Accountant Matthew Gilligan challenges the idea that residential property ownership is not a good long term decision, especially when leveraged

By Matthew Gilligan*

In 2012, the media focused on the comments of an economist, Shamubeel Eaqub, who is well documented for being anti-property.

Bear in mind the media likes to present two sides to a story, in this case the counter point in the property debate.

So Mr Eaqub fits the ticket for anything related to property bashing. Of note was this economist’s claim that owning property as a family home in Auckland does not make sense, that you are better to rent houses and invest your home equity in the stock exchange.

I found this information counter intuitive in relation to the property I routinely get involved with, so crunched the numbers.

Shamubeel Eaqub

To be fair, in a 2014 reader poll (by The Visible Hand in Economics), Mr Eaqub was voted the fourth sexiest economist in New Zealand – I take my hat off to him.

However, I don’t think he will ever be the richest economist, based on his statement that the ownership of houses is bad business.

He called buying a house a ‘loss-making business’ and recommended that people invest the money in the share market instead.

I have many self-made multi-millionaires as clients who made their money in buying residential property. In fact one of my staff members just made his second million (in equity), buying houses in Auckland. He just turned 30. I don’t think owning your own home or rental investments is a bad business, but let’s take a closer look.

Overview of analysis: Sell your home/Rent and put your money in shares

I did the maths on five houses in Auckland and a few down country.

The table below shows what they look like with 50% finance and capital growth rates that are representative of the areas these properties are in, versus renting them. I calculate where you are if you own the houses and get capital growth, versus using the extra cash you would have if you rented and invested the surplus (including the starting equity from selling the house) into shares at a 5% after tax return.

- Note that the first five properties are from all corners of Auckland at all levels, and renting loses every time.

- The sixth and seventh properties are in smaller cities (Hamilton and Rotorua) with lower growth.

- Renting wins (over ownership) on financial grounds in very low growth environments. Having used a 2% growth rate for Rotorua, renting would make sense if the growth is that low. However, it would not take too much more capital growth for ownership to make sense in this small town as well. Take a look at the numbers reading top down:

click the image or here for a larger version

I know people may raise their eyebrows over my capital growth rate assumptions at 7.5%–9% for Auckland houses, but let’s face it, Auckland has a land supply problem.

It is not solved in the short to medium term by the Auckland Unitary Plan, as there are significant lead times to getting the services in the ground and the rules in place to bring land supply on tap.

I acknowledge that projected growth rates are subjective and affect the above analysis, but further note that if you change the capital growth rates to say 6%, ownership still wins.

A few more points of contention are:

- I assume interest-only loans. You could argue that the owner will be locking up more cash as they pay down the loan, but that won’t change the story.

- Cost inflation runs at about 3% and rental inflation at around 2%. As rents are greater than operating expenses (generally rent is 4–5 times OPEX), if you inflate these items, this further supports ownership as rents increase more than opex overall, in gross dollar terms.

- I assume you pick a low maintenance house. I’m not talking about owning run-down villas, or run-down old weatherboard houses. I’m assuming you make an intelligent choice of home and start with a renovated property in my maintenance assumptions.

  • I note that my assumptions are based on direct observation of my clients’ portfolios, and my own portfolio of 20+ residential properties (mostly in Auckland.) I’m not making up the OPEX – these numbers come out of analysing my own property assets and those of thousands of clients that my firm acts for.
  • So when people tell me it costs tens of thousands in maintenance to own a home, I say you need to distinguish renovation and upgrades from basic maintenance to keep a house in working order. If you start with a renovated low maintenance property, my assumptions are good. If you start with a run-down villa that needs to be re-clad, re-reroofed, re-wired, re-insulated, re-plumbed, etc., you are not starting with a renovated property so that’s an unfair argument and comparison.
  • This analysis assumes you borrow 50%, which is probably invalid for most households as they will be more or less indebted depending on the household situation. Interestingly the more the debt, the more the benefit because you are getting leverage on the capital growth at a rate exceeding the after tax return from the shares.

