Market Update

23 March 2023

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The market continues to tick along at a slow but steady pace, with most properties taking a couple of
months to sell. Nicely presented, renovated properties are clearly fetching a premium over properties
needing maintenance or other work, due to the high cost of building work, plus the general sense that
buyers have plenty of other options. We are seeing good numbers of people at open homes, but this
isn’t yet translating into a higher number of offers or higher prices. The properties that are selling at the moment tend to have vendors that are very realistic about the market and typically have definite plans about where they’re going next – i.e. they are buying a bigger or smaller house and are happy to take a reduced price on their property, as the property they are buying is now cheaper than they first expected.

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Holding Costs – a forgotten factor in selling decisions

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We’ve noticed a large number of people are delaying their selling decisions at the moment – either by not listing at all, or by not considering low offers on their property. During these decisions the cost of holding onto the property is often not considered. Take for example a property that would sell for $1,000,000 today, with rates of around $5000 a year and insurance the same at $5000 a year.

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If the owner sells today and puts the money in the bank, within two years they will have $1,104,000 in the bank, and have saved $20,000 on rates and insurance.  

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(For simplicity in this example we will not factor in maintenance on the property or tax on the interest earnings – they may balance out on a newer property, but an older property is likely to cost much more to maintain.

But if that owner chooses to hold the property purely in the hope that the market will recover over the next two years, they would need to be pretty certain that the property’s value was going to bounce back to much more than $1,124,000 within that time frame. Otherwise the risks (of further price declines, or large unexpected maintenance costs) are surely not worth it.

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An owner planning to hold their property in this scenario would effectively be gambling on getting more than a 12.4% increase in market value over the next two years, in a market where prices are currently declining.

If you understand the numerical logic above, you might think that people are crazy to delay their sale due to the current market conditions, however it pays to remember that there’s a long standing belief in New Zealand that property always rises in value over time, typically at an average rate of around 7% per year. 

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Many people are simply waiting for this ‘normality’ to return, they are expecting that the 7% rule will hold true, and that prices will once again continue to rise as they always have. Unfortunately those previous price rises have been very closely tied to a steady decline in interest rates over the last 30 years, which is a pattern that now seems be well and truly at an end. 

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Most economists in this space are predicting a period of further price falls, (perhaps not so much in Wellington, but definitely for the rest of the country) followed by a flat line, then possibly steady price rises of around 3 or 4% annually perhaps beginning in 2025. 

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The other factor is of course rental income – a large portion of these holding costs can be offset by renting the property, say for example the property had three bedrooms and achieved the average rent around $850 per week, which equates to $44,200 a year.

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That is still less than the $55,000 the owner would get from putting that million dollars in the bank, plus with rates, insurance, maintenance, vacancy and any management fees taken into account, the owner would probably be lucky to end up with $20,000 a year before tax, effectively making the ‘holding cost’ (or ‘opportunity cost’ of holding the property) $32,500 per year.

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When mortgages are taken into account the holding costs on a property can increase further, as banks obviously charge a higher rate for lending than they do for term deposits, plus they generally want to see some principle paid off also. (although no one has 100% lending on their investment property, they could still use the proceeds of a sale to pay off the mortgage on their own home) This is where the interest deductibility rules also start to come into play as well, as that rental income starts to attract more and more tax over the coming years.  

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I predict that if these deductibility rules are not reversed at the next election, then we may start to see a slow but steady exodus of ‘mum & dad investors’ out of their investment property, as costs start to tally up and the lack of capital gains make all the effort no longer worthwhile.  

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This might actually mean that the policy ends up being quite effective at achieving its stated goal, if more affordable property becomes available for purchase by first home buyers keen to own their own home, rather than rent. 
 

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