13 October 2023
It seems the only thing that is guaranteed when making predictions about the market is that those
predictions will be proven wrong, fairly quickly. It doesn’t matter if the predictions came from a
learned economist like Tony Alexander, or agents ‘at the coal face’ like us, the market will almost
certainly defy expectations and do something no one had anticipated. No one predicted how far the
market would boom in 2021, then no one predicted how far it would crash in 2022 and 2023. Many pundits opined that high interest rates would stifle any price rebounds, but here we are, with high interest rates and rebounding prices.
At this stage the rebound is limited mainly to homes in the first home buyer category, but we are seeing some flow on effects on second and third family homes up to around $1,800,000 in value. As has been the case for the last few years, buyers are paying a premium for well maintained, renovated or newly built homes.
30 June 2023
The supply and demand curves continue to swing in favour of sellers in the Wellington property market, with listings now sitting well under 600 homes for sale – that’s nearly 20% less than last month. There’s no doubt it is first home buyers who are most active in the market now, we’ve recently seen in excess of twenty offers on Tender Day for some desirable First Homes in the $700,000 - $900,000 bracket.
So what does this mean for homes in higher price brackets? Well considering it was first home buyers who started the buying frenzy of 2021, plus it was first home buyers who first stopped offering in 2022 and sent prices plummeting, then I think we can safely take this as a pretty good sign for the rest of the market.
31 May 2023
Buyers have mostly decided that buying conditions are not going to get much better – i.e. house prices
seem unlikely to fall much further – so now we’re seeing more offers on desirable or well priced property.
New listings are down however, which is partly due to the time of year and partly because most property
owners are convinced that this is a terrible time to sell. This is creating a bit of supply pressure, with Trade Me listings sitting well under 700 at the moment – 30% less than this time last year. This supply pressure, met with increasing demand and stable interest rates, should all work together to give us at least stable prices – or perhaps even mildly improving prices - in the short term.
28 April 2023
Open home numbers are good at the moment – there’s not an abundance of properties
on the market, whilst there are still plenty of buyers around. The general sentiment seems
to be that we are at - or very near to – the bottom of the market now. Anecdotally it feels
like transaction numbers are improving a little – we seem to be selling a few of the listings
that had been sitting on the market for a while. This doesn’t mean that prices are going up, but vendors are becoming more accepting of the prices on offer, whilst purchasers no longer seem to be factoring in future price falls or interest rate increases with their offers. Within the industry I detect more agents are being realistic with vendors from the outset too, so we are seeing some very realistically priced properties coming to the market, which is then making some of the more ‘optimistically priced’ properties much less attractive to buyers.
The number of sales in the Wellington market is currently about half of what it was at the peak of the market and roughly 55% of our long term trend. So whilst predicting the future is impossible, it seems fairly likely that the number of sales will slowly start to increase over the next 5 years or so. How quickly this happens and whether prices will go up or down in this time is probably the bigger question, unfortunately I have no idea what way that’s going to go and am not willing to make any predictions in that regard.
23 March 2023
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.
Holding Costs – a forgotten factor in selling decisions
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.
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.
(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.
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.
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.
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.
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.
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.
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.
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.
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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