Short commentary on Eastern Suburbs' market statistics for November 2018
8 Days to Christmas!
Undeniably, 2018 has not been a great year of capital gains for property owners. In this final 2018 omnibus issue of Ruoxi’s Reflections, discover what is happening at the ground level in the Eastern Suburbs and the Auckland property market for November 2018. What do all these numbers mean for you as either a SELLER or a BUYER?
Find out what 2019 will be like, as we walk through the various changes on the horizon. Boom or bust? How can you profit?
If you are impatient (!), you can skip to the relevant sections:
- Auckland’s market statistics for November 2018
- Eastern Suburbs’ market statistics and general observations
- General Eastern Suburbs’ Market Outlook For 2019
- Looking Ahead To 2019 – Challenges and Opportunities
Auckland's market statistics for November 2018
Compared to October 2018
Compared to November 2017
- Median price up 0.3%
- Sales Count up 1%
- Days to Sell increased by 1 day
- Median price down 1.5%
- Sales Count up 3.9%
- Days to Sell increased by 2 days
The Real Estate Institute of New Zealand’s (REINZ) statistics for November 2018 demonstrate that the Auckland housing market remains stable with price fluctuations within a very narrow band.
Median days to sell has increased slightly as vendors are still adjusting to the market – while negotiations are longer, vendors are still meeting the market resulting in strong overall sales.
Eastern Suburbs' market statistics and general observations
Note 1: Suburbs with less than 5 sales (for e.g. Stonefields and Wai O Taiki Bay) will not have the median price displayed for statistical and privacy reasons. Also, note that the median price for each suburb may see large fluctuations given the relatively low number of sales on a monthly basis.
Note 2: The REINZ uses unconditional sales data (when the price is agreed) rather than at settlement, which can often be weeks later. It is therefore more accurate and timely.
Eastern Suburbs' trends
This time, the Eastern Suburbs have performed subpar as compared to the rest of Auckland. This could be due to the fact that there are a handful of properties (I shall not single out which ones) that have sat on the market for more than a year and still have yet to sell. There are also a few development sites or houses with development potential that are taking longer to sell simply because the pool of buyers available is smaller.
However, family homes that are beautifully done up still sell and sell well, either at a pre-auction offer or under the hammer. Houses with sea views are also snapped up quickly because such million dollar views are few and far between.
General Eastern Suburbs' Market Outlook For 2019
General Economic Outlook: Positive
The economic fundamentals for New Zealand remain solid. Unemployment remains historically low at 3.9%, population growth is likely to continue (albeit at a slower pace compared to 2016/2017 – slow down has been driven by a rise in non-NZ citizens leaving) and the Reserve Bank of New Zealand is expected to keep the Official Cash Rate low (i.e. low mortgage interest rates).
General Property Market Outlook: Stable
A positive economic outlook bodes well for the property market. As previously stated in earlier newsletters, a major correction in housing, especially in popular areas such as the Eastern Bays and Remuera is not expected without any adverse external events.
Generally, the outlook is expected to be of a stable property market without any massive (i.e. more than 5%) increase in property prices on a year-on-year basis. In fact, governmental policies, along with the uncertainty associated with them and banks’ appetite for lending, may likely restrain house prices over the next few years.
Demand For Housing
There is continued strong demand in Auckland for housing, especially in the Eastern Suburbs as population continues to grow. While migration numbers are forecasted to drop, Kiwibank has said that “it will take some time before the rate of construction matches demand. Even if, or when, construction catches up with increased demand, there is still the cumulative housing shortage [of the previous years] to address.”
A short note about apartments
With the influx of immigration and lifestyle changes (Netflix vs gardening), more people prefer (or are open to) higher-density living today. Apartments are often well located near major transport options and close to amenities such as cafes and shops.
With the large number of Asian migrants in recent years, many of whom are used to living close to areas of higher human traffic, apartments well-designed for living are now increasing in popularity. Kiwis who have traditionally yearned for the quarter-acre are also now starting to experience the modern conveniences of apartment living, especially when they have worked overseas and lived in such apartments.
With many luxury apartments being offered into the market, the traditional notion of the small, poorly designed apartments meant for cheap student housing is slowly disappearing. Rightsizers (or downsizers) are especially attracted to such apartments for its low maintenance aspects, without the corresponding sacrifice in the quality of life. The Unit Titles Act (traditionally a bugbear for apartments and terraced housing) is also currently being reviewed.
