the past week shifts the balance of power more towards property investors and landlords.

Both the NZ Property Investors Federation and the Real Estate Institute are happy with the direction it is going.

Indeed, Richard Evans from REINZ’s property management group says in the past the rules tended to favour the tenants, but now they “restore the balance”.

His view is that in the past people were put off property investment because of the difficulties around tenant management, but this new set of rules (if passed) will “encourage  people  to invest in property again”.

A key issue is if the bill gets through Parliament. I suspect it will, but I wouldn’t be against a wager that Labour and the Greens will kick up a big fuss about some of the changes.

Their fault though for not moving on the changes when they had the chance. After all they began the “reform” process early on in their nine years in power.

What drives the property market?

There is plenty of commentary around at the moment about the state of the property market and where it is going. Much of it, in my view, is misguided.

Let’s sit back for a moment and think about what the key factors are.

Three of the biggest are: mortgage rates, immigration and affordability.

I would argue things like the United States economy, mortgagee sales and what farmers are doing has a marginal influence on the market. Indeed, using these factors as arguments for where the market is heading is misleading.

Mortgage rates are a critical factor in the affordability of property. Right now rates are at or near historical lows which help make the property equation stack up.

Buyers in this market are getting a real leg up with low rates and people with existing debt will see their servicing costs come down as they roll over loans. The Reserve Bank has made it clear it sees interest rates staying down for some time, which must be a plus for the market.

History shows us that immigration numbers and the housing market are closely related and tend to move in tandem. The basic logic, which is hard to argue with, is that when people move to New Zealand they need a roof over their heads. Thus, supply of property has to increase.

Right now there is an uptick in immigration numbers which should help stabilise at the least and even support house prices.

The other positive factor for the market now is one which doesn’t generally get a lot of air time and that is consents.

It’s like immigration. With a growing population base the country needs more houses. Right now, new consent numbers are low. Basic supply and demand economics says that in such a situation, house prices will rise.

The big unknown at the moment is rising unemployment.

And finally, a little reality check.

Double digit returns aren’t likely to be widespread in the property market for some time. So what? They shouldn’t be, and nor should there be an expectation that there should be. The risks of rental property investing aren’t high enough to justify double-digit numbers.

Secondly, people shouldn’t look at the residential property market as one big generic asset class. It is made up of lots of sectors and segments. You can break it down in a myriad of ways from coastal to apartments; from lower value rental property to high value prestige properties; from urban to provincial. Each of these markets is different and should be understood.

Many investors are jumping into the market, not for massive quick capital gains but for low risk, cash flow positive properties. This is quite understandable considering some of the other investment options available to them at the moment.

Next week is going to give us a good feel for what is happening with property prices across the country. On Monday we will have the latest QV statistics and, assuming history repeats, the Real Estate Institute figures will be out later in the week.
The feeling is that the market is starting to flatten out. This week’s Auckland house price data from Barfoot and Thompson showed the number of sales are increasing but prices aren’t. One possible theory is that the Mexican standoff between sellers and buyers is easing and vendors are now accepting prices around 9-10% less than they would have a year ago.
Clearly property investors and first home buyers are more active in the market and it wouldn’t be a surprise to see a shortage of stock in the lower price ranges.

What do you think?