Rental properties are still a good buying option for Investors
While we can continue to have confidence in what house prices will do in the medium to long term (they’ll continue to go up, just as they have over the past 30 plus years) there’s simply no way to know what will happen to them over the next few months.
This is because we’re in an extraordinary period of history. After being under control for over 30 years, inflation has taken off like a rocket ship, circulating in space and it's an unknown quantity when it will land back on earth
At some point, higher interest rates will crush inflation and we’ll see it peak and then start to come down until it lands back to earth to one to three percent per year. Once this happens, mortgage interest rates will start to track down again, but we don’t know when that will be and, to make things even more difficult, there’s a lag between interest rates going up and their impact on the economy becoming apparent.
For this reason, and despite the recent higher-than-expected inflation figure, it’s entirely possible that the Reserve Bank has already done enough to bring inflation down, but we won’t see the impact of recent OCR increases for some months. Because of this, the Reserve Bank is stuck between a rock and a hard place. The Reserve Bank doesn’t want to give inflation any breathing room; nor will they want to overshoot by driving interest rates too high and end up driving the country into a deep recession.
In the meantime, the avalanche of media releases from the major banks, expressing their latest views on how far house prices will drop, are both unnecessarily alarming. The track record of the main banks at predicting what house prices will do – particularly since 2020 - is beyond abysmal. All should be treated with healthy scepticism based on the recent track records of these banks in getting such predictions right.
The reality is that house prices, on average, have fallen by about 7% across the country since August last year – and that the rate at which they’re dropping has been getting smaller each month, despite the steady increase in interest rates.
It's a scary time for homeowners right now, but it won’t last forever. One thing we can all be certain: at some stage in the next couple of years, we’ll all be complaining about rising house prices again.
Investors are capitalizing and being drawn back to the Auckland market were rents in the mid to upper range increased 7 percent in the last 12 months and demand is outstripping supply. Investors do not want to invest in shares given current volatility of the stock market and are looking for a safer option for their money. Investors are currently receiving positive rental yields, and this is a far better option than leaving money in the bank where it is being eroded by inflation The rental property market is a good option to embrace until “The Housing Crises” passes where they are still seeing reasonably good returns. Investors are also factoring in the 10-year bright line test and are looking at rental properties as a longer-term investment, which means upwards of 10 years or more.
There have been several developers selling up and having to adapt expectations around pricing. This is presenting some good opportunities for buyers and investors. I’m no economist, by reading the monthly REINZ Reports and statistics, the number of house sales is increasing, and the market is picking up. There is a lot of optimism in the residential market and urgency from buyers. You don’t have to be a rocket scientist to know that this is a good time to invest in property if you’re looking for a long-term investment.
Read about Economist Tony Alexander reports on some of his views around inflation and interest rates.
Sources: Reinz, One Roof, Property Matters, NZ Herald, Stuff
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