ANZ residential investor survey shows most expect property values to keep rising faster than rents

Restrictions on banks' high loan to valuation ratio (LVR) residential mortgage lending have had less impact on residential property investors than expected, according to the 2014 ANZ Property Investment Survey.

Eighty one per cent of the investors surveyed said the LVR restrictions had no impact on their investment strategy, compared with 54% who thought they would not be affected in the last survey, taken before the LVR limits were introduced a year ago.

The survey also found that 46% of investors had decreased the debt to value ratios on their portfolios in the last 12 months, 20% had increased it and it had not changed for 33%.

Those figures were almost unchanged from last year's survey.

The biggest contributor to lower debt ratios was increasing property values (40% of investors), followed by higher principal repayments being made as a result of lower interest rates (18%), while 11% had sold a property and reduced debt.

On average, investors carried debt equivalent to 54% of the total value of their properties, with 36% falling in the 50% to 74% range and 22% in the 75% to 89% range.

Only 6% of investors had debt equivalent to 90% or more of their properties' value.

ANZ's head of mortgages, Sarah Berry, said investors continued to view property as a long term investment.

"The trend of holding on to properties and reducing debt gearing has continued," she said.

"Twice as many investors have decreased their leverage ratios over the last year than increased them.

"While rising property values have contributed to this, it appears most investors are being responsible about gearing their portfolios," she said.

Investors are also expecting property values to keep rising faster than rents, with the survey showing property values are expected to rise by an average of 4.8% in the next 12 months while rents are expected to increase on average by 2.8% over the same period.

In the longer term, investors are expecting capital values to increase by twice as much as rents, with values expected to grow by an average 8.1% a year over the next five years while rents are expected to grow by just 4% a year over the same period.

That would put ongoing downward pressure on rental yields and suggests many landlords will be increasingly reliant on capital gains rather than growth in rental income.

That trend is expected to be especially pronounced in Auckland where investors are expecting property values to increase an average 12% a year for the next five years, while rents are expected to increase an average 4.7% a year over the same period.

Investors expectations  for property value and rental growth throughout the country are detailed in the table below.

Anticipated annual capital and rental growth over next five years
2014 ANZ Property Investment Survey
  Expected change
in property values 
Expected
change in rents
     
Auckland 12% 4.7%
Waikato 8.2% 4%
Tauranga 5.9% 3.3%
Hawkes Bay 5.4% 3.1%
Taranaki 6.1% 3.6%
Manawatu 6.9% 4%
Rotorua 8.2% 4.2%
Wellington Region 7% 4.2%
Nelson 6.9% 3.5%
Canterbury 8.2% 4.3%
Otago 6.3% 3.5%
Southland  4.7% 3%

The survey was undertaken by Colmar Brunton in conjunction with the NZ Property Investors Federation.

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39 Comments

Interesting. And is in any research study, it is always interesting to understand the drivers of individual's expectations. For example, why do you think property prices with increase by x% over the next 5 years? It might be just me, but these expectations seem incredibly high (12%and 4.7% for Auckland) even on a historical basis or even a simple inflation-benchmark expectation.
How do NZ property investors actually forecast these expectations? Or are this just numbers grasped through the concoctions of imagination and socialization?

Yea I agree.  A 12% a year house price increase for Auckland seems unlikely as we have already seen such a surge.  Surly a flattening out for the next couple of years would be more likely?  Some of these numbers may be hopful thinking.

Your own expectations are based on what you believe has already happened. Fair enough. It's not based on a forecasting model. Nothing wrong with that. Same with the respondents in the survey. I just wonder how they quantify their expectations.

A good start would be banning non-resident foreign owners, the whole lot of them, I reckon, then make investment in housing as a whole fairly unattractive then we can get back to housing being what it should be - HOMES for people to live in. Let me tell you the way things are in this country now is really quite sickening

nzcoolie: dangerous thinking.
You do not input into your extremely basic non-quantified model the most important factor of all for predicting future price moves.  The current price.
Using your logic you would still be buying Xero shares at $40 plus.  At this time, the company ticks all the boxes, at least as many as you list above, i.e growing, market share increasing, more customers joining at an increasing rate etc etc.  The only prob is all these factors were 100% 'priced in' at say $20 share price, so using them to justify moves above $40 is rediculous.

Xero , the company , is not to blame for the investing public bidding it's share price into the stratosphere ... beyond any rational fundamental " value " ....
 
... similarly with Auckland house prices ... they have grossly overshot reasonable investment value ....
 
Therein lies the connection ...

Yup.. esp the 'burning cash at a phenomenal rate' which is exactly what would happen if you invested in auckland property at todays prices with todays rents; $18k cashflow negative per annum for an average property

Just remember, "this time it is different"
regards

PI's can use a number of different models; factor models, time series models, Bayesian vector autoregression models or a combination of them all. If a PI can't be bothered developing the models there is plenty of places that will sell the data.

And I guess some PI's use their gut instinct.

Unless we understand the "why", we can't really understand the gut instinct. I think that autoregression would be a model of choice for any PI. 
Anyway, my gut instinct tells me that 12% p.a. capital apppreciation (or is that 5% over years) is somewhat ambitions considering that it hasn't been common in the past and I can't really envisage the short-term future. This kind of thinking is not far removed from the "average guy" and the biggest disconnect is perhaps that I cannot envisage the future. And there perhaps lies the n factor of a great PI investor in NZ: the ability to understand the future, whether it be a mathematical equation, internalization of a universal truth, or religious experience. 

Gut instinct probably comes down to past experiences, some older PI's will remember the 87 crash and not feel safe putting their money into shares, most will remember the recent finance company collapses, a few will even understand the OBR so won't feel safe with their money in a bank.  When weighing investment decisions you have to consider the alternatives to property and the alternatives don't look good. 

Right. So if we isolate this sub group, how does an x% crash in the 1987 sharemarket fit into an expectation of 12% p.a. capital appreciation in Auckland house prices? And if this is an aggregate of individual expectations, how does the mind actually compute these numbers? 
It really is an unknown and a fascinating indicator of the narratives that most people use to speculate on their future. 

The Bovine Model uses gut instinct to produce the right answer for PIs.

Um, Bovine?  Being hooked on to a nice red robot, that feeds you, checks your condition, gently caresses and cleans your udders, then milks you for all you're worth?
 
That would shurely be Employees, not PI's.....
 
Metaphors are such dangerous things....

It is way past time that everything was reset so that house buying was firstly and foremostly most beneficial to owner/occupiers and extremely unattractive to investors as a whole. It is time that this few feeding on the many in housing was stopped and people could get back to owning their own. It is way way past time to put the  mockers on foreign investors especially.
This has gone way too far now
 

Anyone can buy a property if they put the effort into it. They just need to stop living the high life and save accordlingly, I used to work Mon - Friday 8-5 and then an extra 20 odd hours for a seperate company in the evenings and weekends but it paid off. Just depends on how bad the "Want" is.

The ONLY equation that matters is how many years income it takes to buy a house. Don't ever try to tell me it is no different today than ever it was. 
In about 1974 we purchased our first home, it was on about a 1/3 acre overlooked a fabulous estuary, we drank, smoked, had kids, a car (maybe even 2 I forget now) pets, tv and only one of us worked. No-one who worked at the type of work we did and at the age we were (early 20s) could purchase that house today)
No, do not ever try to tell me things are the same now as they were then, that is bs

Which is absolutely not the point, seeing as there are now longer the jobs in places where a first home buyer may be able to afford, on the face of it.
Thngs have changed and not for the better, although, I will point out that the South Island has been found to be much more affordable with better earnings by comparison to the North, I wonder if that has anything to do with the fact it has a small population. 
It is a bit rich though expecting kiwis to have to move to accommodate richer immigrants and people who don't even live here hoovering up the properties. Growth is a ponzi scheme and economies of scale are a pig that we have been sold somehow as being beneficial, they are not, in the end

bs Sam26.  I did more hours, just to cover the rent & ex

Not bs Cowboy I did it. Perhaps you just can't manage the flow of wealth?

I did more hours than you.  I had to as my employer (s) demand 110% commitment and were constantyl trying to downsize.

So it's not about "managing the "flow of wealth""  or "how big is the want"  as you put it.

