Andrew Gawith says the data shows housing has been a poor investment in the last 5 years, except in Auckland. Do you agree?

Andrew Gawith says the data shows housing has been a poor investment in the last 5 years, except in Auckland. Do you agree?

By Andrew Gawith*

Like most other investments over the past five years, property has been a bit of a dog.

House prices are in most cases still below where they were in 2007 and that's before taking into account the ravages of inflation, not to mention the ongoing costs of owning property.

But even over the past dozen years New Zealanders' favourite investment - residential property - has struggled to beat bank term deposits.

As with many other assets there are always exceptions within the broader market.

Apple shares have risen spectacularly over the past five years even as the US stock market has stagnated.

In the case of the New Zealand property market, Auckland is bucking the trend with house prices now firmly on the rise, and this trend is likely to continue given the obvious shortage of housing in the city.

New Zealand house prices on average rose by 120 per cent between 2000 and 2007, giving home owners a huge boost to their paper wealth, especially those that were heavily mortgaged (leveraged).

This boost to wealth, though, was largely a transfer between property-owning New Zealanders and younger New Zealanders, along with foreign buyers entering the market for the first time.

Let's not kid ourselves, this is a simulated rather than a real lift in national wealth.

The sag in house prices since 2007 was driven by a distinct loss of confidence in debt.

Banks pulled the plug on highly leveraged property developers, sending many finance companies to the wall.

Banks also tightened their lending criteria for property purchases, puncturing house sales.

Prices fell, according to Quotable Value NZ (QVNZ), by nearly 10 per cent between December 2007 and March 2009 and for many regions remain well below their 2007 peak.

People see property as an attractive investment for a number of reasons.

Its price is relatively stable compared to shares, it provides most people with a place to live; that is, it provides a service, capital gains are largely untaxed, and it is an easy asset to leverage - banks fall over themselves to help.

But few people take into account all the costs of property ownership when calculating the returns from this important investment, nor the risks of realising those returns - the ability to sell when you need to.

Property ownership is by no means a costless investment.

Rates are an inescapable cost and one that has increased at more than twice the rate of inflation over the past dozen years.

Insurance is another cost that most prudent home owners would pay each year, and then there's the dreaded question of maintenance.

Unless owners spend a bit of time and money maintaining their house it is likely to decline in value at between 1.5 per cent and 3 per cent a year.

These costs need to be subtracted from the apparent returns from property as measured by the change in property prices.

So if we look at the past dozen years, house prices have risen by around 6.5 per cent a year - this covers a period of very strong price growth from 2000 to 2007 followed by a soft five years.

If we take off, say, 2 per cent a year to cover the costs of home ownership (rates, insurance, maintenance, but not mortgage interest payments) we end up with a gain of 4.5 per cent a year.

Now, for those people with a mortgage, the gains on their equity will be bigger (they are leveraged in a rising market), but note that around half of all owner-occupied houses are owned debt-free.

Over the past 12 years the major trading banks have offered an average return of 5.7 per cent a year on six-month term deposits - on the face of it, a better bet than investing in a house.

The problem is, however, the government taxes the return from your bank deposit, but not the return you make on your house.

But even after taking tax into account, property hasn't returned much more than a bank deposit over the past dozen years of data.

Importantly, the risk and liquidity associated with a bank deposit are negligible compared to owning a house.

So, on a risk-adjusted basis bank deposits have trounced housing as an investment since 2000, suggesting our enthusiasm for investing in housing is misplaced.

The decline in home ownership may be a perfectly rational response to financial market signals.

Over the past five years there's certainly been no rational rush to get into the property market.

Bank deposit rates have averaged 5.3 per cent so a deposit of, say, $50,000 would have grown to $60,300 (taking into account tax at 28 per cent on the bank deposit rate).

But the average house price over that time, according to QVNZ data, has at best flat-lined, which means that budding home owners now have a bigger deposit relative to the average house than they did five years ago.

Also, incomes have risen relative to house prices since 2007 - housing has become more affordable.

However, as noted earlier, Auckland is different from the New Zealand average and definitely from a lot of the regions.

Strong population growth in Auckland combined with a low rate of new house construction is putting enormous pressure on the existing housing stock, so it is hardly surprising that house prices in the Super City are now rising at a rate of nearly 11 per cent a year.

Housing in our biggest city remains an attractive investment. The same cannot be said for many other parts of the country.

Andrew Gawith is a director at Gareth Morgan Investments. Any opinions expressed in this column are Andrew's personal views and are not made on behalf of Gareth Morgan Investments. These opinions are general in nature and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial product. Readers should seek independent financial advice specific to their personal financial situation before making an investment decision.


Andrew Gawith is a director of Gareth Morgan Investments.
This piece was first published in the NZ Herald. It is used here with permission.
The opinions in this article are general in nature and should not be taken or relied on as a recommendation to invest in a particular financial product or class of financial product. Readers should seek independent financial advice specific to their personal financial situation before making an investment decision.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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I knew it - thank God I steered clear of those whingeing Wellington tenants and building maintenance repairs. Thank you Colin Riden

Oversized axe to grind - Author makes his living via a 'competing' asset class.