Discussion of analysis

To explain the analysis (if the spreadsheet does not make sense):

1. First I calculate the cost of ownership if you buy a house and keep it for 10 years. Note, I deduct projected capital growth to reveal the cost of ownership after taking into account projected house price inflation. I don’t sell the house at the end so there are no real estate fees, but even if I did, it would not change the story.

i. To be fair, I am using capital growth rates of 7.5%–9% straight line which have been valid long terms trends in Auckland for at least 30 years. Rates assumed are lower for Rotorua and Hamilton. As said, these numbers are subjective and are my opinion of indicative future returns in these areas, based on past performance that I have taken from REINZ stats. (But of course the growth is not guaranteed, it is projected. And to state the obvious, past performance does not guarantee future performance.) These rates could decline as asset values rise, but then with Auckland’s housing shortage I don’t see much chance of that any time soon.

ii. Note I have used a high average interest rate assumption of 7%, not current GFC rates which are prevailing at lower averages. This makes my maths harder, not easier, to say property ownership is better. If I reduce the cost of ownership by reducing the interest rate to say 6.25%, then the story is even more commandingly in favour of ownership.

2. After looking at the full cost of ownership net of capital growth, I then calculate the cost of renting, and assume that the spare cash that comes from not owning is invested at 5% (after tax) and compounded with a fund manager. I assume no entry or exit cost with the manager. Therefore, the real cost of renting is rent paid over 10 years, less the return on the money saved (and invested) by not owning.

i. As a point, I think it is a poor assumption that the surplus would be saved, because most Kiwis (if they rented) would probably spend the surplus and therefore end up poorer at the end.

ii. However, for the purposes of the argument I assume we have a perfectly disciplined investor who diligently saves the surplus and invests it at 5.0% after tax.

iii. It must be noted, however, that if we are talking  about the ‘business of property ownership’, then the commercial observation that Mr Eaqub is missing is that home ownership not only makes sense mathematically, it is commercially good for Kiwis to have their cash locked up in their homes as a forced savings scheme.

iv. In addition, profits on dividends are taxed. The capital growth on houses is not taxed. This gives home ownership another obvious advantage, coupled with the benefit of bank leverage. It is leverage at good growth rates, plus a better tax profile on the capital profits, that really stand the property ownership model up as a winner.

v. As said, I’ve used an after tax rate of return of 5% on surplus funds available if you rent. You can debate what that number should be until the cows come home, but the point is unleveraged returns in shares versus leveraged capital growth on property is not a fair fight. The average Kiwi is carrying debt on their home and therefore they are getting the benefit of leverage in the capital growth they are receiving that you don’t get if you sell your home and put your money in the share market. If you are unleveraged, the story might be a bit different.

Sell your home, rent and tip the surplus into shares

I am guessing that Mr Eaqub also aggregates all property as a giant average, in making the sweeping statement that ‘owning a house is bad business’.

If he said ‘owning a house in a low growth area is bad business’, I might agree. But in the context of Auckland, Canterbury and other better capital growth areas, I think his advice reveals yet another economist talking in averages that are not reflective of regional variances in capital growth rates.

Moreover, many economists who provide commentary on property make the assumption that the population is average, they invest in averages and get the average outcome. This is overly simplistic, because it assumes you are not smart enough to do the maths and work out where you can get above average capital growth in property.

For example, a home owner can beat the market average by buying subdividable property (e.g. buy something that is being rezoned under the Auckland Unitary Plan to get better growth rates – I have been buying heaps of these properties for my own portfolio because it is obvious these assets will jump in value when the new zoning rules come in).

In summary, dealing in averages ignores your ability to add value to the returns gained through home ownership by being intelligent in your choice of property and picking the better assets.

So I say:

- In main centres where growth rates are expected to be high (areas that I advocate investors and home owners stick to), ownership by far wins out over renting and investing the surplus in shares.

- In small town New Zealand where growth rates are likely to be low, of course ownership is not about financial advantage, it is more about the emotional security of having a cheap roof over your head, which you can renovate and call home. But it is still not a bad business; it is very comparable to shares as the example above for Rotorua reveals. And I would say if we are talking about home ownership in the context of a business, the forced disciple of a principal and interest loan is not an unhealthy business practice.

- Mr Eaqub ignores the benefit of leverage (as I expand on below). If you invest $100,000 in shares, you get a return on $100,000. If you leverage at 80% LVR in property investment or through home ownership, you get a capital return on $500,000.

