Money 2013: Betting the house

by The Listener / 28 February, 2013
The percentage of people expecting property prices to keep rising is approaching the previous peak – so is it a good time to buy?
BusinessDesk journalists Pattrick Smellie, Jonathan Underhill and Paul McBeth
BusinessDesk journalists Pattrick Smellie, Jonathan Underhill and Paul McBeth. Photo/David White.

The country’s favourite way to get ahead is never far from the headlines. With Auckland property prices breaking new ground, political parties promoting affordable housing policies and the Christchurch rebuild getting under way, real estate will continue to dominate many traditional investors’ thinking this year.

A cursory glance at the big four Australian-owned banks’ quarterly updates for the last three months of 2012 shows an increase in the total amount of their residential loans and an increasing number of mortgages with high loan-to-value ratios – those in which the lender is stumping up with only a small percentage of the value of the property.

Reserve Bank Governor Graeme Wheeler has voiced his disquiet about the strength of the $625 billion housing market, particularly in Auckland, and is developing a new set of tools so he doesn’t get caught out by a boom like his predecessor.

After all, you only need to see the $10 billion shift from floating mortgages to two-year terms in the past 12 months to see that people are starting to lock in historically low borrowing rates.

So far, about 10% of floating-rate borrowers have jumped ship and fixed their rates. For all the buzz in investment markets these days about “the great rotation” – the flight from interest-bearing investments to shares – this shift to fixed-interest rates shows borrowers are starting to prepare for the day when rates will rise again.

So, as a property investor, is it a good time to buy, sell or stick your head in the ground?

Well, even with headline house prices touching new highs, the actual turnover is relatively soft, according to Real Estate Institute chief executive Helen O’Sullivan. She says sales volumes peaked much earlier than prices, with more properties changing hands in 2003 than any other time.

The current activity is only two-thirds to three-quarters of that, and as a proportion of total housing stock, just 4.5% is moving, compared with 6.5% before 2007. “The number of properties being turned over is in historic terms quite low.”

Does limiting supply tilt things towards being a seller? Maybe. Respondents in the latest ASB Housing Confidence survey are picking prices to keep going up, with a net 59% expecting rises, just shy of the 61% peak in 2003.

Harbour Asset Management’s Andrew Bascand suggests the year to buy a house was at the bottom of the latest cycle: about three years ago. Even today, however, the picture remains mixed, with the dominance of the Auckland and Christchurch markets complicating the outlook for activity and supply.

“Auckland and Christchurch are between them just over half the total number of transactions in the New Zealand market. Therefore what’s happening in the Auckland and Christchurch markets is driving a lot of what’s happening in the national figures,” O’Sullivan says.

When you drill down into other markets around the country, and even into certain Auckland suburbs, you’ll find they’re still recovering, O’Sullivan says.

What’s more, for most people the reason for buying can’t simply be boiled down to price. Although average buyers are looking to build up their equity, they don’t typically crunch the numbers to weigh up future potential for capital gain versus sunk capital costs and ongoing expenses like rates and general maintenance. Just jump on Trade Me and look at how few property sellers will entertain an offer at or below the rateable value.

However, property investors are coming back out of the woodwork and are more hard-nosed than they were five or six years ago.

O’Sullivan says property investors aren’t loading up their rentals with too much debt and running them at a loss in the hope of eventually clawing this back with the capital gain. Rather, they’re expecting them to provide an income over the course of their ownership as well. “Which I think is really positive. That’s always the basis on which a property should be bought.”

Some of that might be coming from the rapid rise in national rents since 2007, which outstripped sale prices until last year, according to ANZ figures.

The recent Auckland Council announcements about urban intensification may also affect housing investment trends, with a return to building “shoebox apartments” looking likely. In the wake of the global financial crisis, many banks refused to lend on properties under 60sq m, but lately there’s been some relaxation of those rules as a trend to smaller living spaces starts to emerge.

In other words, residential property is looking pretty hot in places and a bit indifferent in others, although the underlying driver in the country’s two largest cities will remain a sheer lack of supply.

Which isn’t too far away from the prospects for commercial and industrial property, although the way to do that directly isn’t in reach of too many people.

For the regular Jane and Joe, listed property funds and unit trusts are the easiest way to get into this market. They have paid dividends of 6-9% – slightly ahead of what you’d get in a term deposit – and with a capital gain ranging from 2% to as much as 26% over the past year.

Still, this year might not be that flash, with retail space likely to struggle and demand for office space highly dependent on the region. In Wellington, for example, a smaller public service is leading to lower occupancy, especially in lower-quality buildings.

What is looking more promising is industrial property, with Property For Industry, which specialises in this market, seeing “considerably more optimism” and increasing activity in the sector.

Opportunities still abound in property, but they might be more on the conservative side for the foreseeable future.

Money 2013

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