The rise & rise of real estate prices
It’s been over ten years since the global financial crisis caused a significant correction in our property market. What was interesting about the growth between 2003 and 2007 (which preceded that correction) was as prices increased so too did interest rates. Now, if you fast forward to more recent times, we’ve had a strong growth period coupled with falling interest rates. This, in principle, is like petrol poured on the ‘convention center’ fire. This month we look at some policy and the current supply issues which may combine to be precursors to another round of growth.
The Reserve Bank uses the OCR to control inflation. In times of low economic growth, low rates are used to stimulate spending. At the time of writing the official cash rate is just 1%. Only five years ago it was 3.5%. As the cost of borrowing has reduced, buyer budgets have increased, so it is unsurprising that Wellington experienced growth in the region of 40-50% during this period.
The flip side of low interest is those people looking to earn interest on bank deposits need to look at alternative places to make a return. One of the most lucrative places to invest spare cash in New Zealand has been residential real estate which has the ability to generate both an income and create capital gains.
The Healthy Homes Guarantee Act passed in 2017 and came into effect this year. The basis of the act was to improve the overall standard of living and subsequent healthy outcomes for tenants. The standards require landlords to improve (invest money) in their properties to meet a minimum standard for things such as heating and insulation. As with any increase, these costs are passed down to the consumer (tenants) in the form of increased rents. The cost to borrow for the improvements is low at the current interest rates. This coupled with increased rents means a better returns for investors. So this is one more factor which has led to reduced stock into the market.
Capital gains tax
At the beginning of the year there was some uncertainty about whether a capital gains tax would be introduced. This spooked the market with a few investors looking to cash in, and many making the move to cash up. But with the Labour-led government chucking that policy on the political scrap-heap, the investors are back and adding to their portfolios. These investors are often fighting it out for properties that appeal to first home buyers. The big difference between investors and first home buyers is the expectations about what they are buying. Investors are less concerned about imperfections and decorative finishes whereas first home buyers expect everything to be perfect. So where less than perfect stock has been failing to garner interest, it is now transacting once again as the buyer pool diversifies. We are seeing current low interest rates and a reduced fear of a capital gains tax working hand in hand to make real estate look like an attractive investment option once again. The buyers are out in force.
The bright-line test was introduced in 2015 as a means of establishing a clearly defined rule for the payment of capital gains tax (CGT) by property investors. At its introduction, the period during which the sale of a property would attract a CGT burden was two years, but this was changed to five in 2018 by the current government.
Property investors tend to fall into one of two camps: professional property investors who buy and hold and those who jump on the bandwagon when the market is in ‘goldrush mode’. However, as any experienced investor will tell you, issues affecting rental property ownership – in particular the management of tenants – is not for the faint-hearted. And where there used to be an easy exit strategy when the going got tough, investors are now required to hold their stock for fear of paying tax on it. This policy has had a significant impact on supply coming back into the market.
The Wellington Market
With stock levels on the decline since 2015 further compounded by the aforementioned factors, the Wellington market has seen a flurry of activity as demand significantly outstrips supply.
If you’ve been considering selling and want to take advantage of some great activity, it’s not too late to sell in 2019. November is traditionally the busiest month of the year, so get in touch before the market goes into hibernation and festive celebrations divert the attention of buyers until 2020.
WELLINGTON MARKET QUICK FACTS
Average sale price by Ward:
What’s on this November in Wellington:
Cirque Du Play Capital E, 4 Queens Wharf, Wellington
Roll up! Roll up to Cirque du Play at Capital E!
Experience spectacle, shadow play, kinetic mobiles and sculptures to play with in this new installation, inspired by artist Alexander Calder. Contemporary, fun and bold, Cirque du Play lets your child be the Ringleader of their own circus.
British Film Festival, Penthouse Cinema, 205 Ohiro Rd, Brooklyn, Wellington
Join us at Penthouse Cinema for what we know will be an unforgettable cinematic event, featuring the very best of British filmmaking. We set the stage for film lovers of all ages and cultural backgrounds to come together and embrace the universal power of cinema, where it should be seen, on the big screen!
Powerade Challenge, PwC Centre, 10 Waterloo Quay, Wellington
The Powerade Challenge in Wellington is an interactive 8.5km running course that starts and finishes outside the PWC Building in the Kumutoto Precinct on the Wellington Waterfront:
To start, go to the Powerade Challenge vending machine in Whitmore plaza (outside PWC Building) in the Kumutoto Precinct on the Wellington Waterfront, swipe your wristband or use the Powerade Challenge app on your phone and follow the prompts.
To register, go to www.powerade.co.nz or download the Powerade Challenge Mobile App from Google Play or the App Store.
If you, or anyone you know, could benefit from a considered market assessment by Wellington’s only licensed agent and registered property valuer, please do not hesitate to call. We are always happy to help.