All these reasons should therefore contribute to the continued increase in popularity for apartments (and higher density living) in the future.
Supply For Housing
The number of consents granted for new homes are high – more than 13,000 in Auckland (highest in a year since the 1970s, according to Stats NZ November 2018). In terms of a breakdown of what was consented – over the past year, only 48 percent of consented new homes in Auckland were stand-alone houses (compared to 74 percent across the rest of New Zealand). The remaining 52 percent were apartments, townhouses, retirement village units, and flats.
However, labour shortages remain acute which means the number of houses actually built do not equate to the number of consents granted. One of my clients was looking for a builder to carry out a minor extension prior to selling and the work backlog (for those who bothered replying) was 7 months long!
A similar trend is likely to continue in 2019. A restrained supply growth will therefore mean strong support for housing prices even if demand weakens.
Australian Market Developments Affecting Auckland Market?
QV suggested 3 main reasons as to why the current negative developments in the Australian property market will not affect New Zealand and Auckland significantly:
No Over Supply
New Zealand does not generally have an oversupply of property of any type or in any region, with Auckland facing a large shortfall of housing. By contrast, it is widely accepted that there are too many apartments in Sydney and Melbourne, and this is dragging down average/median prices, especially when many of these are bought from investment purposes
No Increase To Mortgage Rates
New Zealand has not experienced increases to mortgage rates that other countries are seeing, including Australia. QV added that “about 80% of mortgage debt is on fixed interest rates in NZ, giving borrowers time to adjust their finances in advance of an interest rate increase being pushed through to their mortgage. That is in stark contrast to Australia, where floating rates dominate.”
Stricter Banking Regulations
New Zealand’s banking regulators have arguably been much more proactive than Australia’s in curbing the riskiest lending practices, and therefore a royal commission has yet to be set up here (aka Australian style) to investigate banking culture and practices.
To be sure, RBNZ and the Financial Markets Authority have been reviewing such practices and recently made certain observations and suggestions for changes, but they are still nowhere near the extent that the Australian Royal Commission has been involved.
Also, QV noted that “interest-only lending is more controlled in NZ, and it’s also easy to forget that we’ve actually had the LVR restrictions (in one form or another) here for five years now. This has put our mortgage market on a surer footing than Australia’s.” RBNZ will surely be happy to agree with such an assessment, especially given their recent loosening of LVRs (read more below).
Looking Ahead To 2019 - Challenges and Opportunities
The following key changes made in 2018 or proposed to be made in 2019 are likely to affect the property market in various ways, and depending on your circumstances, may have differing (positive/negative) impact. Here’s a summary table for your benefit if you would rather not read through everything.
Loosening of LVRs by RBNZ
RBNZ has loosened the LVR restrictions for both investors and owner-occupiers. Banks can now allocate:
- 20% of their owner-occupier loans to owner-occupiers who have a deposit less than 20%
- 5% of their investor loans to investors with less than 30% deposit (lowered from 35% previously).
From a general market perspective, prices are unlikely to increase much as a result of such relaxation because banks still have a much more restricted lending/serviceability criteria. RBNZ must have been comfortable with the existing rate of house price inflation to make such a change. Remember that the new LVR rules were primarily meant to provide stability in the financial system and not to keep house prices down (albeit this is an indirect effect). As such, RBNZ has acknowledged that if banks’ lending standards are maintained, it expects to further ease LVR restrictions over the next few years.
Impact on buyers / sellers / homeowners
This is certainly good news for first home buyers. Loosening of the LVR rules means that there will be more buyers who can now afford to buy their first home when the banks have more capacity to lend to them. Naturally, more buyers would likely mean more competition and therefore could possibly drive up the price for sellers.
BNZ’s latest shared equity scheme is also another shot in the arm for first home buyers. Devil’s in the details of how this would work in practice. But the buyer saves the extra interest charge for low-deposit purchases and becomes able to purchase when they would not otherwise have been able to.
In the Eastern Bays and Remuera, however, effects are likely to be muted given that average property prices in this area are generally not within the first-home buyer territory. That being said, such a move equally benefits aspiring upgraders if the banks are comfortable with serviceability.
From the other side of the coin, the impact on homeowners and potential sellers should be positive, given that credit growth largely drives property prices. With greater availability of credit, there will be more buyers, provided your property is well presented.
