NZ Property Market – Dead Cat Bounce?
We took a view during the level 4 lockdown that property prices would not go down due to the strong demand drivers, but nor would they go up. We were right and wrong. Right because the market didn’t go down. Wrong because we think prices are going up.
What’s going on with NZ property?
We have seen a lot of enthusiasm in the marketplace, very high clearance rates at auction, multiple offers at deadlines, and evidence of prices increasing.
This week we attended an auction for a client. We saw value at $785k, we requested authority to go to $800k, given market conditions, and it sold for $845k – with 4 parties bidding up to about $820k!
This is not an isolated case, we are missing out on properties frequently to purchasers prepared to pay significantly more than market.
According to REINZ the number of properties sold in Auckland in July 2020 was up 30.3% year-on-year, and the highest sales figure for any July over the past five years. For the greater New Zealand market, excluding Auckland, the number of properties sold in July was up 21.5% year-on-year – the highest for any July since 2005.
We are busy sourcing syndication property, predominantly in the $10m – $40m space. Vendors are simply not panic selling; on the contrary, they are generally not feeling stressed because cost of borrowings has reduced. Unless they have lost a tenant and are mortgaged to the hilt, then there is no urgency to sell.
On the whole, we are certainly not seeing prices decrease.
Why the property price resilience?
As always, we seek to understand the specific demand and supply drivers to understand what is driving prices increases.
On the demand side:
- Cost of Debt – Money has got much cheaper. About 2.5% for residential mortgages… are you joking? Why wouldn’t you buy property at this level, if you can borrow the money? And that leads me to…
- Availability of credit has just become a whole lot easier because:
- The RBNZ has lifted its LVR restrictions on investor purchases. It required banks to get a 30% deposit from investors. That has been completely lifted. Now, the banks aren’t forced to lend to 80%, they set their own criteria. They didn’t race out of the blocks to ease deposit requirements, but it is starting to flow through with a couple of the banks. This is critical because there are a lot good income earning people that could certainly afford more property, but their equity is locked up. So the lifting of the LVR rules releases a lot of equity. I suppose hats off to the RBNZ for slowing things down at the peak of the market and baking in some insurance.
- Secondly – we are hearing that banks are easing serviceability criteria as a result of the falling interest rates. When banks approve a loan they look at equity and serviceability. A key driver when calculating serviceability is the interest rate that the bank uses in the calculation. This has been at a level far higher than prevailing interest rates to ensure investors can afford the debt at higher interest rates. I think we can now safely assume rates are unlikely to rise for some time. Banks must think so, because the hurdle rates appears to be dropping.
- It’s all very well for money to be cheap, it is meaningless unless people can get applications approved. Our historical analysis tells us availability of credit moves the dial to a greater degree than interest rates.
- Net Migration – While it was expected to slow, returning ex-patriate numbers are at levels not seen since Kiwi troops returned home from World War II. Those 30,000-plus New Zealanders who have returned home – and with tens of thousands more in the pipeline – are highly skilled, highly liquid, and highly motivated. We are personally seeing a strong lift in offshore demand from Kiwi ex-pats. This week I was interviewed by an Aussie Hong Kong based investment advisor who has a steady flow of Aussie Expats looking to invest in NZ – think no capital gains tax. And…when the borders open up, watch out for the flood of US citizens wanting to get the heck out of Dodge and get their NZ bolt hole. I would love to know how many more enquiries immigration advisors have fielded.
And on the supply side:
- Construction – Houses are being built, even in Auckland under lock down level 3. But we are playing catch up. And with the current enthusiasm for property it’s hard to see a glut of supply arising any time soon.
- Bank Lending – Add to that the fact that banks are back in love with lending on existing residential property rather than risky developers. Why? Don’t forget about the capital adequacy rules. Residential mortgage lending requires banks to hold less capital compared to business lending. Less lending to developers means less houses built.
- Resource Management Act – Nothing has changed yet; obtaining a resource consent is never a quick process.
Is this a Dead Cat Bounce?
In 2011 I went to London and stood up in front of 200 NZ accountants and told them we had a housing supply crisis and although we were in the midst of a recession prices would have to start going up , and what’s more – the Kiwi dream of partner, kids and a ¼ acre block was coming to a rapid end in Auckland – check out this 2011 article we were quoted in. Most of them thought I was slightly deluded. I was told ‘but this is different’. The absolute fear of the unchartered territory froze a lot of people.
Principles don’t change. The GFC changed the interest rate trend for what seems like the foreseeable future. What it didn’t change is the basic principle that if demand exceeds supply, prices will go up. Do we really think that demand for NZ property is going to go backwards? Perhaps we don’t appreciate how attractive NZ is to the rest of the world.
My personal opinion is this is not a dead cat bounce. Fundamentally the NZ property market is very strong. Will there be stories of forced sales? Of course. Central Auckland apartments are likely to take a hit, but then again I am sure prices will come back quickly once borders open and students can return.
And what about the potential office market collapse? It reminds me of the story we kept being told that residential prices would collapse once baby boomers started retiring and selling their family homes. Yeah right. Our team were itching to get back into the office after lock down.
For me, the intelligent approach is to look for the pockets of opportunity that will bubble up, and be ready to act.