With no certainty of capital gains in the immediate future, recent buyers of investment properties may be forced to pay renewed attention to income versus outgoings

By David Hargreaves

One consequence of the unexpected change in Government is that we may start to see some sorting out between the property investors and the speculators.

There’s an arguably fairly thin line between the two anyway (although I’m sure many of interest.co’s commenters would disagree) and with the kind of ever-rising market seen in recent years, particularly in Auckland then investors have become speculators and speculators investors.

Till we know more exactly about the shape of policy under this Government then any comment about what it will do and the likely impact is, well, speculation.

No one likes uncertainty

What can be said with reasonable certainty is that no market likes uncertainty.

So, with the housing market having gone into ‘wait and see’ mode prior to the election, it’s not likely to switch out of that mode till we see the whites of this Government’s eyes, policy-wise.

What could be reasonably expected till people know better then is a continuation of low housing sales activity and flat prices. And that could be for several months. There will be no pre-Christmas boom in the way there was in 2014 after the National-led Government status quo was preserved.

So, quiet till and beyond Christmas and with greater signs of what exactly the Government policy mix will be in the early months of next year, with the housing market presumably reacting accordingly then.

Government moves

If the new Government is to be taken as read with the pre-election indications of policy (and some tentative post-election indications) then the intention will be there to ramp up house building, immigration will be curbed and non-resident offshore buyers won’t be allowed to buy existing stock.

There’s plenty of room for discussion on how effective any or all of those policies will be, should they be implemented. I’ll come back to that.

What the very presence of those policies does though is add a definite drag factor to a market already being slowed by reduced foreign buying activity, the 40% deposit limits for investors and a move to more cautionary lending policies by the banks.

All this will at the very least cause pause for thought for housing investors, particularly the more recent ones.

Knowing the sums

Only somebody who has bought an investment property truly knows their sums (although presumably the folks who lent them money know too). But anybody who has bought a low rental-yielding property thinking: “Don’t worry about the rental yield it will be worth thousands more in a year,” will now be having a few thoughts about what they want to do.

The good news in all this is that interest rates are still at incredibly low levels and there’s no imminent sign of them going higher.

If interest rates were rising right now, then the portents for the housing market would not be good at all.

A rising interest rate environment would produce what you could call ‘push-pull’ dynamics. On the one hand the borrower is paying more on their mortgage interest rates – which they may or may not be able to recoup from higher rents, and on the other hand rising interest rates make fixed interest deposit investments relatively more attractive alongside property investment – particularly if the rental yields are lousy.

Interest rate rises next year?

If, as some people are suggesting (though it is VERY early days to do so with confidence) that the new Government’s policies will prove inflationary, then maybe we will see interest rate rises next year.

Were that to happen then some of those speculators who thought they were investors might find that the sums really don’t work on that investment property they bought.

In the meantime I think that clearly anybody who bought a property just on the basis of a capital gain will hold fire. But if those interest rates do start to move up, well then the pressure might go on.

The Reserve Bank will need to be watchful.

An early priority

A very early priority for this Government I think must be getting a new Governor appointed to take over when Acting Governor Grant Spencer leaves in March (or maybe even before if possible – though that’s probably unlikely). Then there is the sorting out of the Policy Targets Agreement and whether the focus of monetary policy will be broadened out beyond just inflation.

It will be important to have both those things in place as quickly as possible because we need to know whether the outlook for official interest rates via the Official Cash Rate will be different.

Then the other thing a new Governor will have to give serious and early consideration to is macro-prudential tools and particularly the LVR rules and whether the current regime with the 40% deposit rule for investors and the general 10% ‘speed limit’ on owner occupiers borrowing more than 80% will be retained.

Given the new wave of uncertainty the change of Government puts into the housing market I really do think possibly removing at the very least the 40% deposit rule for investors needs looking at.

There are risks

The risk of course is that if enough investors (or speculators, if you will) feel sufficiently pressured to put their properties on the market then this could cause the sharp fall in the market and therefore the consequences for the banks and the financial system that the RBNZ has actually sought to avoid with the LVRs. Yes, that’s right the ‘cure’ could end up being the cause in the wrong circumstances.

I think the coming months will be a test of nerve for some ‘investors’ and arguably will be a time in which we find out whether reasonable numbers of people have been more risky than they should have been in buying properties in expectation of capital gains but which don’t stack up as investments in the conventional property investment sense – IE the rental yields are not strong enough versus the outgoings on the property.

Perception is likely to be a big factor than reality in the next couple of years because it remains questionable how much impact any new Government policies now will have.

Any curbs on migration will take time to produce a significant flowing in the inbound migration rate (though it is now starting to slow in any case).

Building the houses will be a stretch

Building 10,000 houses a year is going to be a stretch because the capacity constraints that are already visible in the market are going to be an obstacle regardless of whether the Government itself is literally trying to build the houses or as with the previous Government was largely (till it realised it wasn’t working) trying to get the ‘market’ itself to do it.

And I still think the ban on foreign buyers is going to be much harder than Labour has been trying to say it will be. My bet is that if this Government lasts a full year term (and that’s not a given) there will be no ban in place at the end of the term.

So, as I say, many of the obstacles for the housing market at the moment are in the mind rather than ‘real’ obstacles. But the mind’s a powerful thing. And there will be some nervous ‘investors’ out there. What they end up doing will be very important for the economy over the next year.