At the start of last year the property market had entered a new growth phase and investors were tentatively predicting growth for 2020. Then Covid-19 hit and confidence in the market went through what can only be described as a rollercoaster ride over several months.

There was economic uncertainty and market commentators were predicting a dire outcome for the property market on the back of job losses and business instability. Many investors sat on their hands, waiting for an indication of where the market would go. Others invested countercyclically and bagged good deals over lockdown. Then whoosh!

The market was off again and was soon hitting record sales prices across the country. The Government’s response to the lockdown was to freeze rents for a period, and when rapidly increasing property prices became national news it reacted by implementing changes to the Residential Tenancies Act. The raft of changes was aimed at improving security of tenure for tenants, but some of the changes were contested strongly by landlords.

Added to these regulatory changes were impending Healthy Homes standards’ compliance dates, which meant that alongside the rent freeze, the cost of providing rental housing increased again.

But to allay the pain of the increased expenditure, by the end of 2020 landlords were experiencing excellent capital gains across the country. FOMO pushed the prices up, with many investors becoming active in the market.

Entering 2021, population growth is predicted, with thousands of New Zealanders returning home and the borders expected to open late in the year; interest rates have dropped to record lows; and a shortage of housing persists across the main centres. All these drivers reflect a very positive outlook for the property market, and the responses to the Kris Pedersen Mortgages NZ Residential Property Investment Survey 2021 reflect that.

Because despite regulatory challenges and global economic uncertainty the 10th annual survey shows investors are confident about expanding their portfolios this year.

Buyer Trends

In 2020 we saw loan-to-value ratios restricting investors’ lending temporarily removed, which is possibly one of the reasons why 25.95% of respondents bought in the last year. In our 2020 survey, 41.35% of survey respondents said they were looking to purchase in the next year, so some obviously didn’t take the leap. Other investors chose to go the other way in 2020 and took advantage of rising prices – 17.71% sold a property last year.

It seems investors’ appetites for diversification haven’t changed much in the past year. Despite the high number of new apartments coming on stream in the main centres, 63.54% of respondents are still not interested in apartments (compared to 62% in 2020) while 52.91% are not interested in commercial property – a small decrease in interest from 50% in 2020’s survey – which can likely be put down to Covid-19 induced uncertainty in the commercial sector.

For those who are looking to buy in 2021, most expect yields to fall into the 5-8% bracket (56.59%), while those expecting 0-5% and 8-10% are relatively even at 19.95% and 18.28%, respectively.

When it comes to rents, optimism is also prevalent. A resounding 76.43% expect rents to increase in 2021, 22.64% expect they will stay the same, while 5.58% have dropped their rents in the past year, which could possibly be put down to Covid-19 prompted tenant hardship.

Investor Concerns

In 2020’s survey, the overwhelming concern for investors was government

‘Policy changes need to keep the interests of both landlord and tenants in mind - currently the policy changes are skewed against landlord’

policy changes, with 86.67% of respondents citing this as their greatest concern. Many regulatory changes were implemented in 2020, including wholesale changes to the Residential Tenancies Act, and with Healthy Homes standards now part of the landlording landscape, is further change a concern for landlords this year?

The answer is definitive: 87.56% of respondents cited this as their greatest concern. When investors were asked to give their opinions on the regulatory changes, the responses came in two parts: there were those that felt the Healthy Homes standards were a fair change and were happy to implement upgrades – “They have cost me money but I think the reforms are mostly sensible”, while the responses around tenancy law changes were resoundingly negative, from the firm: “Policy changes need to keep the interests of both landlord and tenants in mind – currently the policy changes are skewed against [the] landlord” to the frustrated,

“Too one-sided in favour of tenants. Too many rights given to tenants. We own the
houses therefore should have control, not be told what to do!” Finding good tenants was next in the top three investor concerns with 36.6% of respondents citing it as an issue, while low yields wasn’t far behind (34.58%). The top three barriers preventing investors from growing their portfolios in 2021 are considered to be: government policy changes; property values increasing; and LVR restrictions.

Future Expectations

While property price increases will make buying more challenging for those with limited equity and servicing ability this year, for those who already have substantial equity it will mean they are able to expand their portfolio. Respondents to the survey last year were positive about the possibility of value increases in 2020: 63.54% expected values to increase, 31.7% expected them to remain the same, while only 4.76% expected them to fall.

After a stellar year of value increases, this year’s respondents are confident that price increases will occur, in spite of global economic instability: 67.8% of respondents think prices will increase, 27.3% think they will stay the same, while only 4.84% expect them to fall.

Overall investors appeared positive about investing in property, with few stating that they would abandon it in favour of investing in other asset classes. Kris Pedersen Mortgages’ Ryan Smuts says it’s interesting that so many Kiwi investors choose to go the DIY route when securing lending, particularly given that 29.35% see it as the biggest barrier to growing their portfolio this year.

“This stat will change significantly as people look for more lending and realise how hard banks are. But not everyone has seen a bank in the last 12-24 months (56% of respondents have not bought a property in the last two years).”

Principal Kris Pedersen expects some change as bank lending criteria becomes more stringent: “I expect that what has happened in Australia will happen here as well with a continuing rapid growth in property investors using mortgage advisers.”

Pedersen says it’s also interesting how many investors’ portfolios are positively or neutrally geared. “Less than 10% state their portfolios are negative. With rates expected to stay low for an extended period of time cashflow should get even better and the ringfencing at face value will seem to have a limited effect.”

Survey Highlights: Investor Wins & Losses

We asked survey respondents to share with us their greatest trials and triumphs, and because learning from other investors’ mistakes and successes is far cheaper (and less stressful) than going through the experiences yourself, we’ve shared some of their comments here.

WIN Investing in training and mentoring from a large property community.
LOSS Selling properties for short-term gains when I should have been patient and held them.
WIN Adding value like an extra bedroom; and subdividing and buying lifestyle blocks and adding more dwellings.
LOSS Not buying more properties 20 years ago.
WIN Introduction of the LVRs a few years ago meant less competition which meant that I bought a few properties.

LOSS Buying a leasehold apartment in Auckland.
WIN Selling a rental property purchased in 2006. [The] sale price was three times [the] purchase price. [It was] 20% deposit when purchased so [the] return on investment was very significant.
LOSS Not investing more early on, I was too conservative at first and now it is harder to buy more.
WIN Investing long-term in residential Auckland property with positive cash flow and large capital gains.

Survey Highlights: Lending Trends

• In 2021 68.69% of respondents say their portfolio is currently positively geared, while 8.13% are negatively geared and 15.94% are neutral.

• Investors with all of their lending with one lender totalled 60.37%, which is a slight improvement on last year’s survey when 61% were in this position.

• Just 46.43% use a mortgage broker – and 11.18% have switched lenders over the past 12 months.

• Respondents citing bank lending criteria as still being one of the bigger barriers to investors growing their portfolios this year was 29.35%, which is an improvement on 2020 when 37% of respondents thought this was an issue.

It’s also interesting that 50.95% of respondents have one to three properties, yet 85.76% of respondents say they have all of their lending with either one or two lenders, says Pedersen.

It means a portion of them will not need to split their lending, however, “The answers to question five: ‘How many residential investment properties do you currently own?’ suggest that over 50% of people taking the survey don’t fall into this basket and are potentially opening themselves to risk.”

Non-bank lending is still at a low 5.32% and Pedersen says this isn’t surprising.

“The low level is indicative of where [the] non-bank market share fits currently and that we have had the investment LVRs off for most of 2020. I expect this to more than double over the next 24 months.” ■