President's February Report
17 Feb 2009
For most countries of the world, this year is shaping up to be financially tumultuous. Last year we would have thought that New Zealand was well positioned, with low unemployment and a strong export sector, to bear the brunt of the global downturn. However, our economy is too small and insignificant for us to avoid the negative effects. The unemployment rate is already climbing and there is resistance to our exports from overseas consumers, who are buying cheaper local goods.
Many members of our property investors’ associations will face hardship as more tenants struggle, for reasons beyond their control, to pay rents, and as negatively geared investment properties become a larger burden on disposable incomes. In many cases, associations are already offering assistance and support to those in difficult situations.
However there are also many property investors, who have been waiting patiently for years for the market to change. They have been waiting to find rental properties with positive cash flows. This happy situation occurs when the rent covers all outgoings, including mortgage interest, rates, insurance and maintenance, and there is a positive result for the year after the tax return has been calculated. In the meantime, some of these investors have been using surplus capital to pay down mortgages and upgrade the maintenance on their existing portfolios.
As mentioned last month, I predict that this year we will see the return of opportunities to purchase properties with positive cash flows. Not all properties will drop to the required level - they never do. However there are a number of reasons for expecting that a significant number of properties will do so. For example, mortgagee sales and other must sell situations have been increasing as people are made redundant, some small businesses are failing, and many reluctant landlords will probably run out of the cash required to prop up their mortgage payments so decide to cut their losses and sell. All of these situations will result in prices falling below the average but members need to be aware of the hardship of some vendors and act with consideration.
As first home owners now need a 20% deposit to secure a mortgage, it is likely that these well priced properties will not be purchased by hopeful first time real estate buyers but will be picked up by investors, who will be able to achieve 10% plus yields. Lower mortgage interest rates and rising rents will also increase the yields of available properties.
Why will rents rise? Rent levels are affected by supply and demand. Rents were rising up until April last year, at which time we saw reluctant vendors starting to put their houses up for rent, thereby dramatically increasing the available supply as the year progressed. The total number of rental properties being advertised on Trade Me increased from 8,000 at the beginning of May 2008 to 13,149 by the end of November. This increase effectively prevented rent levels from rising during 2008.
However, a number of factors indicate that the demand for rental accommodation will begin to increase again, while the supply remains static or decreases in 2009. It is expected that New Zealanders living overseas will come home as the economies of countries like the United Kingdom are hard hit. Similarly, foreigners, who have been contemplating immigrating to New Zealand will make the move sooner rather than later as they begin to experience the downturn in their homeland economies. Furthermore, the National government is likely to ease immigration requirements to boost our country’s population
On the other hand, the number of new homes is down 30% compared with this time last year. Developers have stopped building new homes, and this will have a great effect on New Zealand’s housing stock. The National Government has said it will concentrate on upgrading present Housing New Zealand stock rather than increasing it. All in all the rising demand for rental accommodation may outstrip the supply and this adds to my feeling that rents will rise.
So, I believe it certainly is a year of opportunities for property investors ready to make the most of them and I hope you will be one of these investors.