Is investing in property still a valid bet?

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MONIQUE FORD / STUFF

CoreLogic head of research Nick Goodall outlines the looming factors that could sink house prices, and how important the next election will be.

With prices falling, new rules to contend with and lending harder to come by, you might imagine that property investors would be pulling back from purchasing properties.

But while there has been an undeniable shift in the market, commentators say some investors are still active and there are opportunities, if you know where to look for them.

So what is the state of the property investment market, and where would a would-be investor start?

Challenges

The challenges for would-be landlords are obvious, and mounting.

Economist Benje Patterson said the environment was a “very challenging one” for anyone looking to buy residential property as an investment.

“There are a few aspects of the current environment that will push all but the bravest, and most long-term investors out of investing in buying a rental in most parts of the country. These include falling house prices, tighter credit conditions, and regulatory changes.”

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Patterson said many investors had relied on capital appreciation for a long time, but now that house prices were beginning to fall in most places – down 5% or 6% so far and forecast to drop up to 20% once adjusted for inflation – that was no longer a guaranteed strategy.

“Instead, to make a property earn its keep, an investor will need to find something where they can add significant value, or achieve a particularly strong rental yield,” he said. “The problem is though that these types of opportunities are far and few between. Many investors will choose to sit on the sides and wait for better buying opportunities to appear down the track.”

SIMON O’CONNOR/Stuff

Opportunities to find a solid investment property are few and are between.

He said people who did want to act could find access to money a challenge.

Banks are allowed to lend only 5% of new loans to investors with equity or deposit of less than 40%. Rising interest rates also put pressure on people’s ability to service the loans.

People who were able to tick the money box would then have to work out how to navigate new rules.

That included compliance with the Healthy Homes scheme, limits on how often rents could be reviewed, and the removal of tax deductibility on home loan interest payments.

The Government is phasing out investors’ ability to offset their home loan interest cost against rent received to reduce their tax bills. It has been estimated this will mean new investors will pay $2700 more in tax this year than those who bought before the new rules took effect.

“Although many of these factors are ultimately designed to protect tenants, there is a risk that at the margins they leave some investors shying away from rentals,” Patterson said.

“The problem with this is that such behaviour could tighten the pool of rental houses available at present and prospective renters would find it more challenging to access housing they can afford. This would be a perverse outcome in the short-term at a time when other inflationary pressures are already squeezing the budgets of many households.”

Stuff

Graeme Fowler says he hasn’t bought a residential property to hold for four years.

Investor Graeme Fowler said rising interest rates were a big concern for investors, who seemed to be the most affected segment of the weakening market.

“An agent we deal with regularly told me last week that he hasn’t had any enquiries for the whole of this year from an investor wanting to buy.

“Up until the end of last year, he would get several people calling him each week wanting to buy an investment property.”

Opportunities

But investors are still buying.

Reserve Bank data shows there was $1.279 billion in lending to investors in March, compared to $811m in January and $1.3b in March 2020. It was down from $2.28b in March 2021, just as loan-to-value restrictions that were lifted due to Covid-19 were reinstated.

Nick Goodall, head of research at property firm Corelogic, said there was a consistent level of investment activity happening in the market.

“People are still finding ways to make it work,” he said.

Goodall said while yields – the amount of rent paid in comparison to the purchase price of properties – were low, rents were rising. Barfoot & Thompson data shows that the rent on a typical three-bedroom property managed by its agents increased by between 1.5% and 4.5% in the year to March.

Goodall said although prices were softening, a strong labour market was likely to put a floor under them. That made investing in areas with strong local economies a better option, he said.

Some were also seeing opportunities in areas that could be rejuvenated by the borders opening, he said. Central Auckland could see some growth as international students and travellers returned because that would increase demand for apartments, he said.

Goodall said people should buy somewhere they were familiar with so that they understood the local influences that could affect the performance of the property, rather than investing simply because it seemed to have a good rental yield, or there looked to be potential for capital gains.

“That’s fraught with danger.”

Goodall said many property investors still talked about doing up properties as a way to add value.

Supplied

Nick Goodall from CoreLogic says investors are still active.

Best time to buy?

Ed McKnight, economist at Opes Partners, said a falling market often provided the best opportunities for investment.

He said he would smile when he saw people commenting on the business’s Facebook posts, saying it was a bad time to buy.

“The opportunity is in the downward phase,” he said. “When things bottom out and start to recover people are more optimistic and there is not as much incentive to accept lower prices.”

He said he could see opportunities in two clear areas: New builds and significant renovations.

Investors were able to negotiate with developers to lower their prices significantly, he said. McKnight said he had seen movement of up to 15% already.

“You can negotiate hard with developers – their phones aren’t ringing right now.”

While owner-occupiers might be happy to sit and wait months or longer for the right price, developers were in the business of selling property and had more incentive to be flexible.

People who bought new builds would also be able to continue to use their home loan interest costs to reduce their tax bills.

He said the rules also allowed for a property that was converted into two separate dwellings to be considered two new builds.

There was an opportunity, particularly in Auckland and Hamilton, to buy a property at a cheaper price than might have been possible six months ago and renovate it into a home and income, he said.

“It’s a complex process, it’s not as easy as just knocking up a wall, you need a code compliance certificate … but it’s a big opportunity.”

He said it would generally not work any more for investors to buy a standard three-bedroom home, give it a lick of paint and rent it out, hoping for the best.

“You need to renovate to such a degree that you can sharply increase the rent – that’s what is required to increase your cash flow sufficiently to make it make sense.”