Are investors taking over the property market?


Mortgaged multiple property owners (i.e. investors) accounted for 25% of property purchases across NZ in July, returning their market share to levels not seen since late 2016, says CoreLogic Senior Property Economist Kelvin Davidson

The CoreLogic Buyer Classification data for July shows that first home buyers’ share of property purchases is holding pretty steady at an historically-high level of 23%, more or less where it’s been for the past year, and reflecting factors such as their access to KiwiSaver for a deposit (or part of it) and willingness to compromise on location and/or property type. This has reflected a bounce-back by smaller, ‘mum and dad’ investors, perhaps with only one rental property. The low returns available on alternative assets (such as term deposits) and the confidence (and future property profitability) boost from the scrapping of the capital gains tax proposals are likely to have been key factors.

Meanwhile, movers remain a little less active in terms of market share than has been the case historically.

In fact, the most interesting aspect of the CoreLogic data for July was the marked pick-up in the proportion of purchases made by mortgaged multiple property investors (MPOs), i.e. investors. Indeed, as the first chart shows, the figure for July of 25% was the highest since late 2016, when investors’ market share was on the way down in response to the LVR III rules (requiring a minimum 40% deposit nationwide).

NZ % share of purchases (Source: CoreLogic)

The latest rise in market share for mortgaged investors was evident around most of the main centres, including Dunedin (from 24% in Q2 2019 up to 26% in July), Tauranga (22% up to 26%), and especially Hamilton (27% up to 32%) – as shown in the second chart. In addition, the spike in Hamilton was driven by local buyers, not Auckland investors looking further afield.

Hamilton % share of purchases (Source: CoreLogic)

Even more interestingly, although the third chart doesn’t distinguish between cash or mortgaged purchases, it does show that the nationwide rise in investor activity in July reflected a strong bounce-back amongst the MPO 2 category (those that own their own house and one other property, e.g. a rental), and to a lesser extent MPO 3-4. In other words, the recent spike in interest has continued to be driven by ‘mum and dad’ investors.

NZ % of purchases by multiple property owners by number of properties owned (Source: CoreLogic)

It’s not too hard to find reasons for why smaller investors’ appetite for residential property has lifted again. After all, although the costs of being a landlord have increased (e.g. due to extra insulation standards, the tax ring-fence for rental property losses), the flipside is that rents are also rising. And while gross rental yields are running at relatively low levels, subdued property values set alongside rising rents are seeing those yields begin to improve. No prizes for guessing that the scrapping of the capital gains tax proposals will have also been a shot of confidence for smaller landlords (or those aiming to enter the sector).

On top of that, ‘mums and dads’ looking for an attractive and (perceived) low-risk investment don’t have a huge number of alternatives to property at present. For example, after the latest official cash rate cut, many term deposit rates are now sub-3%, and the low returns may well be prompting a switch of some money away from this asset class (and potentially towards property). Indeed, Reserve Bank stats show that the growth of term deposit balances has really slowed down in recent months (see the fourth chart).

Six-month % change in domestic households’ term deposit balances (Source: Reserve Bank of NZ)

Overall, after an interesting period where market share for FHBs and MPOs has been neck and neck, we may now be starting to see investors reassert themselves. Admittedly, the speed limit for high LVR investor lending is pretty restrictive at present (i.e. <5% at less than a 30% deposit), which will be acting as a handbrake. However, for would-be landlords there may also be light at the end of the tunnel here too, with the Reserve Bank potentially loosening this rule in November.