This special report looks at what’s happening in the residential market. James Wilson, Valocity’s Valuation Panel Director, analyses the trends.
It’s official: the buying mania that saw residential property dominate the headlines over the past few years appears to have died down, and we’ve seen that clearly in the past six months.
Many factors have led to a general lowering of confidence. Among them are post-election uncertainty, unsettled global market conditions, immigration changes, signals of future changes, bank finance restrictions, and talk about a ‘bottoming out’ of global interest rates. The market hype seems to have settled now, but many people still seem to be adopting a ‘wait and see’ approach, and that’s stalled market activity.
Sales are dropping
The first signal that current market conditions are subdued is the significant continued drop in sales volumes. Nationally, sales volumes in 2017 ended down 13 per cent annually. This drop in activity becomes even more significant when we compare this January to last January. It shows volumes are down more than 20 per cent.
Values are softening
Despite a significant reduction in sales volumes, median property values haven’t plummeted. With the hype now out of the market, the impact instead has been a ‘softening’ of values.
Nationwide, the median sales price sits at NZ$493,625, which is a 1.2 per cent annual reduction. The median sales price has softened consistently since May last year.
When we look at the main urban centres, median values remain subdued. However, a stalling in the rate of change is more evident, most notable in Auckland, which has had a negative year-on-year change of -3.3 per cent.
Double-digit growth rates are now a thing of the past. Dunedin is still seeing the highest annual growth rate, but that’s because values were low there anyway.
Interest rates still remain historically low, meaning home owners are not under any pressure to sell quickly. Also, there’s still an undersupply of high-quality houses in the market, particularly in Auckland.
Mortgage market cools
Continuing with the trend of softer market conditions, the number of mortgage registrations are down, and some groups have shown significantly higher reductions than others.
New mortgages to investors have fallen the greatest, down 18.6 per cent annually, with ‘movers’ who sold a property and bought another not far behind, down 15.1 per cent.
We suspect the reduction in new mortgages to investors may be the result of several factors. They Include loan-to-value ratios, impending tax changes which will affect rental property losses, and proposed changes to tenancy law and healthy homes rules.
The fall in the number of people moving house may also be due to a general sense of ‘unaffordability’ in the market place. Put simply, the view that ‘it’s just too much money for that property’ is making people shy away from buying.
Mortgages to first-home buyers started by following the same significant declines, with an average annual reduction of 17.1 per cent in the second half of 2017.
However, this rate of decline has lessened to only 5.4 per cent in February 2018, suggesting that first-home buyers can get into the market more easily now that there’s less competition from investors and movers.
What all this means is that activity is down and the ‘heat’ in the market has cooled.
Who the buyers are
Valocity has investigated which market sectors have been most active over the past five years and worked out the winners and losers.
We’ve also taken a look at the implications of some of the proposed changes to the market, whether they’re warranted and how they’ll affect different buyers.
Who’s been buying?
When we were analysing total sales over the past five years, we found six main types of buyers emerged.
Our analysis categorised owners who hold more than one property into three separate groups, to ensure that the term ‘investor’ wasn’t simply a blanket term to cover anyone who owns more than one property:
· Multi-home owner (two properties).
· Investor small (three to five properties).
· Investor large (six-plus properties).
The ‘multi-home owner’ category (two properties) was designed to capture the traditional ‘mum and dad’ investor who may own a family home plus a bach or flat for their children.
Our analysis shows movers and first-home buyers resold a larger percentage of houses than any other group. The two investor buyer types, which include genuine small and large investors, represent only 22 per cent of all re-sales.
Who’s been holding?
When we were looking at the length of time each buyer type held on to their properties, larger-scale investors (who own six or more properties) had one of the lowest re-sale levels within the five-year window.
This suggests that they’re focusing on longer-term returns rather than short-term capital gains.
Smaller investors showed a slightly higher percentage of re-sales, however the number is in line with that of ‘movers’ across this five years.
I’d conclude from this that investors are not as focused on chasing straight capital gains as some people make them out to be.
