Rental property comes back to earth

The glory run that has seen confidence in the residential rental market soar over recent years has come to an end, according to the latest ASB Investor Confidence Survey.

Rental property has been viewed by investors as providing a better return than any other investment class for the past five years. However, the quarterly survey for the three months ending June 2008 shows confidence in rental property having dropped 3% to 16%, now sharing the top spot with term deposits.

“The weak housing market has seen prices come under pressure, with equity in investment property retreating along with prices,” says Jonathan Beale, Head of Investment Services, ASB. “This may be challenging some investors’ perceptions that the strong capital gains of recent years will continue into the future.”

Meanwhile, confidence in term deposits has remained stable at 16%, and confidence in bank saving deposits is not far behind at 15%, up from 12% in Q1 2008.

On a month-to-month basis, rental property was on a downward trend over Q2 2008 and by June had dropped to 13%, both term deposits and bank savings being viewed as providing a better return at 17% and 16% respectively. Geographically, confidence in rental property was down only slightly in the top of the North Island (from 19% to 18%) but slipped more noticeably in the lower North Island (from 16% to 11%) and the South Island (from 22% to 17%).

“Having money in the bank is becoming more appealing to some investors, which is not surprising given that deposit rates have continued to edge up and offer a high return for relatively low risk,” says Mr Beale.

“The Portfolio Investment Entities legislation (PIE) has also opened the door to new savings products which offer the opportunity to pay less tax on investment income. We are certainly seeing an influx of deposits into the ASB Cash Fund since we launched it earlier this month.”

Investor confidence steady but subdued
Overall investor confidence has remained steady at net -1% in Q2 2008, the lowest since confidence dropped to net -4% in late 2001.

“The steadiness in confidence may reflect that the investment environment has been less volatile during the June quarter,” says Mr Beale. “In contrast, the first few months of the year were littered with bouts of sharemarket panic in January and March and a heavy media focus on the weakening housing market.”

Confidence that shares would produce the best return dropped from 9% to 5% in Q1 after another period of market volatility, but rose back up to 8% in Q2. A period of relative market stability between the survey periods may have triggered the recovery but confidence in shares is likely to remain fragile, especially with markets being under pressure again in recent weeks.

“The investment environment remains very challenging, both locally and globally. Oil prices and the US financial crisis are threats to the resilience of global growth and are putting company profitability under pressure. Domestically, the NZ economy is weakening noticeably and the housing market continues to soften.”

Happy Birthday KiwiSaver
It has now been just over a year since KiwiSaver was launched and already over 718,000 New Zealanders have joined the scheme.

The ASB Investor Confidence Survey confirms KiwiSaver has taken on steadily increasing significance throughout 2008, with 40% of those respondents who either use or intend to use KiwiSaver viewing it as their primary means of retirement saving. This is up from 31% at the end of last year and is the highest proportion recorded in the survey to date.

Meanwhile 20% of those respondents who either use or intend to use KiwiSaver also said they were confident that KiwiSaver alone would be enough to support them in their retirement. That is an increase from 13% when the question was first asked in Q1 2008.

“While this remains a small proportion, over time, as KiwiSaver investor balances grow and the scheme becomes more established, we are likely to see a greater level of confidence that KiwiSaver will be sufficient to support people in their retirement,” says Mr Beale.