Is he not obliged to say so under our new investor protection regimes?
I never realised banks paid commissions for TDs, or maybe they do and that's why the rates are so pathetic and don't cover risk undertaken.

Andrew Gawith is clearly an imbecile.
Property generates income, has he forgotten?? 
Why would anyone put their money with Gareth Morgan Investments if this piece of codswallop is the calibre of their research?
For starters areas outside Auckland have higher rental returns - which in other cities are conservatively around 6-7% returns net of all expenses (rates insurance maintenance etc).  These returns are taxable (if there is no mortgage) so again conservatively a 4% after tax net return plus the capital gain, which Gawith puts at 6.5%PA.
That gives property a 10.5%PA after tax return compared to a 3.8% after tax return for the term deposits.
Does Mr Gawith not understand the difference??
So in the 12 years the theoretical total return from TDs is 56% and from unmortgaged property is 231%.  These are exactly the numbers from which Gawith deduces TDs are the winner!!  Gawith is surely the loser!
So enough of theory let's look practically.
In 2001 I bought a house in Dunedin for $13,200.  In 11 years I have received $60,000 in rents (not accounting for interest that has been earned on the money), spent about $2,500 on repairs, paid about $3,500 in insurance and $10,000 in rates.  Market value is at least $110,000.
So if I had had cash (rather than using a mortgage as I did) and put that money in the bank instead then at best I'd have about $20k.  Instead I have something of the order of 7 or 8 times that (depending on how interest on the rents earned and tax paid is calculated).
But that's not just an extreme example.  Consider if you had bought a house in flats in Mt Eden say.  (I looked at one in 2002 for $350k with a $30k return).  Taking that example factoring in rent rises, taking out costs and tax, then the current value of the earned rents would be about $400k and the market value of the property about $1.1m at least so the $350k investement has gone to $1.5m current value whereas the in the bank you would only have about $500k!
If this man is managing your superfund I suggest you withdraw immediately and find someone who knows what they are talking about.

The above comment is flawed.
The house remains the same. Given that, the 'income' has actually been piggy-backed on the tenants' activity. They, in turn, either did something 'real', or didn't. If 'real', then Chris was piggy-backing at least on sumething. If it was a virtual service, then it was a series of people holding onto each other's bootlaces.
Alle same capital gains - which are an expectation that Chris can buy processed bits of the planet - many more processed bits of the planet - than he once could. On the basis of?
There's your 'global financial crisis - too many ChrisJ's not understanding what really underwrote wealth. What we are seeing now, is all those Negative Pigs, evaporating. Matbe the writer will hold the 'wealth' when the music stops (might hold the bricks and mortar) but somebody won't. There aren't enough Positive Pigs available.

No it's not, pdk.

Great post Chris_J
I too can give lots of examples like yours. How anyone could believe the rubbish in this article is beyond me.
Good luck to readers if they do...they will need it.

I thought the article was worth debating until I saw who wrote it. 
No less than an employee of the biggest and most biased property detractor in the country.
Straight into the WPB it goes.

But are they not all wealthy?
And if, as I suspect, they are, how did they achieve that without property?

Yes, property has been such a !st class performer that apparently only NZ tenants are moving to Australia to keep their heads above water!
Phhhhh! Why is it PI's don't understand the gigantic ponzi scheme they have bought into and NOW it's crashed? Only Bolly and English can save you now........but not for long. NZ wages aren't going anywhere for a decade or more so either......PI"s will be screwed or the Aussie banks they borrowed all the fake loot from to fund their 'wee business" will start screwing them. A slow race to nowhere but a cliff 

Yep, makes you wonder. All those ChrisJ types bidding against each other, then gloating about how much they're 'worth' ,having driven each other up. Hard to see why they can't see,

Within 2 years the Aussie economy will crash and all the expats will rush back to NZ.
Guess what 400,000 returning Kiwis will do to the market.
It happened before in the 1970's and it was chaotic and resulted in the massive property boom from 1972 -1976.
I was there and I saw it with my own eyes.
Be prepared.

As they say, dreams are free.

You assume that NZ will prosper in Aussie falls? If NZ's major trading partner is in the can, then so are we. Would you move back to NZ if there were no jobs here?

You are wrong BD. The 1970's property explosion was due entirely to the twin oil-shocks and resulting rampant inflation. Not the return of the wanderers.

You couldn't be more wrong iconoclast.  1970-73 the ecomony was booming. There was not a single registered unemployed person in Auckland (No married ones either). It was the oil shocks that stopped the property boom. In real terms property halved in value by 1980.
In 1971 a NZ $ bought about $1.75US or $1.20Aus. Many  people were returning from Aussie in the early '70's as job prospects were better here. 

Really?  I couldn't be more wrong? In 1972 I purchased a vacant section in auckland. A week later it doubled in price. I was there. The increase in property prices between 1972-1985 leave the period 2000-2012 for dead. Wasnt me?  Must've been two-other-guys.

