This is a derivation for overseas buyers of a theme we have been running for the past 2 months. 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 wont be going anywhere for a while.
First up lets 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 fair 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 NZ 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 followed by the naysayers with headline grabbing predictions. Prices have come back 10% already (which we highlighted back in May) and there is talk of at least another 10% to come (it has already happened!)
What most analysis fails to address is that much of the property boom over the past 6-7 years was fueled by Baby Boomers 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 number. Average household income is not a good representation of housing affordability because it includes people who will simply never afford a house. Looking at a young professional couple in Auckland, house affordability has improved by 20% (10% drop in prices $20 pax tax benefit from 1 Oct, 1% drop in interest rates.) As a result I suspect that entry level properties in good areas (that FHBers like) will sell fairly quickly. One client today bought a place within a couple of days of it going on the market and also had their eye on another place.
For most First Home Buyers we talk to – it is an emotional purchase and all about perceived quality. My view is that houses that appeal to this market will hold their value and gradually disappear as confidence returns to the market over the next two years. In contrast prices will continue to fall on places that people don’t want and in places people don’t want to live. Leaky homes, properties in lower socio areas, and bare land are still in for a bumpy ride but lets not generalise that to the whole market.
Fundamentally we know property in New Zealand is a good long-term investment. Basic supply and demand, solid fundamentals (protein) and a growing population. We also know that there is very limited property development on the go and wont be for some time (capital is scarce!) So within 5 years we will be confronted by a property shortage.
The advantage foreigners have over us Kiwis is that you can keep your wealth in Sterling, US$, of AUD$ and borrow in Kiwi. That way you get the benefit of the falling NZ$, lowering 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 properties value. Squirrel currently has clients in the UK, Ireland, Scotland, USA, Australia and Croatia. We can arrange everything for you from NZ.
