For overseas buyers, I’ve spent the past two months explaining that this is the ideal time to take advantage of the Kiwi property market. The two key points are (1) a falling NZ dollar will make property cheaper and (2) the housing market is not homogeneous. Luckily by borrowing in NZ$ you can benefit from a falling dollar and don’t have to wait!
I’m not trying to talk up the property market. It has been in serious need of a correction and prices mostly won’t be going anywhere for a while.
First up, let’s look at the big picture. You need to be comfortable that New Zealand is a good place to invest. Here is my “high-level” case for selectively investing in New Zealand property, especially while there are still limited buyers in the market.
The recent falls in the NZ$ are good news. We always associate falling interest rates with recession, but in my mind this time around it is a fairly narrow recession. Consumer spending has been curbed and importantly “lax credit policy” by lenders has all but disappeared. This will give the Reserve Bank confidence to keep the interest rate cuts coming. We are expecting to see housing fixed rates below 8.00% by March 2009.
A lot of the global growth over the past decade has come from the services industry. This is also the industry that is arguably facing the biggest challenges as retail spending slows. Ireland, for example, flew up the OECD ladder off the back of a services boom, which appears to have come to a screaming halt.
With a global food shortage New Zealand’s “protein” based exporters will fare well. Our slowing economy (largely off the back of lower retail spending) will continue to push down the NZ$ (also good for exporters), and will make New Zealand a comparatively cheap place to travel. We’re also lucky enough to sit next to Australia, whose mineral-based economy should also ride out the global storm.
Much has been said about New Zealand’s inflated property prices already – inevitably including pessimistic predictions about the dire future of the market. Yet already prices have come back by 10% (which we highlighted back in May) and another 10% is on its way.
What most analysis fails to address is that much of the property boom over the past six or seven years was fuelled by Baby Boomers buying rentals as an alternative form of investment. Kiwis disproportionately invest in property – rightly or wrongly. So we should not be surprised that we have high debt-to-income ratios!
On the supply side, whilst some of these investors will find themselves in trouble from over-leveraging, many will be in a position to ride out the next few years. The big losers are the investors in finance companies and hollow logs like Blue Chip property investment company.
First home buyers have been kept out of the market for a long time but are starting to come back in numbers. Average household income is not a good representation of housing affordability because it includes people who will simply never afford a house. House affordability for young professional couples in Auckland has improved by 20% (a 10% drop in prices plus a $20 tax benefit from 1 October, plus a 1% drop in interest rates.) As a result I suspect that entry level properties in good areas (that FHBers like) will sell fairly quickly. One client today bought a place within a couple of days of it going on the market and also had their eye on another place.
For most first home buyers we talk to their home is an emotional purchase and all about perceived quality. My view, as I explained in another recent blog, is that houses that appeal to this market will hold their value and gradually disappear as confidence returns to the market over the next two years. In contrast prices will continue to fall on places that people don’t want and in places people don’t want to live. Leaky homes, properties in lower-socio areas, and bare land are going to remain cheaper and more difficult to sell.
Fundamentally we know property in New Zealand is a good long-term investment. Basic supply and demand, solid fundamentals (we supply protein to an increasingly hungry world) and a growing population. We also know that there is very limited property development on the go – and construction won’t pick up for some time because capital is scarce! So within five years we will be confronted by a property shortage.
The advantage foreigners have over we Kiwis is that you can keep your wealth in sterling, US$, or AUD$ and borrow in Kiwi. That way you get the benefits of: the falling NZ$, falling interest rates and good buying. If you are buying for long-term capital appreciation (and buy well) then I cannot see a better time than now.
Non-residents can borrow up to 80% of a property’s value. Squirrel currently has clients in the UK, Ireland, Scotland, USA, Australia and Croatia – so we can arrange everything for you from New Zealand.
