Investment opportunities and challenges: An in-depth look at trends in New Zealand's property market

As the global economy and financial markets continue to change, understanding how New Zealand's property market developed in 2022 is crucial for investors. We witnessed the housing boom of 2020 and experienced the ups and downs that followed. In an era full of challenges and opportunities, how can we make sense of the property market and make informed investment decisions?

From boom to panic

The pandemic and subsequent lockdowns in 2020 brought unprecedented challenges to New Zealand's property market. Unexpectedly, when the Reserve Bank of New Zealand removed LVR restrictions in April 2020, the market rebounded and continued to grow over the following months. After lockdown ended, houses that had previously failed to sell fetched higher prices, with differences exceeding two hundred thousand New Zealand dollars. People flocked to the property market, and developers began investing in land, with many even buying blindly at high prices. This was neither right nor wrong; it simply reflected the market at the time.

Townhouse projects then proliferated rapidly, attracting participants from many industries. Our database alone recorded more than 400 projects in Auckland applying for resource consent or building consent. Notably, mortgage rates at the time were as low as 1.9%. Despite the thriving property market, there was cause for concern: would so many townhouses sell successfully in the future? Many believed the border would soon reopen, bringing a large influx of people and further house price rises.

Before the August 2021 lockdown, New Zealand's long record of zero infections had made it the world's best-performing country in containing the pandemic. Under pressure from the pandemic, many New Zealand citizens and residents living overseas returned to settle here and joined the rush to buy homes. First-home buyers faced competition from these returnees, so they turned to off-the-plan homes. Although they would have to wait months or even a year, prices were fixed and only a 10% deposit was required. Off-the-plan sales surged as a result.

Between late July and early August 2021, we set a sales record by selling all 80 homes in eight hours, making headlines in New Zealand's largest English-language news outlet, the NZ Herald. Many others in the industry used this to talk up house prices around Flat Bush, and nearby prices rose. During lockdown, we also sold out another development of 17 townhouses online within half an hour. However, market enthusiasm began to fade a month or two later.

By 2022, interest rates were rising rapidly and listings of existing homes had increased significantly. The enthusiasm buyers had shown when interest rates were 2% vanished as mortgage rates rose above 6% and loans came up for renewal. Many began to realise the seriousness of the situation. Monthly repayments tripled, and many buyers, particularly speculators, began to feel unprecedented panic.

Meanwhile, New Zealand's social conditions were far from encouraging: crime had risen sharply, prices were soaring, labour was scarce, wages were rising, the economy was in a slump and business was weaker than before. Reports suggested that more than 400,000 people in New Zealand had been unable to pay their mortgages for a period of time. Off-the-plan developments were selling poorly, and many investors were selling properties and land development projects. Some predicted a severe property downturn in the near future, even a “bloodbath”.

Crisis can bring opportunities

Alongside the undervaluation of New Zealand's property market, global markets are also unsettled. Silicon Valley Bank's collapse shocked investors worldwide, followed by reports that three banks had failed in succession. Experts estimated that more than 200 banks could be affected.

We have already experienced the financial crises and recessions of 1997/1998 and 2007/2008, but the impact this time could be unlike anything we have seen in our lifetimes. After all, none of us anticipated pandemic lockdowns or flights worldwide being grounded for years.

Recommending investment at this point could be irresponsible, given the many unknowns ahead. Yet crises often bring opportunities. Each round of government intervention usually restores normality after a few years. According to predictions by masters of Chinese metaphysics, the property market is expected to recover in 2025–2026, aligning with forecasts made by central banks in many countries based on economic data.

Despite its many challenges, New Zealand's property market still offers numerous options for those seeking investment opportunities. Beyond traditional residential investment, several other types of property are worth considering.

Commercial property investment is one option. It involves buying and leasing offices, retail premises, warehouses and other properties for commercial use. Although it usually requires a larger initial investment, it may offer higher returns and greater, stable rental income over the long term. Commercial property values are also generally more stable than residential property values. During the previous two economic crises, commercial property activity picked up while the residential market was subdued. Activity began in the leasing market before moving into sales, because commercial leasing, unlike buying and selling, does not require bank loan approval.

Industrial property investment is another viable option. It involves buying and leasing properties such as manufacturing facilities and warehouses, and is particularly attractive to those wishing to invest in production businesses, as industrial property provides physical space for their operations.

Buying property at the bottom of the market has also become an enticing option during New Zealand's property downturn. This means purchasing properties below market value. Although it usually requires research and investment, it can be a very attractive option for those seeking to acquire assets at low cost.

Any type of property investment requires careful consideration of market trends and potential future changes. Given the rapid rise in interest rates in 2022, prospective property investors should proceed cautiously and closely monitor market trends.

Although the current property market may be challenging, it still presents opportunities for experienced investors. Whether considering property or other investments, investors should proceed cautiously, prepare thoroughly and choose the investment strategy that best suits them.