New Zealand’s economic headwinds may feel like they’re reaching gale force but seldom have the conditions for buying residential property been this favourable.

In fact, I have not seen a better time for first-time buyers to get into the market since last decade. And for investors, it must be close to 20 years since potential yields have been this high.

That may sound counterintuitive given the challenges this country faces. But the key to sound investment is to think countercyclically and buy when no when else is.

Yes, interest rates feel crushingly high.  Especially those who weren’t old enough to have a mortgage in the ‘80s and ‘90s. But you can now buy at prices that are tracking below the long-term trend in Wellington. The only area measure of affordability where this is not the case, is price relative to interest cost. Obviously, you must be able to afford the outgoings. But remember: you marry the property and you date the rate.  Interest rates will come down.  Investment property is the cheapest I have seen since the early 2000’s.

Pure investment property, such as your classic villa split into multiple self contained flats — that’s your classic Wellington rental - are back to 7 - 8% yields.  That is cashflow we haven’t seen since the mid 2000’s.  So, if investment property is fundamentally under-valued, why aren’t investors coming out of the woodwork yet? There have a number of structural changes in the investment market.  Many have left the market because the economics have been so poor, and the regulations so tough.

Baby-boomers have been selling up because they’re going into retirement villages, need to use the cash they’ve generated or, like many professional investors, are sick of going backwards.

They’ve been getting whacked from every angle, from regulations to economics, and just haven’t been able hold on.

They’ve had to grapple with the impact of new regulations like the Healthy Homes Standards and what’s proposed in the Residential Property Managers Bill while paying higher interest rates and losing mortgage interest deductibility — so much so they’re actually in negative cash flow.

 Including a newer generation thinking it’s uncool to be a landlord. Whereas that was the aspiration of the baby-boomer generation — buying a couple of houses was the retirement plan — many younger people deem it socially unacceptable to be a “greedy landlord”.

This won’t be a popular view with younger folk, but that attitude really needs to change. We’re going to need rental properties. Without a certain number of investors in the market, rents are going to rise because demand for rental accommodation will exceed supply and the less well-off will suffer.

So, a lot are selling rather than buying in this market, despite the massive opportunities.

But the new Government’s changes to the tax rules are making property investment more equal with normal business while inflation and interest rates appear to have peaked.  Even the construction and development markets are now in the doldrums meaning no supply is going to be constrained moving forward (and underbuilding will eventually set up the next upwards cycle).

All this has led to such historically high yields that if an investor today can stomach the outgoings in the short term, in my view they will do really well over the next 10 years.

If you can get on the ladder in these tough times, once interest rates come down a couple of percentage points combined with a cycle of underbuilding, wage inflation, and population growth, will lead to future price rises.  Then you will have built equity that can be used to leverage your portfolio further.

So, if it’s a golden period for first-time buyers and sophisticated investors who can access credit, what of homeowners who want to trade up or down?

They’ve largely been sitting on their hands during the downturn, but are starting to come back into the market as they realise there’s more to gain than lose by trading in the same market.

Too often people have a fixed price in mind for their home and if they think it’s a bad time to sell, because houses are selling for below RVs that were struck at the peak of the market in 2021, they opt to wait it out for a couple of years.

But even if the market does improve, vendors who want to trade up will wind up paying paying proportionally more for their new home. After all, the percentage gain on a $2 million house is much higher than than of a $1 million property.

And speculating on short term movements is never worth putting your life on hold for anyway.

My advice to people trading in the same market is to just have confidence. Either it’s going to be easy to buy and hard to sell or hard to buy and easy to sell — don’t worry about trying to time the market.  Is it the right move for you at this time? That’s what matters.  On the other hand, first home buyers and investors should be jumping in boots and all, right now.

Craig Lowe

Managing Director