House Prices

Seven months of profits gone

Any profits investors made on their rentals since November have been wiped out.

Thursday, June 09th 2022

The latest QV House Price Index shows house prices have fallen back to levels at the end of November last year.

Rising interest rates and credit constraints have taken a big bite out of the market over the three months to the end of May.

The average home value dropped by 2.2% to $1,030,221 nationally over the past three months. It is the same quarterly drop recorded at the end of April.

While house values year-on-year were up 10.5%, they were down from the annual growth rate of 14% in April.

Wellington took the biggest plunge down 4.9%, while Auckland’s average value fell 3.3% to $1.47 million. Hamilton was down 4.4%. Napier and Rotorua, dropping 4.2% and 4.1% respectively, are not very far behind.

In Auckland the biggest falls were in the central city suburbs, down 4.5% over the quarter. Papakura is down 4.1%, Manukau, down 3.7%,North Shore, down 2.7%, Waitakere, down 1.7% and Franklin, down 1%.

Continuing to defy the downward trend in quarterly growth are Queenstown Lakes, up 4.5% and Marlborough, up 1.1%. Queenstown is the only major urban location to record an increase in the rate of value growth compared to April.

QV general manager David Nagel says there is no question prices are falling, especially now as buyers take the upper hand in negotiations. “It’s really just a matter of how much further values will fall before finding the new equilibrium.”

He says almost all of the country has passed the peak of the market cycle.

“This was originally boosted by investors and first-home buyers competing for limited stock, especially with the availability of low interest loans.

“That led to massive price increases in the more affordable locations, so it’s no surprise these are the first to get hit. However, as the market downturn takes hold, even the higher valued properties have started being impacted,” says Nagel.

He says with interest rates likely to climb further to battle inflationary pressures, as well as economic uncertainty with the Ukraine conflict and continuing supply chain disruptions, there is a long way to go before the market bottoms out.

“There is unlikely to be any significant value growth until at least 2023 when fully open borders might allow for the return of tourists and immigrants to New Zealand at pre-Covid levels.”

Auckland registered valuer Hugh Robson says it appears vendors are now realising the market isn’t what it was from June to November last year, and so they are now adjusting their price expectations in order to secure a sale agreement. “Many auctions are ending without a result, with negotiations taking place later, behind closed doors,” he says.

“With interest rates continuing to creep up, increasing living costs and material shortages, several developers have decided to delay starting multi-unit developments. First-home buyers with approved finance remain active. However, most of them are now well aware the market has changed in their favour.”

Fear of over paying rules market

Meanwhile, independent economist Tony Alexander says the market has turned faster than anybody expected and it has changed from FOMO (fear of missing out) to FOOP (fear of overpaying).

In his regular survey of real estate agents with REINZ, 73% of agents report seeing FOOP, compared to 19% in August.

This is also affecting investors. A net 65%% of agents report fewer investors at auctions and open homes and instead sitting on the fence.

Alexander says it is not rising interest rates or tax deduction changes that are keeping investors on the sidelines but lending restrictions through tighter LVRs and changed criteria to the Credit Contracts and Consumer Finance Act (CCCFA).

Alexander says this is likely to carry on until the middle of next year, when house price drops should be mainly over. However, he is predicting house prices may then plateau for a few years, going on previous experience. They have already dropped 5-6% since their November peak and trading banks are forecasting a drop of 10-20% over the year.

Backing up agents reporting FOOP is dragging on the market are fewer people at auctions and open homes. A net 65% of agents say fewer people are at auctions and 70% report fewer people at open homes in the past month.

FOOP is the dominant feature of the market, says Alexander. Only 8% of agents say people are worried  about their jobs or incomes.

Comments

On Friday, June 10th 2022 12:12 am Peter Lewis said:

A misleading and mischievous headline. I have several rentals, and I have made profits from them over the months from November. How? Because my rental income is greater than my ownership costs. This article simply reinforces the mistaken belief that all profit from residential rentals is from capital gain. Although widely touted by the Capital Gains Tax zealots, this is incorrect. Many (most?) long term residential landlords buy for, and enjoy, weekly cash income from the rents and any change in the value of the property is largely irrelevant.

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