Date posted: 26/10/2023 10 min read

Safe as houses?

The property market has often been the go-to investment for Australians and New Zealanders, and their faith has traditionally been rewarded with strong returns. A number of factors, from unaffordability to taxation and higher interest rates, have some now questioning if property has lost some of its lustre.

In Brief

  • Property markets in both Australia and New Zealand have experienced recent booms followed by downturns, as interest rates moved higher.
  • Analysts on both sides of the Tasman believe that markets have bottomed and are starting to recover, although the evidence is localised and patchy.
  • Property is likely to remain a popular asset class, even though investors and homeowners might have to accept lower-than-historical returns in coming decades.

It’s often said that property prices double every seven-to-10 years. Sydney’s median house price did indeed double to A$1.3 million in the 9.5 years to May 2023, and it took only 6.8 years in the red-hot Hobart market.

However, this is the exception, rather than the rule.

Adelaide investors waited for more than 15 years for prices to double and an even longer 17 years in Perth, according to data from the REA Group. In New Zealand, while more than half of New Zealand’s 76 districts saw prices double between 2013 and 2022, they only increased by 50% in others.

On the roller-coaster

Low interest rates during the pandemic fuelled record prices in both markets, peaking in late 2021 and early 2022. In New Zealand, the market experienced two booms in three years after an earlier peak in 2017. However, after the Reserve Bank of New Zealand (RBNZ) began raising rates the market fell rapidly from the November 2021 high. The peak-to-trough fall has been estimated at around 20% nationally, while some regional markets fell by much more.

While it was a similar story in Australia, the market recovered earlier, partly due to supply issues. Even though the Reserve Bank of Australia (RBA) has been raising interest rates regularly, the market fell by a less than expected 9% and average national prices are now just below their February 2022 peak.

Many investors, however, especially those new to the market, will find it hard to remember a time when mortgage rates were north of 5%. Buyers who locked in low rates when they purchased are now staring at the ‘mortgage cliff’, as they go onto higher variable rates.

And anyone looking at commercial property needs to be careful about office and retail property because of the work-from-home phenomenon and the rise in ecommerce. This leaves only warehousing and logistics, which is largely only accessible through real estate investment trusts.

Always an opportunity

Matthew Gilligan CA is managing director and partner in New Zealand firm Gilligan Rowe and Associates, which specialises in property investment. He has a sanguine view of the market, seeing a cyclical progression which he believes is largely unchanged by recent events.

“The last four cycles were 1987, 1997, 2007 and then 2017,” he says, before mentioning the 2020 peak fuelled by “imprudent” government pandemic spending and record low rates.

“People are saying this time it’s different, but in the GFC [global financial crisis] we were told finance markets were never going to be liquid again, and that was incorrect.

“This time we’ve got post-COVID blues and we’ve got new property-tax rules, so it’s very tempting to say property has slumped. But if you take a five-year view you could also say what an opportunity, because a slump also creates opportunity.”

Gilligan thinks inflation and both income levels and construction costs underpin the long-term inflationary trends for property assets and bake in a 10-year cycle but, as the RBNZ intervention showed, extraneous factors can break the cycle.

Timing is key, he says, and it always depends on what side of the transaction you are on, buying or selling, and how long you’ve been in the market.

Gilligan himself has approval to build a block of 29 units but has no intention of building at the moment. He’s waiting for construction costs to come down and for a resumption in New Zealand immigration to create more demand. When the time is right, he’ll give the green light for construction.


The New Zealand election may be something of a game-changer for the property market, says Gilligan. A national government would be likely to amend Labour Party changes to the bright-line test – effectively a surrogate capital gains tax – which imposes tax on gains from investment property.

Labour extended the sale horizon from five years to 10 years for properties purchased after 21 March 2021. For properties purchased between 29 March 2018 and 2021, the period is five years, while the test does not apply to anything purchased prior to 2018.

Even more significant are rules on tax deductibility on rental properties. Under Labour, tax deductibility on interest expenses for properties purchased before 21 March 2021 is being phased out from 1 April 2025. Deductions cannot now be claimed for properties purchased on or after March 2021. National Party leader Christopher Luxon said that, if elected, his party will restore interest-rate deductibility.

Gilligan says many property investors waited on the October election result before making a move. In the meantime, he believes that – on average – the market has bottomed and he foresees a recovery in interest.

Still wary

Kelvin Davidson is chief property economist with CoreLogic in New Zealand. He largely agrees with Gilligan that the market is turning around, up from what he says is the biggest downturn in “30 or 40 years”, and that a combination of immigration, strong employment and a likely peak to the interest rate cycle is bringing the downturn to an end.

Investors are still wary and while historically they might comprise 24% of all sales, today that is down to around 20%.

“Stock is tightening and people are holding back from listing, so there’s a more competitive price pressure,” he says. “Most new investors are losing money right now because rent is not covering the mortgage. But in some ways that’s always been the model for property investors here: that they’ll make day-to-day losses in terms of cash flow, but they accept that because the trade-off is a capital gain.”

While Gilligan points to interest deductions and the bright-line test as factors dampening investors, Davidson nominates the likely imposition of debt-to-income (DTI) ratios as a new measure to impact investors.

