If housing party is over, who comes out on top?

Professional investors may have more ability to stick out any downturn than "mum-and-dad" operators.

Professional investors may have more ability to stick out any downturn than "mum-and-dad" operators.

Auckland is leading the country into house price stagnation. But while a fall in prices will be good news to those waiting for their chance to buy, the past four years of rises have significantly changed the market.

So let's ask, who are the winners and losers at this stage?

First-home buyers

There is widespread agreement that first-home buyers have suffered the most in the rapid price rises of recent years.

Both the increase in values and Government intervention have worked against them.

In 2012, buyers could buy an average-priced house with a $37,000 deposit. Now they need more than $100,000.
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In 2012, buyers could buy an average-priced house with a $37,000 deposit. Now they need more than $100,000.

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In 2012, they might have been able to get a loan with a 10 per cent deposit - or $37,000 on the average house price of $370,000.

But now, because loan-to-value restrictions reduce the amount of lending banks can do to people with a small deposit, most buyers need $108,000, or 20 per cent on the average house price of $540,000.

First-home buyers now have less competition, Tony Alexander says.
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First-home buyers now have less competition, Tony Alexander says.

But BNZ chief economist Tony Alexander said there were early signs that was changing as price rises slowed. He said they now had less competition from investors, and would feel less stress to buy quickly, thanks to the slowdown.

"They may be able to grow a deposit now at a faster pace ... But capacity constraints  - shortages of builders and finance for developers - mean earlier hopes of a large surge in dwelling supply in Auckland are being dashed. Overall, they are better off because of the plateauing of prices and appearance of some price reductions from investors who had bought for quick capital gain now looking to sell out."

Ryan Greenaway-McGrevy, a senior economics lecturer at the University of Auckland, said it would take more than a plateau in prices to help first-home buyers. "Prices have to come down a very long way or incomes would have to increase by a substantial amount [before houses became affordable] that's highly unlikely."

Existing homeowners

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New Zealanders have a significant portion of their wealth tied up in housing - about $1 trillion, to be precise. There is a mortgage on about a quarter of that.

People who bought before 2014 have had the benefit of significant capital gains. Commentators say, in real terms, house prices in some parts of the country have tripled.

But no matter how well off it makes them feel, a high house price does not really benefit homeowners, who still need to have a roof over their heads. If they sell, they still must buy in the same market.

In many cases it can make them worse off because the jump to the "next step" property has become bigger. Only those who can cash up can access the gains made.

Corelogic said "movers" or people selling one property to move to another now represented a smaller slice of the market -  from 30 per cent of the market in 2006 to 27 per cent now. 

Infometrics chief forecaster Gareth Kiernan said the only clear winners were those, usually Baby Boomers, who had been able to downsize or move out of urban centres to realise the gains their properties had made.

"If you could cash up and realise those gains and buy a smaller, cheaper property you are a really big winner."

But he said that was at the expense of people at the other end of the spectrum, mostly young first-home buyers who were priced out of the market. 

Mum-and-dad investors

Kiernan said many investors had also been winners if they had been able to expand their investment portfolio over the past five years and achieve big tax-free capital gains.

Corelogic data shows that the number of sales to investors is beginning to increase again after a couple of quarters of decline.

But Alexander warned their fortunes were changing.

"Capital gains are weaker, a flattening market is generating capital losses for some as they paid too much when purchasing, and access to credit has been reined in not just by the Reserve Bank's loan-to-value restrictions but bank tightening in credit more generally," he said.

"In addition there is now an over-supply of developable land in Auckland and some panic-selling of subdividable properties no longer of any immediate use to potential developers is possible if not probable in investor-dominated locations."

He said professional investors who had multiple properties, and were in for the very long-term, were also suffering reduced access to credit and absence of as good a rate of capital gains.

"But they are more likely to be able to hold stock through to the next upturn than small investors. And many of these type of investors know that as Mum-and-Dad investors sell out cheaply to get their stress levels down there will be bargains to be snapped up. For professional investors the market is shifting toward looking for such bargains – though access to credit will restrain their ability to buy what they might like to."

Greenaway-McGrevy said investors faced a problem because their rental return - the median rent received divided by median purchase price - was only about 3 per cent per year in Auckland. That is less than they could get from a term deposit, and from that they have to cover all their expenses.

He said if price rises had stopped and capital gains were no longer a sure bet, that was not good from those investors' perspective. Interest rates look to be on a slow upwards trajectory, which may put on further pressure. 

Overseas investors have been slowed by banks' refusal to include foreign income in affordability calculations. But those who do not need a mortgage are still as strong in the market as they ever were  - at a solid 6 per cent.

Developers

In Auckland, the Unitary Plan may help some developers if it allows them to put higher-density buildings on their land.

But the pace of building is glacial in most parts of the country and construction costs are increasing, making many projects less lucrative for developers. Banks are also backing away and are less willing to support them.

"Developers are suffering from a lack of credit which is not only unlikely to get better for many years but will probably get even worse," Alexander said.

Greenaway-McGrevy said construction costs had increased at twice the rate of general inflation over the past decade. If prices are falling, some developers may not be willing or able to take the gamble of building now.

Government

Normally, falling house prices would be bad news for the Government but this time, it may work in its favour because the rest of the economy is sound and consumer confidence is generally high.  There is a general sense that house prices rises should slow for social reasons.

Kiernan said the Government response to housing affordability issues could not be said to be good. He said it had been a problem since before the last election but no real solutions had been offered.

"It's a perfect storm with a large number of factors that have come together to drive the market up but if there was a more effective opposition the Government would have come under a lot more pressure."

Regional New Zealand, where voters sometimes feel ignored by politicians, may be buoyed by the fact that their house prices are still rising.

Opposition

Housing could have been the Opposition's big chance to win some points against the Government but its attempts have not stuck. Now the heat seems to be going out of the argument just when it needs it most.

"It's just luck for the Government that Labour did not seem to have any clear ideas of what to do, either," Kiernan said.

Banks

Banks have done well from New Zealand home loan borrowers over recent years.

A KPMG report showed, in 2016, lending grew at its fastest pace in eight years and banks made an extra $127.4 million from loans, than they had the year before.

But Alexander said they were now suffering reduced mortgage sales because of the lending restrictions introduced by the Reserve Bank and their own tightening of lending as they struggle to raise deposits in New Zealand.

"But they are better off in terms of reduced risk in their balance sheets through less low deposit lending to over-optimistic, uninformed, under-capitalised borrowers."

 - Stuff

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