Does it still make sense for investors to keep investing in property in the current economic climate?

Recently, many readers have contacted YIJU New Zealand to ask: is New Zealand's volatile property market still worth investing in? After the sharp rises and falls in New Zealand house prices over the past few years, people seem to have abandoned their once unshakeable belief that prices would always rise. Yet with mortgage rates possibly having peaked and the decline in house prices seemingly over, many investors are eager to re-enter the market before New Zealand property heats up again.

 

In this article, we explore whether, as investors, we should continue investing in property in the current market environment, or consider other investments offering higher returns.

 

 

Rental yields expected to rise significantly

 

In recent years, New Zealand rental yields have remained low as rent increases have lagged far behind soaring house prices, making strategies focused on finding properties with high rental returns more difficult to pursue. However, CoreLogic chief property economist Kelvin Davidson believes strong rental demand and tight supply leave room for rents to rise further, which would also lift yields.

 

Davidson said rising rental yields could draw investors back into the market, but a return of 3.1% remained low compared with current term deposit rates of around 5.5%. With mortgage rates rising rapidly, investors still needed to consider carefully whether to re-enter the market.

 

Falling house prices and rising rents have lifted rental yields

 

Davidson said that if the National Party won this year's election and restored interest deductibility, it could help rental returns, as the rule preventing mortgage interest from being deducted against rental income significantly increased investment costs. If National changed the rules this year and restored interest deductibility, landlords would benefit, with their annual tax bills potentially falling by NZ$5000. However, even with interest deductibility restored, the gap between yields and interest rates would not change significantly. Davidson advised all prospective investors to weigh the advantages and disadvantages carefully.

 

Chris Farhi, head of Bayleys' insights, data and consulting team, said he was seeing more investors consider buying new homes because their tax advantages offered higher returns than existing homes. Under the new rules, new homes issued with a Code Compliance Certificate after 27 March 2020 remained eligible for interest deductions for 20 years from the certificate's issue date. He also noted that an increasing number of new homes were townhouses or apartments, with more compact designs than traditional homes and often higher rents. Bayleys' nationwide survey of properties found average net yields of 3.2% for houses and 3.6% for apartments and townhouses.

 

 

Farhi expected surging net migration and a decline in new home construction to tighten supply and demand in the rental market and continue pushing rents higher. He said current property market trends were moving in a positive direction for investors who already owned property or were buying, as both rents and property values were likely to keep rising steadily.

 

Does this mean the time has come for investors to return to the property market? In fact, the direction of New Zealand property prices still needs close attention.

 

 

Uncertainty clouds the outlook for house prices

 

Recent revisions by major commercial banks to their house price growth forecasts for 2024 suggest that many New Zealand economists are very optimistic about the property market in 2024. The major banks' latest house price growth forecasts for 2024 vary, ranging from 2.3% to 8%.

 

Other industry figures, however, see a less optimistic future for the property market. Veteran property expert Olly Newland, whose books include The Day the Bubble Bursts, said it could take several years for property prices to really take off again. He believed people needed to understand that property was a long game and investors had to be patient:

 

“I think the property market will remain steady over the next few years. It could take three, four or five years before another boom arrives. People should not expect to make a lot of money from property over the next few years. You have to take a long-term view.”

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The property market appears to be moving towards a steady recovery. However, its complexity means no single factor determines its direction. Property investors therefore need to understand the latest market and economic developments and keep their finger on the market's pulse to develop more considered, robust investment strategies.

 

How can investors sharpen their judgement and see where the market is heading? How should they make their decisions?