It’s an extremely difficult time for new development right now. Costs keep going up, getting consents takes forever, and funding is no joke. Plus, there’s hardly anyone who can actually buy off-the-plans. Talk about a housing shortage in the making! With immigration on the rise and not enough construction happening, we’re in for some trouble. The upside for landlords is rising rents, thats something at least.
See full article from The Waikato Times below:
By Stephen Ward
From higher interest rates to nervous investors, Waikato residential property developers are feeling the squeeze on multiple fronts.
One developer said in March he expected to do only about eight units in the rest of 2023 – normally he’d do up to 60 a year.
On higher interest rates affecting the market, NAI Harcourts managing director Mike Neale said: “It absolutely has an impact.”
It’s not just the extra costs to developers but how higher rates and falling market prices combine to affect the yields (annual return on investment) landlords and other potential buyers get.
That’s particularly the case if developers are borrowing at current rates of around 8% compared to about 3.5% 18 months ago, said Neale.
“That’s a dramatic change to your cost structure.”
“They will want a higher yield due to the cost of borrowing.”
Potential buyers may find it less risky and therefore more attractive to park their money with banks if they can get a good deposit rate, thereby affecting demand for new homes.
“Investment purchasers are seeking a higher return” from housing, he said.
Also, said Neale, it was harder to get money from banks.
“Trying to get a development through a bank at the moment is challenging,” although things in Waikato weren’t as bad as other parts of the country.
Mike Callagher, the owner of Hamilton’s Cornerstone Developments, agreed higher interest rates were definitely helping slow the residential development market.
“Those 3% rates were honeymoon rates. They were unbelievable.”
Falling house prices generally, and the impact of this on the yield on newer stock, was another problem, as were higher costs for materials and labour.
“The hard thing for us is material costs are definitely not coming down.”
However, he wasn’t wanting to sound like a “poor old developer” as highs and lows happened and firms needed to adjust to circumstances and play the long game.
Since the global financial crisis he had become “a cautious developer” so hadn’t been too badly affected by the recent slowdown, Callagher said.
Cambridge’s Assured Property chief executive John Kenel said the market’s two major problems were higher interest rates, driven in part by Government spending, and the restrictions on lending imposed by the Credit Contracts and Consumer Finance Act.
“The high interest means development work for us has slowed”, he said, while the new restrictions were a “policy-inflicted” brake.
His firm planned to build another eight units this year, he said in late March, when normally it would do 50-60 annually.
Assured primarily sells to landlords.
“We can still get funding. We’ve been doing it a long time. We have good relationships with banks.”
“It’s our buyers who are not confident. A lot of landlords are just sitting on the fence,” Kenel said, adding he was concerned at the potential for rental accommodation shortages being exacerbated by the situation.
But he still believed in owning rentals, which he owned.
“Owning property, it still helps me sleep at night. A big part of this is a cycle. It goes up, it goes down.”
He hopes problems will bottom out this year and says the country is still a growth zone that needs more homes.
In Hamilton, McQuarrie Group owner Steve Chatwin said interest was only a comparatively small part of his development costs.
Drops in the finished product of new homes under current market conditions and added building costs generally together created the biggest issues.
“Often the cost of producing the new home or the new units means there’s no profit in it and sometimes there’s even a loss.”
Sales had dropped since the start of last year.
Investors, he said, had now “deserted” the market – previously lots of homes had been sold to them “practically off the plan”. First-home buyers were now a greater proportion of the market.
Also, Chatwin said many people thought there will be a bigger development downturn from June as existing work starts to run out and it would be harder to make “off plan” sales.