It's being fortunate enough to get a spot where there is wealth; where someone is actually willing to pay enough to make it worthwhile to make that happen.  for the large portion of the population that doesn't happen so your system falls down on that.

It's a bit like the self-help books that say "do what you love and you never have to work again" or "stay at it until you make it because success is just around the next corner".   Those who succeed that way have a self-selection bias.   There system _doesn't_ work...for 90% of the population and what is more important, is that a simple analysis will show why it _can't_ work for most people.

In the case of double jobs and head down sacrficing - I ended up will people demanding more of me than I could healthily give.  I stretched myself, got tired, got sick.   And then what?
What I should have done is _less_ sacrifice, less study, more (wider) *social* contact.  By doing all those hours I didn't have the time to do extra "self management" or "self promotion", and the few moments I did have time, I just didn't have the energy and I was caught in a survival mode.   Which are all normal behaviours.   That is because -most- bosses demand too much and are reluctant to fence business off at finish time.  Much of my "wealth" went into basic furniture (bed, table), work needs (car, tires, clothings) or training (courses).

Maybe NZ PIs think the housing accord will fail and continue to aggressively push up values as more people migrate to NZ?
Who knows... how many people would have expected such a huge surge in growth in South Auckland a short while ago...

And we can put the brakes on the immigration as well, Auckland absolutely cannot cater for another million people in any way shape or form at the moment (and hopefully, never)

There is no point, yet more to feed.
regards

This is interesting. The same reasons that are filtered through the media on a regular basis. 
However, it is still unclear how expectations are formulated quantitatively. 
If this is so, what does the research actually tell us?

"The survey also found that 46% of investors had decreased the debt to value ratios on their portfolios in the last 12 months, 20% had increased it and it had not changed for 3..."

Weighting of Auckland investors in survey?
lovely thing about PI is on a good year its very easy to "decrease the debt to value ratio" :)

you realise that doesn't actually shrink your debt, yes?

Step 1 yes... inflate.  yep that's done...
but without 
Step 2......

You end up like a government

not relative.  You need step 2.
and that is?....   I'm wanting to see if anyone is savvy enough to realise it, or whether they're all just spouting platitudes/chiches they've heard.

inflating the asset/devaluing currency improves your debt:equity ratio.  It increases your equity... i.e. it increases the amount of _dead_wealth_....   so show you know the system by pointing out what must happen.

because if you understand step 2 , you'll show you understand what government and banks either don't know (or what con they're pulling)..  As step 2 shows the danger of inflation as debt reduction

step 2 is not to sell up.  that's the asset liquidation that old style takeovers used to do to pay for hositle takeovers.  And if your asset is inflating well, then you'd have to get more munny than the inflation rate otherwise  your munny is going to shrink faster as soon as you sell out.  So if inflation is growing equity on your leveraged asset, selling it is a really dumb thing to do.  So that can't be step 2 (it would be more like step (-2) ... how to get OUT of a profitable situation and go backwards in one easy move!

(selling out is what you do when your leveraged asset ISN'T growing, not what you do when its equity IS growing ! )

Step 2 is to restore your yield.

The rise in equity means you're theoretically making less for each invested dollar, your risk is the same level, but your returns just dropped.
That's why cshing ot of a good investment (while often wise) is a cunter productive step..cash has 0 yield meaning you then have to buy back your yielding asset and if it's inflating, you lose out.

So you have 2 options:
Play brinksmanship - like banks and governments do:  Increase your borrowing/double down to the debt : equity ratio you were originally comfortable with.   This is all good until a market retracing, then suddenly yield looks impressive, but your exposure (and interest payments) are suddenly more than bargined for.  the danger here is that this behaviour is easy and adictive - it looks like you're going forward in leaps and bounds but you're not.

or 

You somehow magically increase the revenue generation, which is going to be tricky becuase the actual unerlying asset hasn't improved, so why it's revenue generation should increase is debatable.  Which is why the earlier step is so popular and dangerous.

