House Prices Are Falling … Is Now Really The Time To Buy An Investment Property?

LM b W

Laine Moger

Journalist and Property Educator for 6 Years
Introduction

It’s really easy to invest in property when house prices are on the rise.

Why? It feels like a sure bet. You see house prices sky-rocketing and climb on board, happy as Larry.

But house prices are falling, slightly. Between November 2021 and January 2022, the market saw a 2.6% drop, and prices look like they’ll fall further.

In fact, the Reserve Bank predicts a total of 8-9% drop in house prices before they begin to recover.

With this in mind, investors may be wondering: “Is it still worth investing in property? Is it really the right time?”

In this article let’s look at an honest review of whether it’s the right time to invest in property, with the pros and the cons, so you can decide for yourself if now’s the time to invest.

House Prices Peaked

What’s Happening To House Prices? Have They Peaked and Is The Boom Over?

All stable asset classes – like shares and property – tend to go through cycles. Prices boom, then they peak. That’s typically followed by a downturn where prices fall, which reaches a trough, before they recover and eventually go through a boom again.

Right now New Zealand property has been through its boom phase. Prices have risen rapidly and the market has peaked. We’re in the downturn phase, where property prices are sliding.

At a recent press conference the Reserve Bank predicted there is going to be an 8.4% decline in house prices between now and the end of 2023.

In fact, the decline is already here.

House prices have already dropped 2.6% since November, according to REINZ (Nov 21 – Jan 22). That’s only 2 months, but it’s a third of the predicted drop.

Fall Predictions

How Far Will House Prices Fall?

Different economists publish their predictions, and frequently update them. At the time of writing the consensus seems to be house prices will drop between 5% and 10%.

Bear in mind the thing is house prices are notoriously difficult to forecast.

The Reserve Bank openly admits this. Yuong Ha, Chief Economist at the Reserve Bank, said: “House price [and] asset prices are notoriously difficult to forecast … so we have a working assumption, a technical projection if you like, that they decline by about 9% over the next 2-3 years, but time will tell whether that will come to pass.”

And Reserve Bank Governor Adrian Orr said: “We are more confident in the direction, rather than the magnitude.”

Said another way, just because the Reserve Bank predicts an 8-9% decrease in prices doesn’t mean that drop is set in stone.

It’s also important to note that house prices will not drop evenly around the country. Although New Zealand property prices dropped 2.6% over the last two months, not all regions experienced the same downward trend. Out of 17 regions, 8 saw prices increase.

So, while some regions will experience price drops above average, house prices in some areas will face a smaller decline than average.

Said another way, house prices in some regions might drop 5%, while in others they might drop 14%.

Impact On Investors

A Decline In House Prices Sounds Scary … What Does This Mean For Property Investors?

Seasoned investors know that house prices go up and down. After a peak prices do fall. At some point they will recover and prices will rise again, but over the long term assets tend to increase in value.

For long-term property investors (those investing for 15-20 years) it doesn’t really matter what’s happening next year. What matters is the long-term trend.

So, while property prices will drop, it won’t be forever. At some point they will recover.

Take the Reserve Bank’s latest prediction – the current dip is likely to be followed by a recovery.

So bottom line, this creates opportunity. If you expect property prices to fall and then recover, then now may be the time to consider investing in property.

Positives

Could Falling House Prices Actually Be A Good Thing?

Softening prices have turned the tables to favour buyers. Over the last 2 years prices have escalated and there has been little room for negotiation or to get a deal.

But now FOMO (fear of missing out) is dissipating, the number of properties on the market is rising, and developers are throwing in extras.

It’s now a buyers’ market. This creates an environment where property investors can negotiate a deal.

Opes’ managing director, Andrew Nicol, says he’s seeing the best deals in a long time. One developer was recently willing to sell a property $35,000 below its valuation (just over 6%).

Andrew reckons the mood in the market, particularly in the New Build space, has shifted. “It’s no longer hot, hot, hot, with contracts flying out the door. Because there is a lot more nervousness in the market it’s harder for developers to move their stock as quickly.”

But these deals don’t just appear. While it’s common in investment circles to say ‘Buy in the Dip’, in property you have to ‘Create the Dip’ by negotiating.

For investors who buy properties through us here at Opes Partners, we negotiate hard on your behalf.

If you want to discover how to negotiate a property yourself, check our recent webinar, How to Find a Screaming Good Deal in 2022.

Now, you might be thinking: “OK, there are bargains a-plenty, but surely everyone will be rushing out to buy houses now. It’s just like a retail sale.”

