A university professor says a mix of factors is driving investors away from the property market.
“Investors, historically, have taken up a third to up to half of purchases in a market, and that’s now reduced significantly,” Auckland University associate professor Michael Rehm said.
He said surveys by economists clearly show that investors are pulling back from the property market.
Rehm said much of the shift comes down to outlook and expectations. He noted that capital gains have traditionally been central to making the numbers stack up for small-scale investors, but that strong gains are no longer expected in the near term, making property investment less appealing.
“You could go all the way down to South London and probably still have some price rises, but the largest markets, Auckland and Wellington, which has its own issues, they’re going backwards,” he said.
“So, there’s no longer capital gains. You’re talking capital losses, and that really puts a lot of pressure on Mom and Dad investors.”
Rehm said the shift could also be traced back to changes in lending conditions, particularly regulatory moves made at the height of the market in December 2021, as well as debt-to-income (DTI) limits introduced by the Reserve Bank in mid-2024.
He said debt-to-income (DTI) limits were the critical factor, especially when looking back over the past decade.
“When the Reserve Bank was looking at loan-to-value ratio-kind of tools versus DTIs, they ended up using LVR, the loan-to-value tool, mainly.”
“The DTI came in late in the piece, but when they were looking at the early figures, they used a figure of five times the borrower’s income as a limit to how much lending you could get to go buy a house. That was considered high.”
“Fast forward to recent times; the limits they actually set were six for an owner-occupant and seven times for an investor, so they’re already higher than what they deemed uncomfortably high a decade ago, and really, what that does is it kind of tethers borrowers’ incomes to whatever they could borrow from the bank.”
Rehm said house prices kept rising quickly while incomes remained “fairly flat and stable,” widening the gap between what buyers could afford and what properties were costing.
He said that if affordability is the goal, house prices and incomes need to move in step with each other, rather than diverging as they have in recent years.
“In my view, the DTI tool should be tapered down to a target that we would like; we would achieve affordability if we got that down to four times instead of six and seven.”