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RBNZ did some analysis of property dynamics and although they couldn't get a 100% accurate model they said the broad contributors to real property values were:
Employment
Productivity Growth
Real Wage Growth
There is also inflation but this is not a contributor to real value and as this tends to harm the prospects of all three other contributors is not the friend of property investors that the "borrow and have inflation eat the loan value" strategy purports it to be. Particularly when compared to the property value fruits of high real growth thanks to strong economic performance.
Dunc I think you gave your friends reasonable advice. I look at my friends, many of whom earn a higher "wage" than me but are poorer for it because they tend towards consumption rather than investment and limit their "investments" to owner occupied houses. While they mostly all have families that doesn't preclude a person from making sensible financial decisions. Few of them have an interest in investing or providing for themselves which I personally find frustrating because many of them also despair at their vocations and material lacks.
Enigma and CDT18: Dunc said it was leased to the farmer for cost of rates. Therefore no rates and the farmer would be required to maintain the property under commercial lease terms.
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Junior Member
BNZ's economist has recently recalculated the NZ average house price increase on a real and nominal basis:
quote:On average since our data series started in 1960 house prices for the country as a whole have risen by 8.9% per annum. Inflation has averaged 6.9% p.a. so on average house prices have beaten inflation by 2% per annum. One can alter this number by moving the time periods around a bit. If we start our analysis in 1970 then the numbers become 10.2%, 7.6%, and 2.6% inflation-adjusted. Starting in 1980 the outcomes have been 9.4%, 6.0% and 3.4%. Since 1990 the numbers have been 6.2%, 2.2%, and 4.0%. So the inflation adjusted rate of capital gain has been trending up.
He then goes on to say he thinks both 2% and 4% are unreasonable, and that 2.8% plus inflation (ie 5.3%) is what to expect going forward.
This is a long ways away from the 10% being thrown around here.
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Nor do those numbers take into account average house size data which have literally grown since the 1960s (and earlier). If you took into account housing "recapitalisation" in the form of renovations and extensions I wonder how big real growth would be then?
Still, 8.9% is not so far off 10% and with NZ property slumps tending to be a once a decade event you can see how people get the "safe as houses" investment mentality.
I wonder though with Baby Boomers rattling around large houses and a proportion of their children either not having families or priced out of the market if homes will continue to grow in size?
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Member
Halebop
Yes agree - have often wondered about the house price statistics put out by the likes of REINZ - they are computed solely on the basis of the average sale price. With a number of so called "do 'em uppers" now operating in the market, these returns are surely exaggerated.
The very useful statistics presented by elfer (thanks mate!) also reflect how punters have benefited from a "one-time" fall in interest rates. This increases affordability hugely and reduces rental yields.
When you thing about it, overall NZ house prices cannot increase at a rate greater than inflation + real GDP growth, over the long-haul. Otherwise, people will simply not be able to afford the higher prices. Agree that 5%pa seems like a reasonable assumption, for good areas.
Interestingly, though, it shows that punters buying on a 4%pa after costs yield aren't necessariliy getting a bad deal. This should yield say 2.4% after tax + 5% tax free capital growth = 7.4% after tax return.
This comfortably beats returns on debentures of say 8.5% = 5.2% after tax, with less risk.
Not a get rich quick scheme by any stretch, but borrowing at 8.5%, after tax, costs only 5.2% which means one makes a 2.2% margin on cost.
With a 15% deposit, that's a 20% ROI when you add back the saves interest (0.8% + 2.2% = 3.0%). Most small punteres couldn't get taht in the stock market.
The numbers still stack up, just, IF interest rates don't continue to rise.
Dimebag
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Junior Member
To be fair, I think the REINZ figures are median (which helps smooth out the result) and that to some extent the effect halebop talks about will be offset by all the lower value apartments (at least in a city, especially Auckland).
The last two reports from the BNZ guy have been very, very interesting (the reports are a bit hard to find, under "About Us" on their home page). Last week had the real returns data set out above - makes you wonder if an investor buying a house now on a crappy yield because of expectations of long term gains is fooling themselves).
The week before had a graph of house prices to rents ---> basically a dead flat line for 20+ years up to 2001, where the house price relationship went up by 40-50%. I guess because this coincided with low interest rates, no-one hurt much, then the capital gains frenzy made everyone happy despite the ever worsening yields.
One has to ask if there has been a fundamental change in the underlying price/equity ratio of housing (as measured by house prices to rents), or if the housing market is overvalued. The graph makes pretty scary reading (interestingly, The Economist magazine places great weight on this measure too).
IMHO, rents aren't going up (because people who rent can't pay more), so either prices come down, or... prices come down. Sooner or later residential rental properties have to become just another asset class.
http://www.bnz.co.nz/binaries/w310305.pdf
http://www.bnz.co.nz/binaries/w230305.pdf
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National Median Price up by $10.8K in March over February
http://www.stuff.co.nz/stuff/0,2106,3253734a10,00.html
Hard to Believe??
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Junior Member
I think this is an indication of the increase in quality of the housing stock. Apparently they believe the top end of the market caused the increase. You could hardly compare a house of the 70s with one built today in terms of the features.
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Member
Some good discussion and analysis so far.
I’m going to add my 2 cents worth, and have a few points to make.
There are always bargains in the real estate market. You just have to look hard enough.
Buy and hold is not the only way to make money in real estate. There are several ways to make a healthy positive cash flow return in real estate, such as a 40%. See my post at the end of the ‘property rocks’ thread for an example using one method.
Now to the other issue of where you live yourself. What do you do – rent or buy?
The answer of which is better is different for everyone, with financial considerations not being the only part of the equation.
In the long run I personally think it makes sense to buy your own home. That said, it is wise to buy such that you can comfortably make the repayments, leaving a surplus each month that you can invest and get ahead, whether it be in shares and/or more real estate or something else.
Whether you pay interest or pay rent, either way it’s a necessary expense. Consider this, NONE of the money you pay in rent has any chance of producing a capital gain or income (for you)!
If you buy a house to live in, once you have paid off the mortgage, your living expenses are greatly reduced. But if you continue to rent, then in 5,10,15,… 30 years time, instead of your expenses dropping, you’re still going to be paying rent week in, week out and have nothing to show for all that rent money you have paid out.
I have, and continue to make money in both real estate and shares. Like Dazza says, both can be good vehicles and why not use both of them.
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