Are real estate commentators correct in their assertions that the property market is showing signs of a resurgence? What impact is a wider economic slowdown likely to have on the market?
In this update, we survey the property market and assess whether claims of a resurgence are a false dawn.
“It’s back, the market is strong again, auction rooms are full, deals are being done. 2024 will be a big year.”
These are some of the comments we are hearing from the trenches of the New Zealand property market at present.
While some are supported by indisputable fact, others stretch into the bounds of unsubstantiated opinion that fly in the face of current economic and fiscal conditions. So, is the property market really “back”?
Residential
What we do know about residential property is that auctions appear to be increasing as the method of sale, and auction rooms are busier. This suggests buyers are now willing to buy on an unconditional basis, and vendors are seeing strengthening buyer competition. Agents are reporting increasing enquiry numbers from owner-occupier buyers. Overall, there appears to be a warmer (not hot) market sentiment.
In the hard data, we are seeing recent, modest increases in pricing. REINZ’s September report shows the annual national median house price was still down by 3.1%, but up by around 3% from the previous month. Contrast this with total annual sales, which are down by around 3%, while the days-to-sell metric has reduced nationally by around 4 days. This indicates the downward trajectory of the last two years may have just turned a corner. But cue the caution.
These trends defy the current interest rate climate, continuing inflation, and ongoing household cost pressures. Recent buyer activity appears to reflect an attitude of “buy now, suck it up, and ride it out”. Industry commentary suggests buyers are thinking: “If I can handle mortgage repayments now, then I get the capital growth later.”
It is an incredibly risky strategy, particularly when borrowers need to hold firm against significant interest costs and unemployment rates begin to rise. The latest one-year fixed rate with ANZ now sits at 7.99%. The two- and three-year rates are 7.69% and 7.49% respectively. Buyers on a one-year fix are placing faith in interest rates decreasing after year one. On an $800,000 loan, the approximate annual interest bill is $64,000.
Within higher price brackets, market activity hasn’t been hugely affected. Those buying $2 million-plus properties appear to remain active, largely unconcerned by rising interest rates. This is likely due to strong equity and cash positions.
What we are seeing quite clearly is a lack of raw land development transactions. This signals a lack of confidence. Developers do not yet trust the market enough to commit to new projects. Significant sell-down risk still exists, with off-plan sales remaining very difficult to achieve. This means there is limited new-build stock coming to market. With recently completed stock now being snapped up, the lack of supply helps explain the upward price movement. However, serious economic headwinds remain.
Commercial
Commercial property has been hit hard by the Covid period. There are numerous examples of landlords offering rent relief to retain tenants. There remains a gap between buyer and vendor expectations at the point of sale. Investors are seeking yields that are not being met by vendors. Limited sales data supports this, with yields continuing to soften.
To close a deal, eventually someone must give ground.
Factors such as fluctuating tenant demand, stagnant rental rates, tenant incentives, and rising debt costs present significant challenges. Employees are also embracing the shift to working from home. The flow-on effect is lower office occupancy, which is impacting retail and hospitality businesses. Tenants are facing rising operating costs and high rents, which are increasingly prohibitive. As a result, the retail construction pipeline remains minimal. Commercial property continues to be a challenging sector.
Industrial
Industrial property has remained the relative safe harbour of property investment. Developer margins and yields have stayed relatively steady over the past three to four years. There has been a notable shift towards logistics-focused developments.
As international trade begins to normalise post-Covid, logistics-related development has continued. Airport precincts, inland hubs, and seaport logistics centres are driving ongoing investment in industrial property. This has resulted in historically low vacancy rates, rising rents, and a continued pipeline of projects.
Despite broader economic and financial headwinds, there remains a willingness within the development industry to take on risk in land acquisitions, with a view to new industrial projects.
Central Government
With a new Government impending, the challenges are mounting. Policy decisions made now will have direct and downstream effects on the property sector. There is much to do, and much to get right.
Beware the false dawn. Keep the blanket close and the fire stoked — the sun has not yet risen.