Friday 15th of May 2009

What drives the property market?

There is plenty of commentary around at the moment about the state of the property market and where it is going. Much of it, in my view, is misguided.

Let’s sit back for a moment and think about what the key factors are.

Three of the biggest are: mortgage rates, immigration and affordability.

I would argue things like the United States economy, mortgagee sales and what farmers are doing has a marginal influence on the market. Indeed, using these factors as arguments for where the market is heading is misleading.

Mortgage rates are a critical factor in the affordability of property. Right now rates are at or near historical lows which help make the property equation stack up.

Buyers in this market are getting a real leg up with low rates and people with existing debt will see their servicing costs come down as they roll over loans. The Reserve Bank has made it clear it sees interest rates staying down for some time, which must be a plus for the market.

History shows us that immigration numbers and the housing market are closely related and tend to move in tandem. The basic logic, which is hard to argue with, is that when people move to New Zealand they need a roof over their heads. Thus, supply of property has to increase.

Right now there is an uptick in immigration numbers which should help stabilise at the least and even support house prices.

The other positive factor for the market now is one which doesn’t generally get a lot of air time and that is consents.

It’s like immigration. With a growing population base the country needs more houses. Right now, new consent numbers are low. Basic supply and demand economics says that in such a situation, house prices will rise.

The big unknown at the moment is rising unemployment.

And finally, a little reality check.

Double digit returns aren’t likely to be widespread in the property market for some time. So what? They shouldn’t be, and nor should there be an expectation that there should be. The risks of rental property investing aren’t high enough to justify double-digit numbers.

Secondly, people shouldn’t look at the residential property market as one big generic asset class. It is made up of lots of sectors and segments. You can break it down in a myriad of ways from coastal to apartments; from lower value rental property to high value prestige properties; from urban to provincial. Each of these markets is different and should be understood.

Many investors are jumping into the market, not for massive quick capital gains but for low risk, cash flow positive properties. This is quite understandable considering some of the other investment options available to them at the moment.