New Zealand Property Market Will Continue to Simmer in 2007

This time last year everyone was in agreement; the New Zealand residential property market was overheated and due a negative correction…and yet one year on and property prices have risen by an average of 9.4% across the country with locations such as Palmerston North and Invercargill recording in excess of 15% growth in just 12 short months. 

The same thing’s happening again this December – the word is that the New Zealand property market has reached the end of the line and 2007 will be a bad year for price growth.  However we disagree with this viewpoint…there are several factors that suggest that the New Zealand property market will continue to simmer in 2007 and that 2007 will be another excellent year for an investor to hunt down some quality real estate and profit from price growth and/or strong rental yields over the medium term.

Apparently the Reserve Bank of New Zealand are again considering inflating interest rates to try and cool an ever active residential property market and to put a hold on general inflation which they see as spiralling too high.  In just two years the Reserve Bank has already increased their rate of interest by over 200 basis points and it now sits around 7.25% - but this is not stopping international buyers from actively targeting property in New Zealand as an investment commodity nor is it putting the brakes on the local consumer for housing and investment.  In fact some mortgage companies in a bid to draw more business have begun relaxing lending rules to attract more buyers into the marketplace.

This is positive on the one hand as it has released a rush of first time buyers into the property market who can now overcome the affordability problem that has dogged this sector of the consumer market for so long, but on the other hand it is negative because it is not helping inflation in New Zealand at all.  The real estate market is central to economy and it is also seen as central to a potentially damaging inflation problem and this is the one negative factor thing that buyers need to keep in mind.

Aside from this issue we believe that the New Zealand property market will continue to simmer in 2007 because there is a strong ‘demand’ factor at play across the nation and because New Zealand has strong inward migration of generally affluent and professional migrants who bring new money and fresh interest to the housing market every single year.

A property investor targeting New Zealand has to be clear about the investment approach they are taking.  For example, an investor buying to let to the tourism market will be seeking a different type of property in a different area to an investor who prefers to purchase stock in an up and coming area that is currently undervalued compared to its predicted value when infrastructure or employment prospects have improved in the immediate vicinity.  Understand that there will be room for price expansion and strong demand for property stock in New Zealand in 2007, but also understand that you have to think carefully about what you buy and where you buy and the investment approach you are trying to take.

In a softer market like New Zealand’s it is harder to make a profit but it is certainly not impossible.  Take Auckland for example where the median property price is currently in the region of NZD 446,000 – at the lower end of the market a new wave of first time buyer interest, fuelled by the aforementioned easing of mortgage criteria, provides an investor with a great opportunity.  Consider buying up auction stock and the worst houses on the street in areas where there is a definite reason to reside and renovate to resell back to this market.  Remember, target who your buyer will be, examine what their affordability restrictions are and what they will be seeking for their budget and then provide them with what they want!  Sounds simple - and it can be if you hunt hard for the right stock.

In areas such as Upper Hutt and Lower Hutt in the Wellington region median prices have shot up by as much as 16.5% in the last year fuelled largely by commuter interest.  This is another approach for an investor to take…move out from the centre of major employment areas and look at road and rail links, see where there are road improvements planned or rail extensions in the pipeline…look ahead and try and determine where the commuter priced out of his favourite suburb will look next because prices tend to ripple outwards and those who profit the most buy ahead of this ripple effect.

A very good alternative for an investor looking at property in New Zealand is buying for the rental market.  As property prices are continuing to rise there is a very real affordability issue constantly rearing its ugly head and making first time buyers reluctant or unable to enter the market.  This has led to a significant increase in demand for rental accommodation with rental rates chargeable significantly higher today than they were a year ago in the likes of Auckland, Wellington and Christchurch.  When you add to this fact the news that Building Issues Minister Clayton Cosgrove has come up with a comprehensive series of legislative amendments to previous tenancy acts that will make the entire rental market safer and fairer for landlords and tenants from 2007 you can have confidence in the rental market.  The fact that the rental market has grown so much has forced these changes through – they are much needed and will make the role and responsibility of landlord and tenant much more clearly defined.

All in all New Zealand has an incredibly real estate mature market where profits will continue to be made.  Buyers looking to enter in 2007 should be careful that they are not buying over inflated stock in areas where demand and affordability are dwindling and then they should do well from their investment over at least the medium to longer term.

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