Investors on the back foot

Property values fell again in June, the third month in a row they have declined 0.8%, CoreLogic’s latest House Price Index shows.

The quarterly fall of -2.3% is the biggest drop over a three month period since February 2009, which was just before the market bottomed out  following the Global Financial Crisis (GFC).

Given the hurdles to get funding such as 40% deposits, increasing interest rates and the cost of housing such as values, maintenance costs and reduced tax, many investors - or would-be investors - simply won’t be able to justify adding a property to their portfolio, says Nick Goodall, CoreLogic’s head of research.

Some investors may be comfortable topping up their property from other income for a period of time, but that has a limit, he says.

As the downturn sets in, and with interest rates set to rise further, the long recovery after the GFC offers a glimpse into one potential scenario which could unfold.

Goodall says the experience then took the shape of a bathtub – a gradual initial decline of -9.9% over 17 months, followed by a period of relatively flat conditions or essentially a  plateau, before eventually increasing back to the pre-GFC peak five years later.

“While the economic and lending environments are remarkably different between 2008 and 2022, housing affordability is more thinly stretched, and interest rates are rising, not falling like in the late 2000s. Under these circumstances it is difficult to foresee any respite for falling house prices in the near term.”

If a bathtub shaped recovery plays out, expectations of short term capital growth should be tempered, leaving investors focused on a long-term horizon, and/or on short term yield.

Arguably, says Goodall, longer term capital gain prospects may be less than those investors have become accustomed to historically.

A recent Infometrics report forecast the average annual growth rate of house price appreciation for the next 25 years to be 3.1% a year. For context the lowest 25 year average from the past 70 years was 6.4% (1988-2013).

When it comes to yield on investment, Goodall says increasing rental payments may have helped keep up with some of the rising costs of investment property ownership, however it’s likely the rate of rental growth will drift back from more than 6% towards the long term average of 3-4% a year.

“Increasing supply, partly due to unsold stock hitting the rental market, alongside reduced demand because of outward migration and affordability pressures limiting how much more tenants can pay could all lead to a tenants market later in the year,” he says.

The country will be left with a situation where it’s difficult to see much demand for investment property. However, this has been the case for a few months and over April and May a total of 23% of property purchases still went to investors who had to secure bank funding.

While this is down from the recent peak of 29%, CoreLogic Buyer Classification data shows investors “still out there”. “Perhaps they’re still well capitalised, have an eye for value and are wary of alternative investment options,” says Goodall. “Whatever it is, not all investors are shying away in the more difficult times.”

No rush to exit

From a supply perspective, there’s also been no rush to the exit from investors, despite a fair amount of postulation after such direct targeting from the Government and Reserve Bank.

Listings are higher than in the past two years, however Goodall says this is due to properties selling more slowly, increasing stock levels, not an increased flow of properties being listed each week.

“Perhaps some investors, as they approach their bright-line date (five years for many, 10 years for recent entrants) will look to sell, thus avoiding a larger capital gains tax, but for now, they’ve been holding on,” says Goodall.

“Meanwhile, the outlook for investment demand looks limited and this will reduce the chance of an upcoming bounce back in values, but a more aggressive fall away in values also seems less likely as the long term appeal, perceived lack of alternatives and the good ol’ Kiwi obsession with investment property remains.”

Affordability

Affordability constraints coupled with higher interest rates and tighter lending conditions are likely to keep a lid on housing demand over the coming months and probably until interest rates start to fall again.

Although a drop in housing prices will support an improvement in affordability, higher mortgage costs and stricter lending policies will probably outweigh the renewed affordability advantage.

A trend towards lower housing prices is evident in CoreLogic’s House Price Index across each of the main centres except Christchurch, where housing affordability relative to income is still favourable.

Auckland, down1.9% had the largest falls in value through June, which is also reflected in the worst quarterly fall of -4.9%.

Goodall says when it comes to property values in Auckland, it’s important to look past median sale prices as they are often affected by a change in the mix of properties reaching agreement over the two periods being analysed, whereas an index measures all properties in an area regardless of whether they have transacted.

In other words, Auckland could have more expensive standalone dwellings dominating sales in a given month, but then cheaper townhouses might take over the next month.

Values in Hamilton bounced up 1.8% in June, but remain down 1.2% over the last three months.

In both Wellington and Dunedin, larger and more persistent falls in housing prices have dragged annual growth rates to 5% or lower – evidence that the last flumes of growth at the end of last year are now being extinguished.

Regional House Price Index

Outside the main cities there are few areas showing any consistent growth.

Those with monthly growth are generally down over the last three months - Whanganui and Hastings, while those with lingering shoots of growth over the quarter - New Plymouth, Whangārei and Queenstown - are showing more recent weakness.

The wider Wellington region as well as Palmerston North a bit further up the line, have experienced more persistent value weakness, with annual rates of growth in these areas falling to 5.3% or lower. Quarterly falls of more than 6% in both Lower Hutt and Upper Hutt illustrate a swiftly turning market.