Otago facing headwinds after boom period

Changes in sentiment are beginning to affect the key Otago property markets of Queenstown, Dunedin, Wanaka and Cromwell, although many sectors of the market remain in good health, according to new research from Colliers.

Colliers’ 2022-2023 Otago Market Review & Outlook, released this week, explores how the region’s key property markets are expected to weather upcoming headwinds.

Heather Beard, Valuation Director in Colliers’ Queenstown office, says a number of factors point to the property market consolidating, in particular for households with the dual challenges of interest rate hikes and increases in the cost of living.

“Any sharp increases in interest rates will compound the unaffordability of mortgages in the region, particularly where high mortgage to income ratios are in play.

"Those homeowners who have purchased recently and are highly leveraged are at risk of falling into negative equity.”

Interest rate rises are likely to increase investors’ yield expectations across the property market.

However, in the commercial property sector, the significant weight of capital still seeking investments continues to keep yields low.

“Prime commercial property generally remains strong across the region with the scarcity of developable land a key factor behind the robustness of the commercial sector.”

Those holding higher quality property will fare better in the face of fluctuations in sentiment, she says.

“Prime property is expected to perform best in the case of a market downturn, with secondary property generally more exposed to the headwinds and risks facing the market.”

Queenstown

The Queenstown property market has historically been slower to react to downturns compared with other main centres in New Zealand, and the market also comes from a position of high value levels.

Among the trends expected to underpin the Queenstown property market are the tourism restart and increased numbers of people opting to move to Queenstown and work remotely.

To date, Queenstown appears to be resisting the national trend of downward pressure on house prices.

The Queenstown residential market is currently characterised by reduced numbers of listings as homeowners wait out the current period of uncertainty, resulting in decreasing sales volumes.

Commercial and industrial property in Queenstown is generally still in a recovery phase following Covid-19, but confidence is still strongly apparent and increased pressure could come on yields.

Dunedin

The Dunedin property market has also shifted to a climate of uncertainty in 2022.

A softening of residential property values characterises the market, following significant increases in values over the past five years.

Sales volumes are down and homes are taking longer to sell, with the downturn apparent across all value levels.

Confidence in the commercial property market is also more subdued, although the market remains heated in a historic context.

Large-scale investment in the new hospital build and university campus development continues to underpin the local economy.

Wanaka

The return of international tourism is expected to help cushion the Wanaka economy.

Staff shortages are a challenge to tourism and hospitality businesses facing increased customer demand due to a very strong start to the 2022 winter season.

A two-tier market is apparent in residential property, with the upper end performing strongly under ongoing high demand and the lower end receiving limited demand with properties taking longer to sell.

Commercial property continues to perform well as high demand meets limited availability of investments and a shortage of new supply.

- Article supplied by Colliers