As we’d expect, first-home buyers make up a big part of re-sales within the last five years. This is typical because once first-home buyers enter the market their equity levels increase, which lets them climb further up the property ladder.
We’re finding that people are speculating on short-term capital gains, with many re-sales of houses within six months of buying – these people are ‘flipping’ properties.
There were 6,606 re-sales within less than three months of the original purchase and 4,317 re-sales within three to six months. A large percentage of those were done by ‘multi-home owners’.
But within the multi-home category, a large percentage of these transactions were when a purchaser bought a new home without selling their current home straight away, instead, moving it on within a month or two after their purchase.
This category includes a lot of individuals ‘selling’ their recently acquired asset into a trust or business ownership structure. Some of them have been included in the ‘other’ buyer type.
These two scenarios don’t show a speculative mindset, because they may be merely a home owner moving on or putting their home into a trust. Removing these people from our analysis, of the total 10,923 sales within six months, we can say 6,407 were directly due to a short-term speculative mindset – around 10 per cent of all re-sales.
Interestingly, only 28 per cent of all re-sales within six months of purchase were by investors over the past five years. This doesn’t back up the theory behind the reasons for the upcoming regulation and law changes which are targeting investors.
The bright-line test changes
We can now see what might happen when the Inland Revenue Department extends the ‘bright-line test’ from two to five years.
The bright-line test is an IRD rule deciding whether or not you have to pay tax on any profit you make when you sell a residential property. Until this year, the bright-line test applied to anyone re-selling a house within two years, but the IRD plans to extend this to anyone re-selling within five years.
We suspected this widened net might catch many people selling for genuine reasons, creating unintended fall-out for ordinary Kiwis. So we ran the data to find out.
The numbers show that, of total re-sales, about 60 per cent were done within two years of the home’s initial purchase. These sales were captured under the current two-year bright line test.
We’ve included exemptions, such as the family home, within this analysis because these are dealt with on a case-by-case basis.
Looking at who’ll be most affected by the tax extension to five years, our data shows first-home buyers, movers and multi-home owners are the three types of people most likely to sell within the two-to-five year window.
We’re assuming that, for the most part, first-home buyers and movers will be exempt from the bright-line test, because these transactions will most likely involve the re-sale and buying of a new family home.
The largest buyer group remaining is the multi-home owners, who make up nearly 30 per cent of re-sales within this period.
In contrast, investors represent just 19 per cent of re-sales during this period.
This clearly shows the majority of the burden from extending the bright-line test to five years will most likely be absorbed by ‘mum and dad’ home-owners who’ve bought a bach, rental property, or flat for their children.
Making money, or losing it?
Another interesting data series is the level of profit which has occurred over the last five years.
When it comes to profit, you’d logically expect that the longer you hold a property in an upwardly moving market, the greater the median profit you'd make, a trend that held to be true.
Interestingly, the median profit made within our various buyer types remains at similar levels across the board.
This could be because over the five-year window, the market was fuelled by cheap capital, and by demand so high that everyone was competing for the same housing stock.
In other words, first-home buyers, movers, multi-home owners, and investors were all equally attracted to the same areas and housing stock, so profit margins would remain the same, irrespective of who owned the property.
The median loss figures reveal an intriguing trend in that the size of the loss reduces over time. The longer you waited before you sold, the less your loss was likely to be.
This is considered the result of the strong capital growth ‘masking’ any overpayment. Buyers who were forced to buy at inflated prices (at auctions or by tender) and sell within a short window of time experienced higher median loss than those who were able to hold on longer. If they held on, the upward-moving market reduced their loss.
We have to ask:
· Are policy and law changes, aimed at curbing investor activity in the market place by extending the bright-line test and ring-fencing tax losses, warranted? Especially when we can see that investors alone are not solely contributing to the speculation?
· Is it fair that the largest tax burden from the bright-line extension may fall on mums and dads who own several properties?
· What are the implications of these ‘anti-investor’ regulation and legislative changes on the overall supply of long-term rental properties? Will rents continue to rise?
First published 28 May, 2018
Story by James Wilson, Valocity
JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate.