Is Property Investment Still Worth It?

New Zealand property faces headwinds, is it still a worthwhile investment?  

Property investment has been a great method of wealth creation for many New Zealanders over the years, especially for generations including the baby boomers. However, a lot has changed over recent years, which begs the question: is property investment still worth it?

Below, we explore the pros and cons of New Zealand residential real estate investing.

For the avoidance of doubt, this focusses on the most common form of New Zealand property investment: buying residential properties as part of a long-term ‘buy and hold’ strategy.  

The Case Against Property

Push Factors

Over recent years, a lot of things have changed, or are about to which make residential property investment less appealing:

• Especially in larger cities, yields are usually too low to make a cashflow profit
• Tax changes - it is becoming harder to offset any rental property cashflow losses against other income
• Investors face higher compliance costs such as additional costs for heating and insulation
• There is now limited or no capital gain in some areas, and a reduced possibility of capital gains moving forward
• More favourable laws for tenants
• Social pressure to make housing more affordable is only likely to increase
• High housing prices relative to incomes have made property seemingly less affordable
• Every few years, potential talk of capital gains tax rears its head. Sometimes this scares away some traditional property investors. Though of course, no-one can know what may happen with future legislation.

Pull Factors

Complementing the list above are a range of reasons that Kiwi mums and dads are increasingly being pulled away from property:

• ‍KiwiSaver has increased familiarity with investing in diversified managed funds‍
• Increasing knowledge, coupled with widespread use of the internet has shown many New Zealanders that this country is just 0.2% of the global economy. Many people are now more familiar with the investment opportunities which present themselves overseas
• Coupled with the points above, online share trading platforms have given New Zealanders a means to invest in promising other markets in a (generally) low cost and tax-efficient way

The Case For Property Investment

Real estate investing can be defined as the money or profits you make from investing in property. People buy investment properties to make a long-term profit as prices rise. In the short-term there may be little or no profit from rent after expenses like mortgage, insurance, rates, and maintenance are considered. Property investment is generally done for one or more of these three reasons:

1. Build a passive income, in the form of rent
2. Live a comfortable retirement
3. Grow wealth

You probably already know that investing in a property is a good idea, but do you know why? Here’s a few reasons property can still be a great investment.

Leverage

One major advantage of property is the willingness of banks to lend against it. Conversely, obtaining 80% lending for a business, a managed fund, KiwiSaver Scheme, or some other investment such as shares is tough to obtain – certainly for the average everyday New Zealander.

Current loan-to-value restrictions mean that often only a 20% deposit is required to get an investment mortgage approved by a bank for a new-build property – not 40% as is the current case for established properties. As a result, astute investors often favour these properties.

Control

You have control over most parts of the investment. This includes control over whether you or someone else manages the property, renovations or improvements, and how you structure the lending for the property.

Rental Income

Rental income can be put towards repaying a mortgage and/or providing a passive income.

Inflation Protection

Traditional financial wisdom suggests property is a great protection against inflation. Over long timeframes, property prices and rental income tend to rise at the same, or faster rate, than headline inflation. In addition, positive effects occur if the purchase is financed via mortgage with an interest rate below the rate of inflation, as the real value of the debt falls, and you therefore pay back the debt when it is worth less.

Tax Advantages

Under previous New Zealand tax rules, your rental property could give you tax deductions to offset other income such as wages, reducing your overall tax paid. Property investment is still seen as a tax-efficient way to invest, especially as New Zealand has no capital gains taxes.

With recent interest deductibility rules, investors purchasing existing properties will need to pay tax as if they haven’t incurred interest. However, new builds, will not be impacted for the first 20 years. So, this is another reason newly-built properties are also desirable for savvy investors – they’re more tax-efficient.

Security

Buying an investment property means you’re buying a physical asset you can literally touch if you wish. Many people remain more comfortable with this type of investment when compared with a range of other investments.

Demand

Residential housing is favoured by banks for lending for one key reason: we all need somewhere to live. This creates demand.

The proportion of people living in their own home is near a 70 year low, and homeownership is becoming much less common for younger people. This underpins demand for rentals.

New Zealand government and industry commentators all state there is a shortage of housing and if conventional economic theory was to be applied, then house prices should continue to rise. Some are also seeing opportunities in areas that could be rejuvenated by the borders opening, perhaps:

• Central Auckland could see some growth as international students and travellers return, which would logically increase demand for apartments
• Christchurch, as the tourist gateway to the South Island

What Is the Best Way to Invest?

Options for New Property Investors

On balance, it seems the easy days of property investment are over, though investing in property still presents impressive advantages.

Therefore, it seems we now could be entering a new era – one where residential property investing needs to be assessed as just another part of an overall investment portfolio, rather than the sole component of wealth creation and wealth sustainment plans. Buying and retaining an investment property should be viewed in the same way as buying any other type of investment. That is, only performed as the result of careful analysis and only performed as part of an ‘overall’ portfolio approach to achieving an overall aim or goals.

Smart property investors are still buying.

Recent moderations in prices in many parts of the country, and several advantages which present with new builds, mean that wise investors have a great opportunity to invest in property.

Options for Existing Property Investors

For some existing property investors, depending on the age of their holdings and what they’re trying to achieve, different solutions might be to cull their portfolio and:

1. Keep only the property/ies giving them the right return based on how much they must spend to upgrade them to comply with new legislation regarding tenancies and Healthy Homes Standards
2. Re-invest in new-build property/ies, perhaps with the addition of a diverse managed portfolio including international shares, and other non-property investments

The Bottom Line: Property Investment Is Well Worth It, as Part of an Overall Plan and Portfolio

Residential property investment is still a great choice, if done well. The current market presents opportunities for both clever first home buyers and for investors.  

It would be our pleasure to help you work through your decision-making regarding property investment, including any property investment loans, with a complimentary initial consultation. Get in touch today.