- - 
One popular way of the later is selling advertising.
I really dislike the advertising path and will actually go out of my way to _avoid_ such brands.  I'll support them if they're part of building something - avoid them if they revenue generation on some thing that exists.   

why?  because see those car ads on the side of the screen (that I pay to download).  Where did the money come from for those?  It's an amount portioned off each sale, all those like me who chose not to buy are being paid for by an increased price by the few that do buy.   the more ads, the higher the advertising cost, the more cross-subsidisation that gets put on the shelf price...... the more the shelf price the more the RBNZ thinks we have a growing economy....to pay for ads for crap I'm avoiding buying.  
    (and I'm avoiding it because I don't want to sponsor the rest of the country's or internet's user activity  because I'm hoping to get an -efficient- lower cost service to reduce my costs...not to pay for everyone elses stuff)

This sort of 'business thinking' is fairly rare in the average investor, its as you said, counter intuative and goes against of lot of human nature that evolved during times when money, and certainly, stocks/investment properties didnt exist.
The rational decision now would be to sell some auckland property, not buy more which some speculators are doing, egged on by the recent increase in prices (ala xero SP illustrates this over a shortened time span, where price moves higher spark further buying until values are so out of wack that enough rational share holders sell out stopping the once thought 'non-stop' increases in price and with this 'trend following' factor removed, price collapse.)
 
"The rise in equity means you're theoretically making less for each invested dollar, your risk is the same level, but your returns just dropped.
That's why cshing ot of a good investment (while often wise) is a cunter productive step..cash has 0 yield meaning you then have to buy back your yielding asset and if it's inflating, you lose out.
So you have 2 options:
Play brinksmanship - like banks and governments do:  Increase your borrowing/double down to the debt : equity ratio you were originally comfortable with.   This is all good until a market retracing, then suddenly yield looks impressive, but your exposure (and interest payments) are suddenly more than bargined for.  the danger here is that this behaviour is easy and adictive - it looks like you're going forward in leaps and bounds but you're not."
You need to get comfortable with the most rational/calculated fair value assessment of the assets you own; if they get too far above its a good time to sell, i.e auckland property at present would tick that box for mine.
Increase borrowing; not into an already over valued market with yields that dont make sense.  Most look for the one thing their auckland portfolio lack, cashflow, and this is mostly present in apartments or in secondary cities outside of auckland.  I never like buying things for 50% more than what I could have paid for them a few years back.  But I'm very happy buying something thats now 30% cheaper (in real terms), i.e property in secondary cities that has stagnated for 8+ years, at the same time both rent and wages in that city have edged up.

Get yer head around this
 
Total Value of all property in New Zealand is $750 billion
Total Value of property stock in the Auckland Region is $474 billion
 
Auckland alone now accounts for 63% of property, nationally
Greater than the sum of all the other regions put together
 
The ACC council assessed 525,000 properties - 86 per cent of which were residential.
The average CV rise across the city since 2011 is 34 per cent, putting the total value of the property stock throughout the region at an eye-popping $474 billion.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11344711

Wel considering some auckland houses are 2-4 good-average houses = 1 small farm, or 9 regional houses or small town commercials, or 20-40 small town houses.  It's not surprising.

Why do think it's daft for regional and small town people to be put on the same ruleset and expectations as Auckland/Auckland commercial/Industrial/Bulk Retail?  (and vice versa)

Nonsense.  In March 2013, the size of the New Zealand economy was $211.6 billion. 

Any relative position of savings and debt without mention of the economic base is pointless. Secondly, the numbers you provide are too generalized to be meaningful. Without looking at the composition of the debt and growth in M3, using simply accounting methods to suggest "we're alright Jack" is nonsensical. But if you want to elaborate, I'm all ears.
http://www.rbnz.govt.nz/statistics/tables/s3/
http://www.rbnz.govt.nz/statistics/tables/c19/

First of all, mortagage debt is only one component of private debt. Secondly, when that mortage debt is owned by a segment of the population, the issue is magnified.And thirdly, when the aggreagte value of assets is driven by what is potentially a bubble, then a simple ledger to explain "we're alright jack" is nonsensical. Just as I said.
 

There is nothing wrong with Ex-pats buying more property in NZ. At the end of the day IRDs nets are now catering towards them when they come back so they pay either way...

unless you're bidding against them, from you NZ based wage.    So yeah there is a problem why you can't even Gerald Ford a home in your own country