With approximately 440,000 privately owned rental properties across Aotearoa, residential investors make up a significant proportion of the property market, and their participation can be the difference between humming activity and a market go-slow.

Research from CoreLogic has found that of all properties sold in New Zealand in September, finance-dependent investors only bought 20 percent of them – which is the lowest proportion since the firm began collecting this data in 2003.

The metric goes against the broad market anecdote that sentiment is improving, but is this a withdrawal from the residential market, or are investors simply biding their time until conditions change?

ADDED REGULATION

Kiwis are adapting to new economic conditions, which are the result of the pandemic fallout and inflation controls the world over. For residential investors, this looks like a reduction in higher-risk lending appetites from our leading banks, which are adopting a more conservative approach to individual risk and exposure.

New consumer protection legislation has slowed mortgage application efficiency, and the removal of tax deductibility for interest payments on investment properties has changed the math for residential investors – this is becoming even more apparent as mortgage lending rates rise.

Despite this, a recent survey of residential investors undertaken by independent economist Tony Alexander and property management business Crockers shows that high volatility and uncertainty regarding interest rates have had little impact on investor plans for their properties.

While a stable 25 percent (neither trending up nor down) of respondents said they planned on making another investment purchase, it was interesting to note investors’ moves away from townhouses and toward standalone homes.

This is broadly in line with recent building consent data, which shows seven percent more standalone homes consented in the year to September 2022 compared with the previous year.

BRIGHT SPOTS

Equity investors and large-scale players, including those with 10 or more investment properties, have been purchasing more homes proportionally lately, suggesting opportunities still exist for those with means.

CoreLogic’s Buyer Classification data shows the proportion of homes purchased recently by cash investors rose from 10 percent in September 2021 to 15 percent a year later – a significant proportional boost that underpins the notion that liquidity and availability of funds remain a crucial constraint to investment, rather than a fundamental willingness or desire to invest.

The new-build market remains most attractive for residential investors, which can continue to write off their interest costs if they buy new and enjoy exemption from the 40 percent loan-to-value ratio (LVR) restrictions.

The former policy, which saw the government introduce tax changes actively favouring the purchase by investors of newly built dwellings over those that already exist, appears to be having its intended effect.

The aim – to channel extra capital toward boosting new house supply while leaving more existing properties for first home buyers to purchase – has seen investors change tack, targeting new-build properties in desirable locations over existing homes.

In light of rapidly rising construction costs, timeframe delays, cooler market conditions and increased reticence from main banks to fund residential projects, there has been a demonstrable downward trend in the number of investors undertaking developments.

While this has seen a higher-than-usual proportion of sites viable for residential development come online for sale over the last 12 months, it is still being determined whether other investors in stronger equity positions will take up these opportunities.

New Zealand’s looming general election is emerging as one of the most influential factors in investor behaviour.

The current opposition – The National Party – has been clear in its intention to reverse tax changes imposed on residential investors by the current government if it were to secure leadership. This would restore interest rate deductibility and, it says, the incentive to provide private rental accommodation in New Zealand, the overarching influence of which will likely see political promises and the result of polling have an added element of market influence over the next year.