Market Comment: Election 2017 Fallout

There was an expectation that we would see changes in the marketplace irrespective of the result of the election. Tightening of funding availability and anticipation of increases in interest rates were always going to impact. With a cobbled together government now a reality, and the various parties wish lists of policy either being enacted or revised in the face of reality, what is starting to have most impact on the market is apprehension.

Many investors are taking the view that it is “business as usual” and that ultimately  business will go on, irrespective of the influence politicians think they may have on the world. But for those investors who are naturally  of a nervous disposition, any potential change is a reason to do nothing. And that is what we have – “potential” change.

The reality is that one of the major touted changes to the economic landscape, the reduction in immigration, may not in reality occur. If all the houses that are supposedly needed, are to be built, we need more tradespeople than we have. Add to that the fact that a significant portion of the inflow of “immigrants” are in fact returning New Zealanders (mainly from Australia)  and the rhetoric may be for naught.

But there is an historic lesson that every market must take a breather from time to time. The increases in rentals per square metre, and decreases in yields, cannot continue at the same pace. There are tipping points when it again becomes economic to build new stock. There comes a time when it becomes economic for some businesses to move out of Auckland. There comes a time when alternative asset classes become a more attractive option.

A combination of these factors  is starting to happen. A slight slowdown in the enthusiasm of owner-occupiers to acquire their own premises, is also impacting on prices in parts of the market – mainly caused by the major banks trying to slow down their lending.

Our view is that there is unlikely to be a big drop in prices – except that yields are likely to move up slowly on the expectation of interest rate increases. More likely that both prices and rental rates have reached a plateau.

The other major reality is that there is still money needing a home. And the potential changes to the residential rental market are influencing some investors to look more seriously at industrial property than they may have in the past.

So although the prevailing sentiment is that yields are moving up, there is also more enquiry for property post-election than there was pre-election.

And we see this continuing for some time. Will we be proved correct – or will external events derail us?