Investors have been key players in the property market since mid-2019, but they will also be facing a significant impact on their returns over the coming weeks and months. Queenstown and Gisborne are two examples of areas that have recently seen high investor activity and could now therefore be more affected the downswing. The new-build market for flats, apartments etc in Central Auckland has also been dominated by investors lately, but could now face falling rents (e.g. as Airbnb-type properties move into the traditional long-term rental sector) and/or investor sales. 

Queenstown % of purchases (Source: CoreLogic)
Queenstown % of purchases (Source: CoreLogic)

According to the CoreLogic Buyer Classification series, multiple property owners - i.e. investors - started a comeback in the second half of 2019, especially driven by mortgage-backed purchases. The recent rebound in mortgaged investors’ percentage share (and number) of purchases has been evident pretty much right across the country, but nowhere more so than in Queenstown (see the first chart).

National gross rental yields (Sources: MBIE, CoreLogic)
National gross rental yields (Sources: MBIE, CoreLogic)

However, the property market game has obviously changed in recent weeks. There’s been a lot of commentary about how job losses will affect owner-occupiers and that we could see a rise in listings activity once the lockdown has finished. But the investment side of the market isn’t going to be immune to some selling pressures either:

  • Even with a 30% deposit, some mortgaged landlords are still operating on thin rent vs. cost margins. After all, gross rental yields are relatively low compared to historical levels (see the second chart).
  • As unemployment rises, those margins will be tested even further (for both mortgaged and non-mortgaged landlords) if/when some tenants face problems paying rent. In addition, the landlords themselves may of course face a job loss (or business failure) in some cases.
  • Short-term lets (e.g. on Airbnb) are already reported to be shifting into the traditional long-term market, which will tend to dampen rents.
  • It’s conceivable that some landlords will retire early from their day jobs, either because of redundancy or by choice (perhaps to free up jobs for younger workers). To fund retirement, properties could be sold.

 

Households’ term deposit holdings $bn (Source: RBNZ)
Households’ term deposit holdings $bn (Source: RBNZ)

To be fair, it’s not all doom and gloom. Demand for investment property will still benefit from low returns on other assets – indeed, rock-bottom interest rates on term deposits already seem to have contributed to a withdrawal of money out of these products (see the third chart). Property is still also perceived to be ’safe’ and provides investors the control they often like – e.g. to choose tenants, choose when to renovate etc. In addition, mortgaged landlords can benefit from the loan payment deferral scheme.

However, it’s still pretty clear that alongside owner-occupiers, investors should also be bracing for bigger problems ahead. This raises the question; in which parts of the country could the wider property market feel the greatest effects from a change in investors’ mentality and a potential rise in listings from this source? The first chart above highlights how Queenstown would be one obvious area that’s vulnerable to investment stock sales – either from mortgaged investors (who want to deleverage) or non-mortgaged investors (who might want shore up their wider finances, for example). But it’s not alone – Gisborne, for example, is another area that’s recently had strong investor activity.

Central Auckland % of purchases of new-build flat/apartment/townhouse (Source: CoreLogic)
Central Auckland % of purchases of new-build flat/apartment/townhouse (Source: CoreLogic)

Finally, we will base next week’s Pulse around this issue in more detail – but as a taster for now, investors (combined mortgaged and cash) have recently accounted for 40% of new-build purchases across all property types nationally. Then when you hone in on the old Auckland City TA area and look at ‘small’ dwellings, that figure is >50% (see the fourth chart). Given that these types of dwellings would have been strong candidates for Airbnb as well as the foreign student market, the downturn in these sectors could now see a surge in the supply of traditional long-term rentals – making Central Auckland vulnerable to falling rents and/or investor sales.