Opinion: To buy or not to buy

Property Council’s Auckland Regional Chair, Martin Cooper of Cooper and Associates shares his view on the million dollar question; to buy or not to buy?

Kiwis really love property. We love looking at it, talking about it and everyone has a friend who is an “expert” in it. So, it is no surprise that there has been a lot of commentary this year over the state of the property market. What buyers should do? What are developers doing?

There is no doubt that the past years have been marked by an increase in housing production and readily available cheap credit. Historically low interest rates, government and the Reserve Bank stimulus pumping credit into the market. This has fueled people into spending more on a house than they otherwise would have, as it has often been a simple calculation of what does it cost and what can I borrow, or what is my current house worth when I sell it and what can I do with those funds.

These are all factors that led to the explosion of sales, both existing and new, and house prices followed up, as people continued to buy. This was all fine in a market where everything seemed ‘okay’, and a degree of FOMO kicked in to drive sales.

From a developer’s perspective, things have definitely got tougher, especially for those who haven’t looked to the future and planned ahead.

This is both from a delivery perspective and a sales side. As project costs rise, pressures develop on the feasibility side, with a lot of additional pressure on developers as of late.

Resource Consents have continued to have processing times pushed out. Larger projects have seen processing times of 6 to 9+ months and the cost of this to projects has been significant. Even if a developer has bought their land with cash, there is a cost of holding land which affects a project. Delays of this magnitude can even take you from a sweet spot of being able to sell housing easier into a harder selling market. Just think about if you had planned to launch in mid-2021 and consenting delays pushed you into early 2022. Quite a different sales market. Delays had been fine in previous years, where the longer you waited to sell the more you could sell the house for. However, for a developer generally time is not your friend. The quicker you can start and the quicker you can finish, the better the risk profile.

Then there are ongoing regulation costs. Things like changes to H1 are adding extra cost to houses at a time when things are becoming harder in general.

After the initial sugar rush of people trying to buy anything mixed use or THAB zoned after the Unitary Plan allowed more density, the pressure is starting to come out of this space. 

The NPS-UD has further up-zoned land and is providing even more choice to developers, especially those doing standalone or terraced houses.

Good sites for apartments in the luxury end will continue to be harder to get and choice here will be slim.

During the sugar rush, people bought marginal sites, got a resource consent and sold it to the next person who thought it had value. This process led to rapid land price increases beyond what was sustainable. However, good land will always be good land if you analyse it right from the start.

Land is often 8-12% of the Total Development Cost for apartments. If land values halved, not that I think they will, it’s really only the equivalent of less than 5-10% of the construction price.

Construction prices have continued to go up over the last 2 years and have got to what many believe is unsustainable levels. Prices are often quoted today as being 20-30% higher than in 2019.

Supply chain affects, lack of labour with closed borders, factories not having enough workers overseas and now the ongoing effects of the war in Ukraine on steel supply as well as a lack of power in Europe to run factories means that supply prices are staying stubbornly high. With apartment projects often having 60-70% of the Total Development cost as construction related, this is by far the biggest factor for developing new apartments in particular.

It has the feel of 2015-16 when housing boomed, construction prices rose, and people got caught out. Lots of people said, “I’ll wait a bit until we drop back to the 2012-2014 prices”. Now the 2015-16 prices seem cheap. You wonder what will happen this time. 

Will construction prices keep rising? Will they ease and go back? Will they stabilise and people will do less at a higher rate? Will things just stop in the housing sector, and little gets built? There is a lot of crystal ball gazing at the moment.

The cost of debt for projects is also on the rise with the rise in interest rates. Everyone has focused on what buyers are borrowing at, but it is also affecting developers. With senior debt having been in the 3-4% plus fees range for some time, banks are now forecasting development funding at 7-8% plus fees. This means finance costs are now becoming more significant for developments. With lenders putting more emphasis on the quality of delivery teams, strengths of pre-sales and the type of project this will lead to tighter lending I’m sure and projects slowing down.

It will be interesting to see what happens to developers who have been offering wholesale investors a 10% return to fund projects. Essentially the same cost as the banks now. When this started there was a significant gap between the cost of debt from banks and / or what return you could get from a bank on term deposit. 5 year rates were seeing returns of 1-3% and this has now lifted to 5%.

The risk profiles appear to be getting closer to pre-GFC levels, where finance companies and banks were starting to offer similar returns for what could be seen as very different risk profiles.

Consultants, Councils, Marketers, signage people you name it everyone is experiencing increased wage costs through the lack of people in the labour force. The question will be how sustainable this is? Prices haven’t necessarily lifted but the cost side has. If / as demand starts to come off what will this mean? Will business be left with higher cost bases and dropping incomes? Or will prices rise again? This will require careful management on both developer and supplier side for the benefit of all.

Sales have undoubtedly become tougher off plan. Especially in the mid-tier market. As times get tough the affordable and luxury end of the markets have tended to bounce along but the middle has been squeezed as buyers defer upgrading to larger houses or stretching themselves as times are good.

Buyers who understand quality and certainty of delivery appear to have been able to look through the current issues.

Despite this, you can’t help but feel apartments and houses will be harder to come by come 2023 and into 2024, so people will need to ask themselves what they are looking for and when. Especially at the luxury end as access to quality construction partners becomes even more critical.

First home buyers will have to think; what does a first home mean to me? With prices for delivering new units in the future unlikely to drop (how can they if all the costs keep rising?) and the quantum being delivered possibly dropping as it becomes harder to make developments stack, now may be the best time to purchase?

One thing we do know is those who try to pick the bottom of the market tend to miss it as the data is always lagging.

That being said, not all is negative. There are still some great properties being delivered by some wonderful companies with long-term views. NZ is generally still an attractive place to live, our isolation that kept us in good stead during the pandemic will only continue to be more attractive to people in the future. The thing buyers need to think about is what do I want for this stage of my life? Does buying something fit that and if not now, when? What is the reputation of the developer and builder delivering the product? If I had to wait another 2, 3 or 5 years is that ok? It is all leading to an interesting couple of years in property ahead for all.

Martin Cooper

Director | Cooper and Associates

Martin started Cooper and Associates in 2013 to provide turn key Development Management Services to the property industry with a focus on apartments.

Working with his team of development managers, marketers and sales experts they have led some of Auckland’s best examples of apartments projects. With a key focus on the customer experience, projects take a true design led experience across all elements of the buyer journey from initial design and marketing through to post completion activities.

Recent projects have included Elm Remuera and One St Stephens, Parnell. Martin is the current Chair of the Auckland Regional Committee.

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