Return of the investors

Presumably in a few days time, maybe even before this report is distributed, we will have details of the pace with which investors will regain interest expense deductibility for their non-new rental properties. Let’s assume the change will be at the pace proposed by National ahead of the election whereby full deductibility does not return until the middle of 2026. 

With interest rates at cyclically high levels the numbers are not going to add up from a cash flow perspective for many investors over the next couple of years if their purchase is heavily reliant on debt financing. But does this mean we should not expect investors to return to the residential real estate market until maybe 2025? Not at all. 

I can tell from my monthly surveys that the surge in first home buyer demand from February is now being joined by a rise (not a surge) in buying interest from investors. My monthly survey of mortgage brokers undertaken with shows that as of the second week in November a net 31% were seeing more investors coming forward for advice. 

This is up from 24% in October and September, and a net 13% in August and July seeing fewer investors. This is the highest reading for this gauge of investor presence since October 2020. 

My monthly survey of real estate agents undertaken with NZHL shows that at the very end of October a net 26% were seeing more investors in the market looking to buy. Three months earlier in late-July a net 13% were seeing fewer investors and at the start of the year a net 55% were seeing fewer investors. This reading of 26% is the highest since January 2021. 

With a net 55% of agents saying they are seeing more first home buyers we cannot say that investors are anywhere near close to dominating the market. But they are coming back, and it is unlikely that the return can be solely attributed to the coming change in tax rules. 

House prices are now firmly accepted by most as rising and expectations of further gains will be encouraging extra and accelerated buying by investors. First home buyers are also likely feeling that they need to hurry up their purchase. 

There is also the simple logic of housing demand growing more rapidly than housing supply. The number of consents issued for the construction of new dwellings has fallen 20% over the past year with September 37% weaker than September last year. With escalating costs and rising liquidations in the home-building sector, its probably going to take a year for the level of orders placed for new houses to start rising again. 

Yet at the same time as supply growth is slowing, the country’s annual rate of population growth has accelerated to 2.1% from 0.1% the year before and 0.4% in the year to June 2021. Auckland’s growth this past year has been 2.8%. There is firm growth in housing demand, and I can see the effects of this rising imbalance between demand and supply in my monthly survey of residential property investors. 

Whereas in December a net 8% of landlords said that it was hard to find a good tenant, now a record net 28% say it is easy. The proportion planning to raise their rents has over these two time periods gone from 70% to 84%. Rising rents will act as extra encouragement to young people to consider buying, while landlords are increasingly going to find themselves able to cover rapidly rising costs such as for insurance, maintenance, and council rates. 

The upshot is that investors are increasingly going to re-engage with the property market as buyers and this will add extra upward impetus to house prices.

Tony Alexander is an independent economist and produces a free weekly publication with a housing focus called “Tony’s View”, available for signup at