Impact on investors
The biggest impact on the LVR changes will be for investors. Undoubtedly, it makes buying the first investment property easier given the lower deposit required. On the other hand, that may mean more competition for existing houses if all things remain equal (which obviously is not the case – read on below). Serviceability for an expansion of the property portfolio will also be an issue if yields remain low (especially in Auckland). It therefore remains critical to buy well, and there are certainly good deals out there.
Ringfencing rules to be introduced
This is a rule proposed to be introduced in full from the start of the 2019-2020 income year (i.e. from 1 April 2019).
The rule ensures that “investors will no longer be able to deduct expenditure relating to their loss-making residential investment properties from their other income, to reduce their tax liability” (read the official commentary, the Taxation Bill and seek professional tax advice!).
The rules will be applied to:
- (by default) a portfolio, meaning that investors can offset losses from one property against income from other properties. Losses can also be carried forward and offset against future rental profits.
- (if elected otherwise) on a property-by-property basis, where each property is looked at separately and deductions for one are not able to be offset against income from another. Losses can also be carried forward and offset against future rental profits from that property only.
These are part of the government policies targeted at speculators and to level the playing field between investors and homeowners. The changes may influence the amount of risk investors are willing to take (read below), but it is doubtful that that will cause an exodus from the market.
Impact on homeowners
This rule will have no direct impact on homeowners (i.e. main home) / mixed used assets (for e.g. bach owners) as these are exempted from the proposed legislation. Under the proposed ring-fencing rules, a property would qualify as a person’s main home for a particular income year if it was used predominantly as their main home for most of that year. This includes a home owned by a trust subject to certain legal requirements.
In any case, homeowners generally cannot claim any deductions against their family home under existing tax rules.
Impact on sellers
If you are selling:
- properties intended for owner-occupation without any development potential: ringfencing rules are unlikely to have any effect
- investment properties without development potential (for e.g. units): ringfencing rules are likely to have an adverse effect on buyers’ interest, and therefore final sale price. Consider sprucing it up to cater to a wider (owner-occupier) audience.
- investment properties with development potential: ringfencing rules may have an adverse effect depending on the type of development that can be built on such land.
Impact on buyers
For buyers who are buying properties for owner-occupation, this rule will have no direct effect. As above, homeowners generally cannot claim any deductions against their family home.
Impact on ‘buy and hold’ investors
This rule would likely have a greater effect on those who are buying Auckland properties for investment purposes and thus affecting sellers who are putting such properties onto the market. In the past, investors were willing to buy a property even though the rental income did not fully cover the mortgage and other expenses (especially in an affluent area such as the Eastern Bays) for the following reasons:
- they were speculating that capital gains in the future would make the negative cashflow worth it.
- all losses resulting from the rental property could be deducted against one’s income, thereby reducing the burden of negative cashflow.
With the introduction of this rule and the general market stabilising rather than booming, there may be less Auckland investors who are willing to purchase such investment properties going forward.
But investors remained active in the residential property market in November, according to the latest CoreLogic Buyer Classification data. This shows that “they are not yet deterred by government measures” (it could well be that in November, the detailed ringfencing rules were not yet published). 25% of November’s residential property purchases across New Zealand were made by multiple property owners with a mortgage (mortgaged investors). It would certainly be interesting to see the future breakdown for Auckland investors.
As mentioned, the greatest impact will probably be on investors currently holding onto negatively geared properties, especially if they were bought recently in the Eastern Bays and Remuera where yields are frequently below 3%.
Therefore, as an investor, if you are in such a situation, you should
- look hard at ways to increase yield
- consider carrying out all your maintenance (such as painting and sprucing up your bathroom etc) before the proposed 1 April 2019 commencement date of these rules.
For (1), you can potentially increase yield by:
- subdividing and building another house to collect more rent
- renovating the house to potentially obtain more rent (but be really careful about over-capitalising)
- creating more rooms by either making an addition bedroom, converting the garage into a sleepout or converting basement into bedrooms (subject to consents)
Yields can also be increased by reviewing the rent to ensure that it is in line with the current market and/or potentially breaking the mortgage to achieve lower rates. Talk to a mortgage broker who can conduct a specialised portfolio review.
Impact on developers
The proposed rules will not apply to land that is identified to Inland Revenue as being taxable on sale. This would include land held in dealing, development, subdivision, and building businesses, and land that was bought with the intention of resale.