-  I can play with the numbers and fiddle the analysis to make it look more marginal or more attractive, but I genuinely believe that if people own assets in land-starved areas with good fundamentals (think Auckland), the growth on their home will cause them to be ahead over renting in the long term. They will also get the commercial benefit of being forced to effectively save (by funding ownership, to later have the money refunded on sale through capital growth).

- OK, a risk of the argument is that capital growth rates fall or interest rates go higher than the 7% average forecast. I think these risks can be managed with fixed rate agreements and picking your areas carefully. Moreover these risks also exist for shares.

- I say again, I disagree with commentators who use averages as projected returns, when discussing direct investment in property. Averages assume everyone is equal and gets the average of the market – not true when it comes to property. The average is the aggregate of good and bad results mixed together. It’s very misleading and a misinformed analysis in my view.

- Direct investment in property is therefore less comparable to an indexed fund in this regard. You can use your brain and your brawn, buy the better assets in the better areas, add value to them, and make money on the way into a property (renovation etc.) – which eclipses the average returns. If my property investment portfolio was built on averages, I would be broke. Average houses in Auckland are cash flow negative. Mine are cash flow positive when I buy them. I balance cash flow with capital growth assets, and target niches. I buy subdividable or rezoned land (for higher growth). I don’t invest in ‘average houses in average suburbs getting average yields’. The same argument extends to home ownership. You can beat the average by buying smart, and commentators should not assume that home owners are not smart enough to make informed choices.

Shares vs property: Is property investment bad business?

Let’s look at a second argument that arises from Mr Eaqub’s property bashing stance. He has said that you are better to sell your home and invest your equity in the stock market.

This pre-supposes that the stock market beats property investment. More particularly, property investment is normally leveraged, so he presupposes that the stock market beats leveraged property investment.

In short, I wonder why Mr Eaqub does not suggest instead as a more balanced view to ‘sell your home if it is in a low growth area, and buy a mix of leveraged property investment in high growth areas and some shares’. This would result in a more diversified return and provide the benefit of leveraged high growth property assets for part of the return. Most authorised financial advisers I have met take this approach when advising my firm’s clients in financial planning engagements.

The benefit of leverage

Take the following example showing identical returns between property and shares as a hypothetical analysis. Recall that to compare two investments, you should be thinking about the total return derived from the different asset classes (i.e. the after tax cash flow added to the capital growth).

In the case of property: Total Return = Net Revenue + Capital Growth

In the case of shares: Total Return = Dividend + Capital Growth

For argument’s sake, let’s look at these and assume a similar rate of return, given that the markets are perfectly competitive and over time the returns should be similar. (Economic theory would say capital will chase higher returns and compete away any supernormal profits to equalise/normalise returns over time.)

Unleveraged investment, hypothetical identical return assumption

But people generally use 80% leverage in their residential property investment. Now let’s look at the returns with the costs of leverage and benefit of capital growth factored in.

As you can see, investing the same amount ($100,000) on identical returns (which I have made up for argument’s sake), provides a very different result with leverage applied to property. Property wins hands down.

- You end up with $199,600 more by buying property and leveraging at 80% LVR, after taking into account deficit cash flow (after tax) on the stated assumptions.

- Projected property equity is double the equity you would get from unleveraged investing in shares.

- Granted, you will have the risk of the leverage in property, and you will have the ups and downs of the property cycle. But you earn twice as much for your risk, and that aside, shares and the share market carry their own risks.

- I would also comment that when it comes to the shares versus property argument, many people I meet prefer to be in control of a physical asset (property), rather than relying on the performance of company CEOs and the fund managers picking or indexing stocks. This is part of the Kiwi psyche and love affair with property, rightly or wrongly.

- The key to negatively geared property is getting the capital growth. It is essential to invest a leveraged property portfolio in areas with good fundamentals, as not all property has equal prospects for capital growth or revenue returns. Weighted against that, the share market story requires you to pick the right shares with the best fundamentals, so this part of the risk is the same – you have to pick winning property and winning stocks.

Leverage in the share market?

Of course for devil’s advocate, we might say you can leverage shares.

I would reply firstly that this is much riskier due to the propensity to have a rapid market movement in the stock market and margin call by a bank (on the leveraged shortfall).

