Squirrel: Property Investors Beware the Credit Crunch

Property investors beware the credit crunch! As we start to feel the bite of recent legislative and bank policy changes, New Zealand has been left staring down the barrel of a major credit crunch. In such a nuanced situation, of course, it’s impossible to say exactly how everything’s going to pan out.

When it comes to the housing market, the impact will vary from region to region, and even property to property. But for property investors, the dynamics at play are going to have a heap of wide-ranging impacts.

There are a few big trends property investors should keep a watch for over the coming months and years. And, of course, access to credit is going to be affected across the board.

Property investors: harder to access credit

Between the new responsible lending laws, tighter LVR restrictions, and higher servicing and interest rates, it’s a hell of a lot harder to access credit these days than it was a few months ago. And investors aren’t immune.

If you don’t pass the new servicing requirements, you won’t get approved to buy. It’s as simple as that, regardless of whether it’s your first property or your fifth. If you need a loan top-up, or want to borrow against a property in the event of an emergency, that’s going to be harder too.

For investors with several cross-collateralised properties with a single bank, it could be an especially tricky environment to navigate.

If you want to sell one of those properties, the bank is going to review all your other loans as well. If they don’t think you can afford the remaining debt – the chances of which are a lot higher under the new restrictions – they might opt to take the full proceeds of the sale to repay more than just the loan on the property you’ve sold.

That’s why we always recommend our clients split their properties across different banks, to help manage that risk. But if you haven’t done that already, the horse has well and truly bolted.

Property investors: the housing market will slow, and prices may drop

In my opinion, the biggest risk for investors in the coming months is going to be a combination of a slowing housing market and, potentially, softer house prices.

Softer demand

A lack of immigration and population growth, reduced affordability and borrowing power, has meant fewer buyers. Add to that the flood of new builds we’re seeing, and a degree of price softening is inevitable. In short, we’re seeing a shift towards a buyer’s market.

Of course, different parts of the market will feel that to different degrees.

There’s a lot of development and we’re seeing record levels of consenting at the moment, as affordability prompts more first home buyers to look to new builds. Large, second-hand properties are still going to be attractive to developers and should maintain their value quite well. As always, though, location is key.

Softer prices

New builds could see a slight reduction in price, as that reduced affordability means buyers can’t front up on the same sort of prices we were seeing towards the back end of 2021. Prices will need to adjust to reflect that, and that could flow on to the value of development land as well.

Good looking properties in great locations are still going to sell well, particularly in areas (like Auckland’s Ponsonby or Westmere) where demand is high, and development and intensification potential just isn’t there.

Historically, lifestyle properties have experienced softer prices in a buyer’s market. But thanks to the pandemic and people working from home, these properties have gone through a bit of a renaissance. And I think they’ll broadly hold up, especially anything that’s unique.

The tough-to-shift properties are going to be those that aren’t well presented, in less desirable locations. That said, these can offer an interesting opportunity for property traders looking to buy, repackage and on-sell to a first home buyer – provided they know their market.

Property investors: lack of liquidity

Keep in mind that when we say price softness, we’re not talking about a crash. But more a correction of some of the (truly insane) prices we saw at the end of 2021. For anyone who’s been in the market for a few years, and is already sitting on considerable gains, the impact is going to be negligible.

All of this means liquidity might not be within such easy reach.

If you’ve got all your wealth tied up in property, it’s always been a pretty safe assumption that (if you needed to) you could easily sell part of your portfolio to tap into that wealth. Under this new environment, with less credit available, and fewer buyers in market, it could be a harder and slower process.

And throwing back to my earlier example, if your bank opts to take the full proceeds of a sale to cover your other debt, even if you can sell, you might be left with nothing to show for it.

None of this is to say that property investment is a bad thing, but there are a lot of headwinds pushing against the housing market at the moment, and not a lot supporting it.

As an investor, caution is advised. Be aware of the factors at play, and the implications they could have for you, and for the wider market.

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