However, some consideration will necessarily need to be made as to the potentially reduced buyer pool. If a view is taken that some property investors (especially the more recent ones) will be discouraged from investing in properties, then certain developments (for e.g. terraced housing or mass apartments) may be riskier as the buyer pool has just shrunk. Luxury developments meant for owner-occupation will, however, be unlikely to be affected.
Healthy Homes Standards
The Healthy Homes Guarantee Act (No 2) passed into law in December 2017 and enables the government to create regulations that will set new standards for rental homes. These are called the Healthy Homes Standards. The standards aim to make rental homes warmer and drier, and deliver the greatest benefit to tenants.
Consultation on these standards has closed and we are now awaiting the finalised standards which are focused on heating, insulation, ventilation, moisture ingress, drainage, and draught stopping. These remain open proposals and the final standards may still change. Timeframe for compliance remains open, and is likely to be at least a couple of years away.
Here’s a brief summary of the proposed changes:
- Heating: landlords, who have not already provided adequate heating devices, may be required to install fixed heating devices (estimate of $1800,000-2,500 for a heat pump) and possibly provide portable plug-in heaters (estimate of $30-50), and remove unhealthy or inefficient sources such as unflued gas heaters and open fires.
- Insulation: Existing regulations already require landlords to provide ceiling and underfloor insulation by 1 July 2019, and replace or top-up existing insulation where it is below a minimum level or not in ‘reasonable condition’. Some homes are exempt from the requirement if it is not practical to install insulation. The healthy homes insulation standard could require a higher minimum level of existing insulation than the current regulations, thereby increasing the number of rental homes that benefit from an insulation upgrade.
- Ventilation: proposals range from windows in kitchen/bathrooms that can be opened to (or and) installing appropriately sized and installed extractor fan(s) in rooms with a shower, bath or indoor cooktop.
- Protection against moisture entering the home: Landlords may need to install a ground moisture barrier where there isn’t already one (estimate of $800 including GST, based on $8 per square metre), or underfloor vents. This may also include gutters, downpipes and drains for the removal of roof water to the satisfaction of the local authority.
- Draught stopping: options remain open as to whether maintenance of existing walls/ceilings would be sufficient or landlords must block any unused fireplaces and chimneys and stop any unnecessary gaps or holes that cause noticeable draughts and a colder home
Impact on buyers/sellers/homeowners/investors
These standards have not been finalised yet (likely implementation is in 2020 and beyond) and will only affect rental properties. Any adverse impact will be on buyers/sellers of rental properties and current investors.
Expenses and maintenance costs for investors in the future will likely increase. This might result in some investors selling up, as the hassle of complying with the standards may not worth the reward, especially in the absence of capital gains. Potential investors who remain interested will have to consider what work needs to be done to comply with such standards. All that being said, if such expenses can be recouped from rent increases, then the impact may be muted.
Kiwibuild affecting house prices?
This was discussed in my previous newsletter. In short, Kiwibuild is unlikely to make a dent in home prices simply because of the shortage of tradespeople and supply.
Hence, while the government has good intentions, the market is unlikely to be flooded with a huge supply of houses based on Kiwibuild any time soon. There is also speculation of the re-purposing of Kiwibuild houses (which were originally intended for first-home buyers) to that of social housing, given the recent establishment of the Housing and Urban Development Authority. The HUDA absorbs both Kiwibuild and Housing New Zealand into its fold.
Also, as BNZ’s chief economist has pointed out:
There is also growing awareness and cynicism regarding the way in which KiwiBuild seems to involve the government simply stamping the KiwiBuild brand onto apartments which were going to be built anyway by developers.
Capital Gains Tax - a boon or bane?
The Tax Working Group is currently considering two main forms of Capital Gains Tax in its interim report –
- Taxing gains on assets that are not already taxed
- Taxing deemed returns from certain assets
People who argue for a capital gains tax mainly do so because they feel that capital income is not taxed unlike labour income. Hence, the purpose of CGT is to distribute wealth and make it fairer for everyone regardless of whether income is earned on capital gains or otherwise.
Even if the capital gains tax will only be implemented after the next general election in 2020, the impact might be felt next year depending on what the Tax Working Group proposes in its final report.
Impact on buyers/homeowners
As there is a main home exemption, homeowners will not be taxed on the capital gains when they sell their family home.
