Is now a good time to Invest in Property?

Housing Market Written by John Bolton, Aug 5 2020

Back in June I made a prediction that we’re in for another housing boom and the average house price will increase to $1m by 2030. I still feel strongly about that and I think that there is reasonable science to support it.

Household incomes will continue to increase albeit gradually for a while and that will tend to push up house prices on its own. Most economists are picking that New Zealand will have a fruitful decade with growth out of Asia once we get through this recession.

Another reason is very low interest rates and by all accounts they are here to stay for a long time yet.

In my previous blog I pointed to affordability being unchanged and that low interest rates will push up prices. On average Kiwis are spending about 40% of their after-tax income on ‘shelter.’

The other factor is that we never build fast enough for population growth and that building apartments is considered to be too hard by most developers. They cannot get the economics working with very high construction costs and a lack of scale in our small market for vertical construction.

So long-term I still think investing in property has enough legs for a broad increase of 50% over the next ten years.

When it comes to property investing, those returns are still tax-free albeit there is no ability to offset losses against other income. Tenancy laws are getting tougher.

Given there is no offset to tax losses, the best properties will have higher yields and be at least cash flow neutral on day one. These will be easier to find outside of the major cities (Auckland and Wellington). For a larger city, Christchurch still looks appealing long-term when you consider lower house prices relative to incomes.

The main thing will be picking winners and losers. Business growth and population growth are key to a market keeping pace with the overall trend. Some locations will struggle as they always have, especially if supported by industries that aren’t generating income or job growth.

What about the expected slump?

There is still the possibility that house prices could fall even though we are going through a short-term spike in buying at the moment. The current demand might not be enough as the economy slows, and more vendors enter the market to sell. Only time will tell.

I’ve never expected a big fall in prices and I made that call early, for many of the reasons above. One of the markets to be cautious of is apartments. Especially if buying off-plan and in the locations that will inevitably be hit harder if tourism doesn’t recover next year. The wage subsidies will only help tourism markets in the short term.

Where to start

I think now is a good time to be at least looking, but take your time and make sure the numbers stack up. If you buy cash flow neutral in the right areas, irrespective of what happens with short-term house prices it will be an excellent long-term investment.

Whatever you decide to do, make sure you have reserves set aside for a rainy day. I’d plan for higher vacancy rates and the possibility of lower rents over the next one to two years, just as a precaution.

Our mortgage advisers can help you come up with a plan and provide feedback on potential properties. Get in touch by calling 0800 21 22 30.

We can help. Have a chat to one of our advisers.