It doesn’t work the same way in the property market. When prices are rising people pile in and push up prices further. This is what we call the “herd mentality” because you are following the market.

But contrarian investors see a market decline like a Farmer’s Red Dot sale that nobody else knows about.

How could this happen? It’s because falling house prices are scary. People are scared of the decline, scared of what it means, scared of overpaying for a house.

Put simply, property, shares and assets are the only things to go on sale, and people don’t buy more.

That means if you’re on the hunt for a deal, you’re more likely to find one.

When To Buy

So … Should I Buy A Property Now, Or Should I Wait For Prices To Drop?

 

As an astute investor you might be thinking: “Why don’t I just wait for property prices to fall further? Wouldn’t that mean I can get an even better deal?”

If you had a perfect crystal ball that showed exactly what’s going to happen to property prices, then it would make total sense to wait until property prices are at their lowest.

Unfortunately, nobody has one of these, otherwise we would have all bought 10 properties 20 years ago.

Here’s the thing: Property prices are hard to predict. Just because the Reserve Bank has said they will fall by 9% doesn’t mean it will happen.

You could be waiting for a dip that never comes. You could be waiting for a dip that doesn’t happen in the area you want to invest.

And even if that dip does come you may not be in the position to take the deal, for instance if the bank changes its lending criteria (again).

That is why if you can get the lending today it could be worth negotiating to get a good deal, and taking the one that’s right in front of you.

Because a better deal may not come and if it does you might not be able to take advantage of it.

What we are saying is: The dip is already here. The deals are ripe and ready. So, you want to get in now.

You also don’t know what external factors could influence the property market. It’s almost cliche at this point to reference Covid. But, at some stage, something is going to change. Next year is an election year, the National Party is already saying it will roll back taxes for property investors.

Similarly, the CCCFA, which is one of the main causes of house prices dropping, could also be rolled back. Similarly, an increase in immigration following the global pandemic could influence house prices. The window for negotiation might not be open for as long as you expect.

Conclusion

So … Is It The Right Time To Invest?

The answer is: It depends. Arguably, it is a lot more interesting to invest in a market approaching a dip, than it was say in the last year, when house prices were skyrocketing.

There are 2 things we know:

#1 The dip in house prices creates the ability to negotiate. If you’re a buyer in a buyers’ market, you could get a deal

#2 Over the long term, house prices will increase again … at some point.

The question you might want to ask yourself is: “Can I use what is happening now in the market today to negotiate a good deal?”

If you can, and you’ve got the bank lending, it could be a great time for long-term investors to grow their portfolio.

But, if you can’t get the bank lending, are a short-term property investor, or aren’t able to negotiate, then it might not be the right time.

For the investors working with Opes Partners, we negotiate hard on their behalf to get these deals. Some developers are currently decreasing prices by up to $50,000.

FAQ

I’ve signed a contract, and my settlement is coming up. I think I’ll need more useable equity? Should I panic?

You may need a larger deposit if you have signed a contract to buy and the value of the property has fallen below the purchase price. This is because the bank will either lend you up to 80% of the purchase price or value of a new build property, whichever is lower.

So if you buy a $1 million new build property and the value goes up to $1.05 million, they’ll lend you 80% of $1 million. But if the value goes down to $950k, they’ll lend you 80% of $900k.

But you still need to pay $1 million to the developer. In that instance, you would need to allow an extra $40k worth of equity/deposit to settle the property.

That sounds scary, but in practice, not much has changed. If you planned to buy the property with 100% of the bank’s money, you can still do that. Your total amount of debt won’t have changed. What’s changed is how the mortgages are set up and arranged.

This is where you want to speak with a good mortgage broker to help you work the numbers for your situation.

I signed the contract for my new build 12 months ago and it’s now worth much less?

Property prices do go up and down, and while they tend to increase over the long term, there is a fluctuation on the way. In this case your best defence is to keep holding. Don’t sell the property.

If you do decide to sell now you will make a real cash loss. But, if you keep holding the property until prices recover, then you can still reap the benefit of long term capital gains.

How will rents be affected?

Rents are not correlated with property prices. When property prices spike, rents do not necessarily spike at the same time.

At the time of writing, property prices are stagnating while rents have started to spike. This will mean investors face higher yields and potentially better cashflows as the market stabilises while rents increase.

LM b W

Laine Moger

Laine Moger has been a journalist and reporter for the last 6 years. She previously worked for Stuff, The North Shore Times and Radio NZ. She has a Bachelor of Communications (Honours) from Massey University and a Diploma of Journalism from the London School of Journalism.