How to get into the property market in 2023

How to get into the property market in 2023
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Is now a good time to buy a property in New Zealand? Following the recent downturn in New Zealand property values, investors and 'emotional buyers' alike are examining trends in the market to assess if the market has hit bottom, or if a further downturn is likely.

Recent commentary about 'green shoots' in the property market suggest that the market could be about to turn. 

When analysing market trends, we can look back to other property booms and downturns over the years. Property values increased by approximately 289 percent from the bottom of the market in January 2009, following the Global Financial Crisis of 2007-2008, to the peak of the market in November 2021. 

During the Global Financial Crisis, median property values in NZ dropped by 9.9 percent, from a high of $355,000 in November 2007, to a low of $320,000 in January 2009.

"These were significant drops in value, even though the values seem ridiculously cheap these days," said Debbie Roberts, Financial Adviser at Property Apprentice.

"Now we are regularly reminded that this current downturn has shown drops in values of 17-18 percent, with some predictions that it could fall even further, which appears to be almost twice as bad as the GFC."

Roberts runs regular free training sessions about the property market and how to improve your financial position through property, both online and in person in Ellerslie, Auckland. Property Apprentice does not sell property, so there is no conflict of interest with the financial advice provided.

In February of 2020, after the first recorded COVID-19 case in New Zealand, the median property value was $640,000. That increased to $795,000 by the end of September 2021. There was a significant jump in property values between September and November of that year. The median value in New Zealand at the peak of the market was $925,000, a staggering increase of 16.35 percent in just two months. 

Since then, property values have diminished. The lowest median value so far since the peak in November 2021 was $762,000, in February of this year. As of April, this has increased to $780,000, which suggests to some that the market is picking up again. 

A number of factors contributed to that huge increase towards the end of 2021. The first round of the amendments to the Credit Contracts and Consumer Finance Act (CCCFA) became law on the first of December 2021.

People with pre-approvals for lending were told that once those expired they might not be able to get lending at the same level due to stricter lending rules. People were told that any discretionary spending could potentially disqualify them from mortgage approvals, and cancelled their Netflix subscriptions and stopped buying cappuccinos or Friday night takeaways in order to have a chance of getting finance. 

The Reserve Bank of New Zealand reinstated the deposit restrictions after they had been removed during COVID-19, so again, people with pre-approvals had pressure to buy before they expired, or they would need a larger deposit. Interest rates were also increasing for the first time since 2017.

All of these factors caused huge amounts of FOMO (fear of missing out) in the property market, which created massive competition between buyers for a limited number of available properties for sale. This was the perfect storm, creating a strong seller's market, and property prices skyrocketed. 

Then Christmas came, the property market cooled, then appeared to be in freefall. Median values dropped 17.6 percent during that time, from the high point in November 2021 to the lowest point in February 2023. Within the last year, the number of new listings has decreased, and the length of time taken to sell has increased. 

However, when you compare the median value in February 2023 to the median value in September 2021, just before the FOMO reached boiling point at the peak of the market in November 2021, the drop is less: a decline in median value of 4.2 percent. Median values in February 2023 were still 19 percent higher than pre-COVID levels, and the median value has now increased two months in a row.  

Does this mean that this February was the bottom of the market?

"It's still a bit too soon to say for sure but it could have been. We need to get a few more months showing the continued trend upward to be sure," said Roberts. But what this means is that if you've been waiting for the bottom of the property market before you buy, you might have already missed it.

The good news for those buying property for the first time, is that it is still a buyer's market. If you are looking to purchase a property, the biggest challenge you are likely to face is the ability to get lending. With interest rates at higher levels than they've been for several years, banks are testing your ability to be able to pay the mortgage at interest rates of up to 9 percent.

"If you are able to obtain lending, this is a great time to be a buyer," said Roberts. "But there are definite signs that the property market could be about to turn."

One important factor is that there are simply less houses for the population. Housing construction levels are slowing. Building consents for residential dwellings are approximately 8.4 percent lower in year end 31 March 2023 compared to the year prior. 

Thousands of dwellings have also been lost following the extreme weather events so far this year. Data from the Ministry of Business, Innovation, and Employment in early March stated that approximately 750 properties were red stickered (584 in Auckland) and 3588 were yellow stickered (2278 in Auckland), and there have been more extreme weather events since then. These two measures combined means that there are less properties available, and we are replacing them at a slower rate.

Long term net migration shows that there are 65,439 more people living in NZ as of March 2023 than the year before, which will put extra pressure on our housing stock.

Rents have increased by approximately 3 percent nationwide, so it is getting more expensive to rent. Taking into account the high net migration, there is likely to be more upward pressure on rents. This will encourage those that can buy a home to enter the market, and with higher rental returns, we could also see more property investors returning to the market.

Currently, over half of the buyers in the market at the moment are emotional purchasers, who are first home buyers, or people moving homes, as opposed to investors who make purchasing decisions based on the numbers. Emotional buyers tend to pay higher prices than property investors, so this will put upward pressure on the market.

"There is a good chance that we are at or past the peak of the interest rate cycle, which means that by choosing a fixed interest rate you could reduce the risk of having higher interest rates in the near future," said Roberts. 

Sales volumes are still low, but volumes are increasing, and the number of new listings are falling. It is still a buyers market, but it won't take much to tip that balance more in favour of the sellers. For example, with the RBNZ's announcement that they are relaxing the rules around Loan to Value (LVR) restrictions from 1 June 2023, this could bring more buyers into the market.

These factors are all worth taking into consideration when analysing the market and trying to decide when is the right time for you to buy. 

"There is a risk that if you wait much longer before taking action, that you could miss the window of opportunity that we have in the property market right now," said Roberts. "Remember that we can only pinpoint the bottom of the market when we are already 3-6 months past that point, so trying to time the market is about as effective as trying to win Lotto. You might get lucky, but more often than not, you will miss out."

It is important that you purchase a property that fits your financial position and also your long term goals. Increase your knowledge to reduce your risk, and seek the advice from a suitably qualified Financial Adviser.

Register for a free, no-obligation training session with Debbie Roberts via the Property Apprentice website.

For regular free updates about the property market, subscribe to the Property Apprentice Podcast available through your favourite podcast provider and/or YouTube.

Article created in partnership with Property Apprentice.