When the market went crazy last year, real estate investor Matthew Ryan says he “went fishing”.
Viewing price increases as unsustainable, he spent 2021 buying less and sell some of his properties in Auckland.
Two other big investors have very different plans.
* A mega homeowner who bought 20 homes in a year says those days are over
* Investors change strategy to deal with new rules
* First-time home buyers are ‘overwhelmed’ in Christchurch as investors increase market share
Hawke’s Bay-based investor Tammy Onekawa has stopped buying in New Zealand altogether.
She says the prices are too high and the compliance requirements too stringent for the cash flow to accumulate and allow the properties to be held long term.
She is now focused on buying properties in Australia.
Graeme Fowler, meanwhile, which has 57 propertiesmostly around Hastings, says he won’t buy any more residential property this year and prefers commercial property in light of changes to mortgage interest deductibility rules.
He already owns eight commercial properties.
The three investors share their views on what lies ahead, how they are adapting to the new market, and which segments of the market they believe are most at risk. as interest rates rise.
Back to GFC playbook
Ryan is dusting off the playbook he used during the global financial crisis and intends to use the downturn to acquire more properties.
He says house hunters are “immeasurably better off” buying now compared to last year, with auction clearance rate and prices fall.
“Feels like April 2008, which was definitely below the low point [of] July 2009,” he says.
Ryan had intended to start cutting back on his investments, but says buying is a hard habit to shake when he sees a good deal. “A lot of investors like me take advantage of an opportunity like this to swim against the tide.”
This approach takes courage, Ryan says, but can pay off.
Onekawa felt the sting of a bubble that burst, shattered by the crash of 2008. She started investing again in 2012.
She sees a lot of similarities between now and then, and thinks many investors might be on the verge of feeling the pain.
Onekawa says many big investors have sat down over the past two years and are now “foam at the mouth” as they consider joining the market.
“They’re all ready and waiting to start picking up the crumbs,” she says.
But some might hold back due to new tenancy laws, which she says are too favorable to tenants, and compliance requirements that create “headaches” for investors.
Abandon the New Zealand market
Onekawa has sold nine of its New Zealand properties in the past two years to cash in when prices were high, and used the profits to pay down debt and ensure it was in a position of strength when rates rose. interest was growing.
She says the downsell made up about a third of her residential portfolio.
She had intended to sell a 10th property, but she signed up at the end of November when the market turned and she says she went from five offers to none.
Now, every two weeks, Onekawa has a real estate agent offer her cheap properties – something that hasn’t happened for a few years.
“I haven’t had agents calling me for so long, because they’re getting houses and would have 10 people to choose from. The last person they would go to is me because usually I’m not going to pay the highest price,” she says.
Onekawa is now looking to invest more around Brisbane and has already bought five properties in the area in the past year.
Preference for commercial real estate
Fowler plans to sell 20 to 25 of his residential properties over the next three to four years to get out of debt.
“I will be keeping approximately 25 residential properties as well as the commercial properties I have purchased over the past three years.”
He says commercial properties are generally more expensive than residences and both have their pros and cons.
“Before, I preferred residential, now I prefer commercial.”
Fowler says that after making his projected sales, the combined value of the residential and commercial properties will be around $35 million, and he will have after-expense, pre-tax income from those properties of around $1.5 million. per year.
Fowler says his intention was never to buy properties again this year.
Most at risk
Onekawa says investors who bought only to take advantage of recent capital gains and disregarded cash flow are most at risk.
“For me, the rents should cover all the expenses and pay me weekly from day one. If they don’t, I won’t touch it,” she said.
“Capital gains are a great bonus, but I never consider them when buying rental properties; investing in capital gains is gambling.
Fowler says buyers and homeowners were lucky to have very low interest rates for several years, but that allowed buyers and investors to borrow a lot more.
With one- and two-year fixed rates now double what they were last yearhe says, many who have borrowed large amounts might struggle to manage the payments, especially if an investment property’s cash flow was tight to begin with.
“A 2% increase in interest rates on my properties would currently result in additional payments of $20,000 per month. Most of my loans should be reduced to their rates later this year, so it will make a difference to cash flow. ”
Ryan says owners of ‘shoe flats’ in Auckland are particularly likely to see big price drops because they’re not wanted and banks don’t like to lend to them.
He says many new townhouse developments are also likely to struggle.
A “hustle” at the height of the market sent new townhome prices soaring, and many jumped because deposit requirements could be as low as 5%, he says.
These buyers are now approaching settlement, having paid top dollar, but are facing much higher interest rates than they were when they placed their deposits and a market where prices are falling, which could cause some to try to get out of their contracts.
Where will the market go?
ryan says statistics that suggest prices are leveling off or rising only modestly are wrong and anyone who thinks the market hasn’t already fallen by around 10% lives in ‘cuckoo country’.
“Statistics can be so easily manipulated,” he says.
He predicts that some markets could fall by as much as 20% from the prices they reached at the end of last year.
Ryan notes that if the National Party returns to power in the next election, it will drop plans to phase out mortgage interest deductibility, which will provide relief to investors.
He says tweaks and tweaks are needed in the property market to help Kiwis buy their first home and reduce the number of properties in the hands of investors, but the inability to deduct mortgage interest from rental income was a step too far.
If the phasing out of mortgage deductibility continues, he thinks some small investors will sell their rents because keeping them will no longer make financial sense.
Onekawa says prices could fall 10% – a prediction in line with ANZ economists – but continued high demand will keep prices from collapsing.
Fowler keeps his cards close to his chest, and while higher interest rates and tougher borrowing requirements are softening the market somewhat, he says he never has expectations.
“What happens from here, no one ever knows, whether you’re an investor or a first-time home buyer,” he says.
CORRECTION: An earlier version of this story stated that Graeme Fowler’s wallet was worth $35 million. He will be worth $35 million after selling 20-25 properties. His portfolio is currently worth around $45 million. Corrected April 11, 11:25 a.m.