The CoreLogic Buyer Classification data series showed that investors continued to maintain a strong share of property purchases in February, while by contrast, there were hints that first home buyers are showing fatigue. Of course, there have been seismic changes to all aspects of life in the past few weeks, with the onset of COVID-19. We also take the opportunity in this note to set out a few reasons why the property market could avoid a full-blown downturn.
Based on the CoreLogic Buyer Classification data, investors retained a strong appetite for residential property in February. Indeed, cash multiple property owners (MPOs, or investors) accounted for 14.5% of purchases for the month and their mortgaged counterparts took a 26.2% share. That’s the first time the combined market share has cracked 40% for almost four years. Low-term deposit rates are one factor that have pushed investors back towards property, while anecdotally, we’ve lately heard that the control an investor has over a rental property (as opposed to say shares or a syndicated fund) is another strong drawcard.
At the same time, there were hints in the latest Buyer Classification data that first home buyers (FHBs) have begun to feel a bit more strain. As the first chart shows, their market share of 23% for the first two months of the year represents a dip (admittedly small) from recent norms. It’s nothing serious yet, but the competition from reinvigorated investors, as well as renewed growth in house prices, may have started to hamper FHBs.
Auckland is a good example of these patterns, where mortgaged investors’ market share has recently gone back above FHBs (see the second chart).
As we’ve noted previously, it’s the smaller investors that have come back to property the most strongly. Indeed, the share of purchases going to MPO 2’s – or investors with two properties after their latest purchase (generally their own home and one rental) – has recently climbed sharply to 9% (see the third chart). The bounce-back in Dunedin, for example, has been even starker (see the fourth chart).
Of course, the world has changed dramatically on the back of COVID-19 in the past few weeks and any stats relating to February are quickly ‘out of date’. Indeed, we’re now staring down the barrel of a sharp recession and rising unemployment, which will knock property market confidence, and will also hamper FHBs, for example, via reduced KiwiSaver balances and hence less scope to withdraw a chunky deposit. Similarly, some landlords will have to face up to the risk of unemployed tenants and rental losses. These risks are greater in tourism-heavy areas like Queenstown and Rotorua, but nowhere is immune.
For now, our working assumption is that market activity/sales volumes (rather than property values) will take the brunt of these effects, as would-be buyers shun auctions and open homes, as well as fewer vendors listing their property. But there are still reasons to think the property market will avoid a major downturn. After all, yesterday’s 0.75% official cash rate cut has been passed through to mortgage rates, and the postponement of the extra bank capital requirements until at least July next year will also help mortgage lending flows in the meantime.
In addition, any asset purchase programme by the Reserve Bank will tend to discourage cash savings (by lowering risk-free interest rates) and divert money into other asset classes, such as property. And finally, today’s fiscal rescue package – especially the wage subsidy element - will also benefit property by helping affected households to shore up their finances and keep paying the mortgage or rent.
Overall, the property outlook is clearly not as bright as it was a month ago – sales volumes are likely to fall and value growth to slow. But it’s not the time for outright pessimism just yet.