The DTIs would be imposed by the RBNZ under its prudential responsibilities, and would be different from the loan-to-value ratio (LVR) restrictions the central bank tightened and then loosened over the last few years.

The RBNZ loosened LVR rules from June to allow a higher 15% of owner-occupiers to borrow with less than a 20% deposit, and 5% of investors – a huge cut from 40% previously – to borrow with less than a 35% deposit. Under the new DTI rules, Davidson believes the RBNZ could introduce a cap of seven times income, regardless of whether borrowers are owner-occupiers or investors.

The DTI would include all income and debt, and would factor in existing loans as well as the potential new mortgage. Unknowns include a potential exemption for new builds. Davidson believes that because of their risk profile and tendency for higher DTIs, the caps are likely to have more of an impact on investors.

The same, but different

Australia doesn’t have the taxation uncertainty facing New Zealand. Capital-gains tax (CGT) rules are longstanding and well understood and the debate on abolishing negative gearing for investors has few friends. Rent controls are a political issue in Canberra, but numbers in the parliament mean that significant change is unlikely.

Samara Badgery CA, director at Integrity Wealth in Brisbane, points out there have been some changes to CGT rules for non-residents in the past few years, along with changes in the past five years to depreciation rules affecting negative gearing in some properties.

Foreign residents, for example, are now not entitled to CGT exemption on property sold after 30 June 2020, unless they satisfy the requirements of the life-events test. These include marriage breakdown, terminal illness for family members or if the vendor was a foreign resident for six years or less.

Since 2017, there has also been a tightening of rules around the depreciation of second-hand assets installed in investment properties. These changes, however, have not made negative gearing any less attractive.

“In general, I think negative gearing does factor into property investment decisions, as it’s one of the few options available for wage earners with high incomes to claim deductions and achieve tax savings,” says Badgery.

“I don’t think CGT factors into property investment decisions to a great extent. If you have a capital gain on the sale of your property it’s a good problem to have, because it means you made a profit on your investment! The 50% discount if you hold a property longer than 12 months cushions the blow, too.”

“If you have a capital gain on the sale of your property it’s a good problem to have, because it means you made a profit on your investment!”
Samara Badgery CA, Integrity Wealth

National laws, in Badgery’s view, have less impact on the property market than state based laws and taxes such as transfer duty, land tax and landholder duties.

She observes that there has been “a lot of movement in clients’ investment properties in the past few years”.

Investors who took advantage of the recent boom realised good gains on their properties, while at the other extreme some clients with investment properties have been motivated – or forced – to sell as their low-fixed-interest-rate periods are ending. In Queensland, for example, recent changes mean that landlords are only able to increase rents every 12 months, a move in line with several other states.

Market rebound

In terms of Australian property values, rising interest rates had a negative impact on the market when the RBA began its tightening cycle, but a lack of supply combined with a strong labour market has seen house values rebound, despite interest-rate increases.

CoreLogic’s head of residential research, Eliza Owen, also attributes this to a slowdown in the rate of completion in new dwellings.

“Housing values have remained resilient and now appear to be in upswing, and the overall value of housing debt, at A$2.2 trillion, is dwarfed by the overall asset value of around A$10 trillion,” she says.

“Housing values have remained resilient and now appear to be in upswing, and the overall value of housing debt, at A$2.2 trillion, is dwarfed by the overall asset value of around A$10 trillion.”
Eliza Owen, Corelogic Australia

While higher rates are historically associated with lower home values, creating the double threat of mortgage stress and negative equity, Owen says that only a very small percentage of borrowers – 0.2% – are in a negative equity situation and 0.7% are experiencing mortgage stress.

Investment returns vary widely according to geography. Sydney continues to march on as the nation’s premier market, with annualised capital growth of 6% over the past decade, while investors in markets such as Darwin have experienced volatility.

CoreLogic says that total return – a measure of capital growth and annualised rental income – has sat at 8.7% a year for the past decade.

Gross rent yields nationally have become more compressed over time, and were 3.8% as of July 2023, down from 4.8% a decade ago, because dwelling value growth has outpaced income growth and the ability of renters to pay in line with home value increases.

Annualised capital growth in the past decade was 4.7% per annum across the Australian dwelling market and capital growth was 58.4% over the decade overall.

Accepting lower growth

While the short-term outlook in Australia remains strong, long-term capital growth returns are more uncertain because the 2020s are likely to see a low-interest-rate environment.

“Markets may see inflationary spikes and subsequently elevated interest rates, amid inflationary pressures around global conflict, extreme weather events becoming more frequent due to climate change, and supply constraints amid transitions to renewable energy,” says Owen.

In New Zealand, Davidson sees a similar outlook. Property investing will continue to deliver returns, but “whether they will be as lucrative in the future as in the past is up for debate”.

“Gains might not be as big because, if anything, the tax system is probably weighted a little more against property than it has been in the past,” he says. “Over the last 20 years, house price growth has averaged around 6% but, looking in the crystal ball, it wouldn’t surprise me if over the next 20 years it was 4%.”