In the Auckland region we have a shortage of properties for sale, high immigration, and money coming in from China. All of these factors along with low interest rates and increased rating valuations will fuel further house price appreciation through the first half of 2015, particularly in the central Isthmus. Politicians and the RBNZ both struggle to grasp what's going on in terms of capital inflow.
The first point is that it is NZ residents who are buying. The Chinese and Indian markets which are both broad based in Auckland have very strong family ties back to their homelands. It is not uncommon for NZ residents to get deposit funds transferred from overseas. With the Chinese market in particular, the amount of money they can access is eye-watering. I've seen firsthand numerous offshore buyers send $millions to NZ for relatives to buy investment properties. So in the short-term nothing will change.
Demand is likely to be higher than it was in 2014 without a material lift in supply. If phycology plays its part houses prices will again be fuelled by low interest rates and the fear of missing out or seeing friends do well. Of course the media will play its part! However, by late 2015 some of the new housing supply will be kicking in, particular lower value apartments and town houses. This will help slow down headline price appreciation. It will also limit any rent increases and put more focus back on yield. In the absence of further capital gain, rent yields in Auckland are way too low and that will start to put pressure on demand and prices. You’ll get some spillover into the rest of NZ as property investors look outside of Auckland for better yielding investments. We’re already seeing that in Hamilton and Tauranga with strong investor demand for rentals yielding over 6.00%.
By the end of 2015 I think we'll be heading into a softer period for the property market. That will be driven by lower consumer confidence (due to lower economic growth prospects), a less bullish media, and increased supply of rental properties. The mistake I see often is homeowners jumping into investment property off the back of how well their friends did over the past 3 years. The jump in house prices was a result of record low interest rates, record high immigration, a bullish unitary plan, and a recovery from falls earlier in the GFC. You cannot reasonably expect that same mix to repeat. Equally house prices cannot increase faster than income indefinitely. At some point we would run out of money to service the debt.
Sure there will be those that say it can keep going due to money coming out of Asian and immigration. That might happen but that is becoming an increasingly speculative argument. There are far too many other factors at play that would change the current paradigm. In this market (with more uncertainty) my general advice is to buy without expecting to get any capital gain and to buy with a reasonably long timeframe in mind. Short term capital gain is a bonus. From an “investment” perspective the more central to the city you can buy, the better, and that will ensure some long-term capital growth. If there is a market crisis and corresponding property correction, then in Auckland it will be felt on the fringes. This is where there is plenty of long-term land supply, demand is more fickle, and where the market is predominantly rentals. I'd be wary of buying low yielding properties in South Auckland. It is ludicrous that $500,000 is now considered a cheap entry-level property. I also think it's dangerous to borrow more off the back of recent rating value increases. Unless you have strong income, you should feel uncomfortable holding a portfolio with a loan-to-value ratio over 70%. If values decreased it would leave you with limited capacity to change things and less control. That's why you should consider spreading your lending over more than one bank. It reduces your risks from having all of your debt eggs in one basket.