Hence, if the legislation is introduced, buyers who are looking for their family home would likely buy a massive family home or buy a home with an income element (e.g. minor dwellings, sleepout, self-contained units) so as to realise more gains when they sell without having to pay tax on it. This suggests stronger demand for such houses and prices may increase correspondingly.
Impact on sellers/investors
A capital gains tax could also likely lead to speculative landlords selling up and realising their gains before the legislation comes into place (i.e. in 2019 and early 2020). If that’s true, the sudden rush of properties on the market with less takers would mean adverse price pressure on vendors.
Any investors purchasing those homes will only want to do so if it made financial sense. As such a tax is only levied upon a sale, buy-and-hold investors may also choose to never sell as they are incentivised to keep for as long as possible to avoid paying tax. This would artificially restrict supply in the market, and conversely lead to price increases.
Foreign Buyer Ban
This has been extensively discussed previously.
In short, as the majority of buyers in the Eastern Suburbs are permanent residents or New Zealand citizens, the impact on our property market is not huge.
Further Changes To Policies Relating To Landlords
Reform on the Residential Tenancies Act 1986
To add to an already tough year on landlords, there are also proposed reforms of the Residential Tenancies Act 1986 (RTA). The RTA is a response to the shifting demographic where more people are now renting homes for longer periods. The purpose of such reform is to afford more protection to tenants by giving them increased security in their tenancies.
A major change is to the termination provisions for periodic tenancies:
- Extending the notice period given from landlord to tenant from 42 days to 90 days in circumstances where the property is sold or the owner or family member is looking to move in
- Removing termination without cause (landlord could give 90 days’ notice previously without providing any reasons) such that landlords have to apply to the tenancy tribunal for an order to terminate the tenancy in the event that there is a breach and the breach is not remedied in time
The effects are obviously negative for landlords.
By extending the notice period, selling a property with vacant possession is going to be harder. Previously, you may have had to wait just 42 days to provide vacant possession to the new buyers, when conducting the sale process and open homes through the tenancy.
However, once the reforms are implemented, landlords will need to provide notice 3 months in advance of the settlement date. This obviously increases the risk of damage caused by the tenants during the longer notice period.
Removing the termination without cause option would create a more time consuming and costly process for the landlord to give a tenant notice. It would also mean that landlords have to be extra careful who they put in their rental as once they are in, it might be difficult to get them out. This would also mean that tenants without a good track record may face problems renting.
Tenants can still give 21 days’ notice to the landlord if they want to leave the rental. The jury is therefore still out on whether the landlords’ right to asset protection and the tenants’ right to a stable tenancy is balanced.
Ban on Letting Fees
Letting agents and property management companies can no longer charge a letting fee to tenants.
Impact on investors
While tenants no longer pay the fee, the fee has to be paid by someone. Hence, letting agents and property management companies are likely to pass on the cost to the landlords.
Landlords will then pass on the costs to the tenants through an incremental hikes in rent. While that could mean the tenants end up paying more in the long term, the benefit to them is that they are not slapped with a huge upfront cost that would make moving homes prohibitive.
Overall observations for landlords / investors
It seems like a tough year for landlords/investors! Most of the regulations that have been implemented and/or are proposed to be implemented will affect the bottom line of a landlord’s pocket.
Although the aim is to divert people towards more productive investments, the truth is that the truly wealthy landlords/investors are not affected at all. In fact, this shuts out the newbie investors who are trying to make a plan for their future but now face so many additional hurdles that it might not be worth it at all.
Anti-money laundering rules
In the festive spirit of regulations, anti-money laundering rules will be applicable to real estate agents from 1 January 2019.
You may wonder why. Because “criminals often use real estate to convert the money they make from illegal activities into legitimate assets.”
I will therefore need to verify the identity of my clients, and verify the identity of purchasers who pay cash deposits of $10,000 or more. In some circumstances (such as if they represent a company or trust), I may also need to ask for information about where the money came from and the other people involved.
Don’t feel upset when I ask such questions (and you can read more about what is required from you here) before I can sell your Eastern Bays or Remuera home! It will be as painless as possible (very much like my selling process!)
The impact on the property market will likely be muted, except that transaction costs and processing times will be increased.
Found this post useful and have more questions?
I have detailed statistics at my fingertips, including recent sales within the Eastern Suburbs (or any suburbs), so do not hesitate to contact me for a no-obligation discussion over coffee on your future plans to either buy or sell.