I sort of see his point if you are borrowing to invest.  However what if you've got cash.  Bank deposits currently net you about 3%.  If you've got a spare $200k,  a freehold apartment in Auckland city will net you about 7%.  I imagine you would get similar returns (if not better) in some of the provincial areas of NZ where prices have dropped way back to pre 2007 prices.  Now that rents have come up, property is certainly looking more appealing than it was 4-5 years ago.

Being a Gen-X I didn't purchase my first rental property until mid 2003.
I paid $82k with a $17k deposit.
The $11k p.a. rent I receive more than covers the mortgage, in fact it will be paid off in 2 years.
I haven't increased the rent in 7 years and the GV has increased $100k since I purchased it.
I can't see myself selling anytime so I don't care which bubble bursts, either the so called property price bubble or the property knockers bubble.

I bought a rental house a Christchurch before the earthquakes and then the rents went up. What a clever investor I am. Everybody should buy solid houses in earthquake zones.

Property owning has lots of hooks.  But they are at least hooks you can see, and sometimes manage.  You can even drive past it daily.
In many ways the hands on aspects of property are more important than arguements about minor differences in return.
Once you commit to financial markets it's very opaque.  Indeed the old adage that   --  if you can't understand the deal, don't do it  - applies to financial markets.
Accordingly new Zealanders avoid those markets like the plague they are.  Term deposits in a major bank are more understandable true.  So we are a little keener on those.  (although we don't know much about the banks actually.  BNZ and Westpac have been near bankrupt in recent decades.  You could wake up one morning and hear on morning report one or all have gone bust)
The 'financial' are driven crazy by this.  So depict New Zealander property owners as wrong.  But actually they are very very wise.

Cheese - you didn't pay 82k. You paid 17, and I wonder how much of that was real. Any real repayment is via real work done by your tenants, or by them hanging on the coattails of someone who does.
That capital gain is because a whole lot of folk - like you -  got into the rental game, pushing 'prices' up. It's a zero-sum game, though. Ultimately, the buildings already existed. The real incomes already existed. You've just syphoned-off some of what the tenants brought in, making yourself richer at theri expense.
Same with the asset sales. Zero sum game, just some folk gettting more at the expense of others.
It's actually a sign that real growth is in trouble, when folk have to displace others, rather than grow green-fields style, and it's been coming for a while. The question is what will happen to the growth-based fiscal system, and what will/won't be worth what after it morphs.
For morph it will. Pray for enough social cohesion that ownership is still via a bit of paper, by by force....

Andrew:  Good article, intelligent reading (except for the landlord bloggers apparently, lol!)
However, are you taking full account of the tax situation, unique (I think) to NZ?  When you own a rental unit, you can claim the tax against your primary income, thus getting a nice subsidy & reducing your apparent costs.   Then of course getting a nice tax-free capital gain at the end (if prices go up), courtesy of the generous taxpayer. 
Did you factor this in?  Cheers

Is it just me, or did this guy forget that housing returns rent, in addition to capital returns?
Even if you live in the house yourself, the rental still has a value - what you would have paid in rent had you lived elsewhere.
We recently bought a rental property.  Not with the intention of ever selling it or getting the capital gains (though that may happen), but with the expectation that the rental we receive will track inflation.  The debt shrinks accordingly.
It sucks that things are this way, but with the present low value of money there aren't many good investing options right now.  I think interest rates are far too low.

Have you ever met a landlord who did have the "intention of ever selling it or getting the capital gains". 
No, nor me!  Funny that!

I am a landlord who has never sold Philly.
Everything I have bought has been with the intention of never selling.
And I haven't...ever.
Nor will I. 
Why would I ever want to sell.

Oh my God .... And I chose Gareth Morgan as my kiwi saver provider....
Maybe I missed something...
There is no mention about the fundamental fact that we actually have to live somewhere...the choice is between owing and renting.
If we don't own, then we have to rent....
The real returns on deposits is almost zero...
The rent one has to pay on a $800,000 house is probably $600-$700 per wk.
$800,000 at 4.5% = $36000 / yr...  tax at 30%  gives at net income of say.. $26,000
It gets worse...  money actually depeciates.. ( inverse relationship with money supply growth )..  The CPI does not properly measure this ..but for this argument lets use 2%..
SO 2% of $800,000 = $16,000  ....  So..REAL net income on deposits = $10,000
GETS worse.... One still has to pay RENT.
RENT is $36,000 per yr ($600/wk )
Income is $10,000  per yr   ( real ,after tax returns on a $800,000 term deposit )
GO figure... who is better off.??? 
The majic about Housing ..(thou its' not majic).... is that it maintains its' value in the face of devaluing money... and because we measure in $dollars... its' nominal value goes up.
The guy who wrote this article...   is lost at sea...   he has no idea.. ( hope he's not the one investing my kiwisaver money !!)
As an aside ... here is a great site with some financial calculators...
AND... this is a really..really good book about  the real costs of mortgages...etc
cheers  Roelof

So we have someone who is sposed to be a financial adviser not taking into account the fact that investment properties provide income and focusing on capital gains which are irrelevant.
And then we have someone who gives good advice being done for it.