I’ve just been to a one day seminar about property investment and it was interesting to see the positivity in the room compared to when I went to a similar event a year ago. Most people I speak to whether it be real estate agents, property investors or just people with a good understanding of our economy think that we hit the bottom of the property market in the middle of winter this year. They don’t necessarily see a huge boom coming quickly but all agree we are well into the recovery phase of the property cycle. You will have read in the media that auction rooms are busier and good properties are getting great prices.
Economist Tony Alexander came out last week predicting Auckland house prices will rise 10% in 2024 and 15% in 2025. This will be good news for some but maybe not so much for others. With immigration now hitting 110,000 there is increasing pressure on supply. Based on an average of 2.5 people per house then 44,000 houses are needed. In addition, rents have gone up on average in NZ 7.5% in the last 12 months.
So, it looks strongly like it’s now a good time to buy. What about high interest rates you might ask? The thinking seems to be that they will remain around current levels for another 12 months or so depending on how inflation tracks down. That does make buying an investment property tough on cashflow currently but its balancing that with paying higher prices once interest rates come down. Let’s look at an example:
An average 2 bed townhouse/apartment in a reasonable area might cost around $800,000 Negative cashflow on a 7% interest only mortgage will be approx. $1,500-2,000 per month (not including tax relief carried forward). If interest rates drop by 1% then your cashflow will improve by $8,000 pa.
If the property went up by 10% it goes from $800,000 to $880,000.
Option A – buy now and spend an additional $8,000 more in interest for 12 months with interest rates at 7% OR
Option B – wait 12 months or so until interest rates drop 1%, save $8,000 pa in cashflow but pay an additional $80k for the same property after prices have gone up 10%
When you look at it like this then it makes more sense to buy now rather than wait. However, you still need to have the additional income to fund this shortfall and of course the banks need to be comfortable to lend to you.
A few other things to consider:
- DTIs – Debt to Income Ratios look like they will be implemented in 2024. This will make it harder to buy an investment property.
- New builds are a great option for long term passive investors however options that are close to finishing or recently finished are drying up and building has slowed down a lot in recent times so soon it will become more likely that you will need to buy off the plans.
- There is not a lot of competition at the moment as most mum and dad investors buy well into the recovery/boom time of the property cycle.
- New builds have full interest deductibility which improves cashflow. It’s not likely that this will be fully reinstated for existing properties for another few years.
If you are considering property investment and can borrow, property is highly unlikely to ever be any cheaper. If you would like some help to purchase a new build take a look at my property programme designed specifically for this: https://acumen.co.nz/property-investment/
If you want to have a chat with me about it either give me a call or you can book a 15min call on this link: https://acumen.zohobookings.com/#/customer/acumen