ANALYSIS: The coalition agreements recently signed between the National, ACT and NZ First parties contained good news for residential property investors. Not only will they be able to terminate tenancies for no reason with 90 days notice, but they will also regain 80% interest expense deductibility from April 1 next year. 100% deductibility will return a year later. Will these changes drive a lot more investors into the market?
In theory the answer has to be yes because all of my surveys show a strong fall-off in investor demand after the tax changes were announced at the end of March 2021. But my latest survey of real estate agents sponsored by NZHL shows no such thing.
One of the many questions I ask agents is whether they are seeing more or fewer investors in the market as buyers. A month ago at the very end of October a net 26% said they were seeing more investors. But my most recent survey conducted in the middle of last week shows an easing in this measure to a net 22%.
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This tells us that agents are definitely seeing more investors, especially compared with the pre-election net 14% at the end of September seeing more investor buyers. But there is no evidence that confirmation of early tax changes is bringing a wave of investor buyers.
In fact, the net proportion of agents saying that they are seeing more investors looking to sell has just risen to 11% from 7% a month ago and 0% pre-election. It looks like some investors who might have been holding off selling are choosing to now bring their property to the market to take advantage of the good demand coming from first home buyers and the possibility that other, perhaps newer, investors will now be looking to buy.
The data from my latest survey help us to flesh out a broader picture of what has been happening this year. From February we saw a wave of first home buyers move into the market encouraged by lower prices, greater choice, low competition from other buyers, higher savings, good job security, an aversion to building, and a slight improvement in access to credit.
Independent economist Tony Alexander: "Credit is still quite difficult to get – especially for investors." Photo / Fiona Goodall
Then from about the middle of the year activity levels became quite strong as people who had perhaps put off making a purchase for a long time decided the time was right to move. This September quarter surge in activity looks to have cleaned out a lot of these delayed buyers and now things are settling down again.
Does this settling down involve prices once again flattening out? No. A net 28% of agents last week said that they still see prices rising in their locations. This result is consistent with the previous three months and tells us that upward price momentum remains in place. But there is no frenzy.
That is most easily seen when we look at the proportion of agents saying that they are seeing buyers display FOMO – fear of missing out. The percentage in my latest survey is 28%, down slightly from 33% a month ago and 40% two and three months back. FOMO is present but at slightly below average levels. Again - no frenzy.
It is easy to understand why the market is not running away on itself at the moment. Credit is still quite difficult to get – especially for investors – and the test interest rates used by banks before agreeing to a loan sit above 9%. This is a high hurdle for many people and will continue to exercise restraint on the market until interest rates start to come down at some point next year between January 1 and December 31!
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
