The Longterm Appeal of New Zealand Property Investment

The New Zealand property market has always been characterised by its cyclical nature, with peaks and troughs occurring through each property cycle. Yet, beneath these fluctuations lies a fundamental aspect that has remained constant over the years: an undersupply of housing. This persistent demand-supply imbalance has resulted in property remaining a historically solid long-term investment. 

Safari Group‘s Sales Manager, Phill Sharp, aptly summarises the New Zealand property market: “As a rule of thumb, the New Zealand property market historically runs with an undersupply. In other words, there are more people needing housing than what is available. Even with the peaks and troughs that occur through the property cycle, the fundamentals are there that with the increased demand, coupled with ever-increasing build costs, causes an increase in value. Riding the wave and keeping your investment for the long haul means you are well placed to have an appreciating asset.”

The Undersupply Factor:

The persistent demand for housing in New Zealand, driven by population growth, increased migration, and limited housing supply, sets the foundation for property’s long-term appeal. The undersupply of housing has created a unique market dynamic, where buyers are continually seeking housing solutions, even during periods of market cooling.

Property values have shown a tendency to appreciate over time due to this supply-demand imbalance. The cyclical nature of the market may bring short-term fluctuations, but the fundamental housing shortage ensures that property remains a valuable investment option for those with a long-term vision.

 

 

Weathering the Property Cycle:

Real estate cycles are a natural part of the market’s ebb and flow. While investors and homebuyers may experience moments of market frenzy, such as the recent shift from a “Fear of Overpaying” (FOOP) environment to a “Fear of Missing Out” (FOMO) sentiment, those who embrace the long-term perspective are better equipped to navigate these fluctuations.

The property cycle’s peaks and troughs do not alter the underlying demand-supply dynamics in the housing market. Over the years, property values have continued to rise, offering a stable and appreciating asset for those who maintain ownership through various market phases. Tony Alexander’s mid 2023 report, emphasises the merits of adopting a long-term perspective.

According to Tony Alexander’s report, the real estate market is turning upward with a growing sense of urgency among potential buyers. He notes that the buyer’s market is dissipating, and Auckland is already witnessing a seller’s market, where vendors hold the upper hand in negotiations. This shift in sentiment comes as net migration numbers have rapidly turned from a deficit to a substantial gain, further exacerbating the demand-supply imbalance.

Tony Alexander also notes that a net 42% of real estate agents are already seeing more people attend open homes, indicating a surge in interest. By weathering the market cycle’s peaks and troughs, long-term investors stand to benefit from property appreciation and capitalise on market upturns.

Tony Alexander asserts, “The chances are strong that house prices will rise towards 10% on average over the coming year.” This forecast reinforces the notion that, despite short-term market fluctuations, the fundamentals of an undersupply persist, creating opportunities for property values to appreciate over time.

Ever-Increasing Build Costs:

Another factor that contributes to the long-term appreciation of property is the consistent rise in construction costs. As the cost of building materials and labour continues to increase, newly constructed properties command higher prices, translating into an upward push on existing property values.

This trend strengthens the position of property owners, as their assets gain value over time due to the scarcity of housing and the higher cost of producing new dwellings. Investors who understand this aspect of the market are better prepared to leverage the benefits of long-term property ownership.

 

 

The Impact of Interest Rates:

In addition to the undersupply factor and the resilience of the property cycle, interest rates play a crucial role in shaping the New Zealand property market’s dynamics. The Reserve Bank’s monetary policy decisions significantly influence borrowing costs and, in turn, property affordability and demand. As of mid-2023, interest rates are believed to be at their peak, having risen due to global economic conditions and concerns over inflation. Higher interest rates have translated into increased borrowing costs, with mortgage rates reaching near 7%. 

The rising interest rate environment most certainly contributed to the previous FOOP sentiment, as some buyers might have felt hesitant to enter the market at the peak of interest rates. However, the focus is now shifting towards the potential decline in interest rates. Lower interest rates could open doors for frustrated buyers who previously faced affordability constraints, allowing them to enter the market and stimulate demand.

Property investors who consider a long-term horizon recognize that interest rates may fluctuate but ultimately tend to move in cycles. By accounting for these cycles and understanding the potential impact of interest rate changes on their investments, investors can position themselves for the property market’s evolving landscape.

So embracing property investment with a focus on the long haul allows investors to capitalise on ever-increasing build costs, the inherent scarcity of housing and long term interest rate trends. While short-term market dynamics may bring moments of excitement or hesitation, the fundamental fundamentals of the New Zealand property market remain strong.

For those seeking a resilient and rewarding investment, property in New Zealand presents a wealth-building opportunity that has stood the test of time. By understanding the value of adopting a long-term approach, investors can confidently ride the property market wave, knowing they are well-positioned to reap the rewards of an appreciating asset for years to come.