#2 - Don't Wait! It ain't gonna happen!
Covid-19 has changed the landscape of the New Zealand property market a whole lot more than I first thought it would. Here are the main ones:
- More and more property commentators and economists have predicted armageddon, with some predicting up to 30% losses in the value of property in the long white cloud. These loose and mis-calculated predictions have shot fear into the market but more importantly - everyday New Zealanders who may have just brought their first home and were then being told to expect massive losses compared to their newly attained mortgage. Hows that for horrible?!
- The brain drain is over. Since the 2000's, hundreds of thousands of Kiwi's have departed New Zealand, mostly recent university graduates, to seek a better life overseas or have just never retuned from their 'overseas experience'. However that is now well and truly over. Like a child going back to his mother, the Kiwi's are coming back to the mother ship in their droves. As at July, New Zealand had a net inflow of around 35,000 people. More on this soon.
- All this supposed "economic carnage" has caused the Reserve Bank to take action. The boss of banks has slashed the Official Cash Rate so low that we are now seeing historic interest rate lows at the main retail banks. As well as the rates, they are also effectively funding the debt that the government is racking up and by doing so pumping billions of dollars into the country. They are literally printing money off the machines! And finally the Reserve Bank has done away with the LVR (loan to value) restrictions. This benefits investors more who no longer need a 30% deposit, and more like 20%. This means that an investor can purchase three properties for the price of two!
So yes Covid-19 has had a major impact of the Kiwi property market - but I am yet to find a negative. Perhaps AirBNB could be one - but then again some regions are back to 80% occupancy on last year...
I have heard many people saying "perhaps I should wait to buy, there may be some deals".
We are simply not seeing that. Median house prices have held and are currently sitting where they were as NZ went into Level 4 lockdown in March.
The argument people make is that when the wage subsidy comes off, thousands will be forced to sell their homes at a discounted rates to financially survive. But who is actually on the wage subsidy?
- Hospitality sector
- Tourism sector
Home ownership of workers in those two sectors is very low. It is not likely that the wage subsidy will affect the property market, and even it does the affect would be mynute.
Coming back to the inflow of Kiwi's - where are they all going to go?
First home buyers take note - we have seen this before. In Auckland between 2011 and 2017, house prices doubled. The inflow into Auckland of migrants was around 35,000 per year on average. Property became well and truly over demanded and supply dried up. New Zealand has never recovered from that and in my opinion simply never will. If you are considering stepping onto the property ladder, anywhere in the country, then take the step now if you can. You will be highly disappointed when you come to purchase and you need $10,000 - $20,000 more in a deposit due to the increase in the market.
Property investors take note - it is simple, all returning Kiwi's will not be able to afford to purchase a home. The rental market will benefit equally from these inflows and I expect the four main cities - Auckland, Hamilton, Wellington and Christchurch to all see some pressure for renters looking to lock in a tenancy agreement at a reasonable price. Christchurch perhaps not so bad as there is currently a good supply of rental properties, about 1100 properties currently.
How do property price increases actually effect us getting into the market?
Lets use the median NZ house price for this example = $660,000 (end July 2020).
- If you purchased now with a 20% deposit, you would need $132,000 to put forward. You would have a mortgage of $528,000 and pay interest of approximately $13,728 on a 2.6% interest rate. That all totals $145,728 of funding expense in the 1st year.
Now lets say we waited a year and purchased this time in 2021, hoping for that deal! The median NZ house price has increased by 6% to $700,000 (it is currently pushing up at 9% but I like to be conservative).
- If you purchased with a 20% deposit, you would need $140,000 to put forward. You would have a mortgage of $560,000 and pay interest of approximately $14,560 on a 2.6% interest rate. That all totals $154,560 of funding expense in the 1st year.
Waiting a year could cost you an extra $8,840.
What could you do in your life with that money instead of giving it to someone else and the bank?
And what about if you are wanting to purchase in a region that is going up much quicker such as Taranaki (24%), Gisborne (36%), Auckland (11.5) or Otago (8.8%)?
There is a saying from the great Warren Buffett - "Be fearful when others are greedy, and greedy when others are fearful".
There is plenty of fear out there but its all coming from the voices of those who haven't learnt from history. The fundamentals of the New Zealand property market are extremely strong.
Don't miss out. Don't wait, because that drop ain't coming!