Full-scale investor comeback not expected soon
The decline in property purchases by mortgaged investors over the past few years has been driven by the smaller players, but with tax rule changes allowing for full mortgage deductions, mum and dad buyers will be a group to watch out for, CoreLogic said.
The CoreLogic Buyer Classification data showed that mortgaged multiple property owners (MPO), which includes investors, have been relatively inactive lately, representing just 21% of property purchases in the third quarter, in contrast to the average of 25%.
Breaking down that figure by size revealed that MPO-2s, or people now owning two properties after their latest purchase (their residence and their first investment, for example), and MPO 3-4s have experienced the biggest decline in their share of purchasing activity.
Mortgaged MPO-2s, which saw their share of the purchases peak in early 2021 at 9%, now accounted for about 6%, while MPO 3-4’s saw theirs dip from 7% to less than 5%. In contrast, the share for MPO-10+ has held fairly steady at 3-4%.
“In other words, it’s the cliched ‘mum and dad’ investors, perhaps those buying their first or second rental property, who have pulled back the most – either by choice (e.g. opting for a term deposit instead) or having it forced upon them by changed lending criteria around minimum deposits or serviceability requirements,” said Kelvin Davidson (pictured above), chief property economist at CoreLogic NZ.
“In fact, when you compare the MPO-2’s and MPO 3-4’s to their own troughs in 2018, it’s actually the latter group that has been a bit weaker still.”
Either way, Davidson said it is currently quite challenging to make the numbers work for a “standard” existing rental property purchase, given the combination of low gross yields, high mortgage rates, a 35% deposit requirement, and the inability to deduct mortgage interest.
“The negative gap between yields and mortgage rates currently sits at its highest (worst) level in around 15 years – meaning large cash top-ups from other income sources are typically required,” he said.
“For new-build property purchases, the sums look different, given they still have full interest deductibility for 20 years, while refurbishments of older properties are anecdotally still paying well for those with the know-how. But these options aren’t open to, or favoured by, everyone.”
Some of these are set to change soon, however, with a move towards center-right politics and looming changes to property tax regulations, including a shorter Brightline Test for all properties/owners, and the phased reintroduction of mortgage interest deductibility for both new and existing landlords, and for older properties.
“On the back of these changes, it seems pretty likely that some investors will begin to grow their portfolios again, while of course existing owners will enjoy lower tax bills too,” Davidson said.
“But will there be a flood of new property investment purchases? On that question, there have to be some doubts, at least for the next year or two, given that a lower tax bill will still leave the top-ups at pretty significant levels on many properties – on the back of continued low rental yields and ‘higher for longer’ mortgage rates.”
More positively for property investors, the migration boom is now translating into faster rental growth, particularly in major urban centres like Auckland, while tight rental vacancy rates indicated potential growth in income stream.
Davidson said another factor to take into account is the possible implementation of caps on DTI ratios for mortgage lending by the Reserve Bank next year.
“This could impact ‘mid-range’ investors the most, say an MPO 3-4, who has already used the equity in their own house and acquired large debts too –even if those properties don’t require much in the way of top-ups,” he said.
Overall, the CoreLogic economist “a full-scale comeback by investors may not be on the cards in the near term.”
“If anything, however, it’s the smaller players who could start to perk up the most,” Davidson said in a media release. “They may already have some cash in the bank, a bit of equity in their own house, and less to lose from a possible DTI system.
“Even then, however, the combination of low gross rental yields and high mortgage rates for the foreseeable future will remain a significant hurdle.”
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