Secondly, leverage offered by New Zealand bankers tends to be limited to 50% on lower risk shares, reducing leverage and restricting yield to that derived from blue chip stock.

Thirdly, you end up with interest/cash flow issues on most stocks (as many will not pay a dividend and instead retain earnings), making the investment extremely cash flow negative if you leverage it (until you sell). I hope that makes sense.

Comment on growth prospects

Right throughout the GFC I encouraged clients to focus property investment in the Auckland property market (and I continue to do so). The yield averages cited by various commentators (on Auckland yields) assume the investor is uninformed and buying on averages. I don’t know many investors who are this uninformed to be frank – it seems the investors know more about the topic that the commentators here.

Parochial investors in small towns are less likely to be rewarded in the long run with good growth. With the exception of Canterbury and maybe Hamilton and Wellington, the smaller cities and provinces just don’t have the fundamentals that support a commanding capital growth story in my view.

I prefer areas with tight supply, sustainable demand and high incomes to support a growth environment. Call me a Jafa, but the winner will always be Auckland in a capital growth contest in NZ.


1. While the return on shares may equal property over the long term (in a perfectly competitive environment), the benefit of leverage means in the ‘property versus shares’ argument, property wins. Take the leverage out of the argument and it’s a fair fight, but few people own property unleveraged.

2. It is much better to own property if you buy it in areas with high capital growth. Less so in low growth areas.

@ Mr Eaqub

3. The benefit of leverage coupled with untaxed gains on home capital growth, gives home ownership an advantage over share investing.

4. Owning your family home in low growth towns is of questionable financial benefit (it’s more even – not particularly tipped one way or the other in my numbers). But then most people want the benefit of being able to have a secure home environment (from which they cannot be evicted by a landlord) and to be able to make renovations to suit their own purposes. Can we put a number on this as part of the analysis of ‘is home ownership a bad business’? I think so, and whatever the number, it tips the balance of the argument in favour of home ownership, even in low growth environments.

I therefore conclude owning your home is a good business to be in.


Matthew Gilligan is a chartered accountant, and has been practicing since 1992. He is the managing director of Gilligan Rowe and Associates where he works assisting the firm’s clients in taxation and property related matters. You can contact him here. The author notes past performance is not a guarantee of future performance. This article is a generic discussion only, and should not be construed as financial advice. 

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Articles like this are incredibly dangerous - adding fuel to an already raging property bubble (sorry for mixed metaphor). Of course with an assumption of capital growth rates of 7.5%–9% property is going to win - but with income growth at under 3% it doesn't take very many of years of compounding before there's no one left to buy houses! Not to mention the negative returns because rents track income (for obvious reasons). Leverage is great on the way up but a bear on the way down. Just ask the million Californian households who lost their homes.

Exactly. A long backward look, after a few property cycles, will be necessary, but I could state with confidence that it will be possible to determine who were the winners and losers in each cycle depending what point in it they bought at.
Matthew Gilligan's analysis would not look anywhere near as good right now if it were not for the unprecedented inflation well ahead of the historical norm, since 1996, which has been created by a shortage of supply, which is turn is due to urban planners distorting the market. 
Land/sites do rise in value in any growing city, because of economies of scale, agglomeration effects, and increased location advantage relative to a moving urban fringe. This value increase does tend to beat the rate of inflation, but this is at no-one’s expense, as incomes and productivity and efficiencies are increasing, and this is what the capital gain is really derived from. In this sense, property is a safe, "Real" investment.
However, growth boundaries cause an explosion in land/site values and this is straight-out wealth transfer. It is an up-front capitalisation of the higher housing costs that will be paid by all future first home buyers and renters.
There is plenty of research that shows that the value of land/sites in Auckland has jumped some 20-fold since the Planners started slowing fringe growth in the 1990’s.
There is also research regarding the UK, that since the Planning Act of 1947, by 1984 land values in UK cities were 100 to 320 times higher than otherwise; a just-published update of that research suggests the higher bound factor is now 900, in London.
The most unbeatable “returns on investments” under these conditions is to be found in raw land:
Or conversely, in the appreciation of the value of centrally located sites with modest structures on them that could be bought cheaply up to 1996 but inflated disproportionally the most since then.
It is easy to prove by reference to Real Estate sites, that cities without growth boundaries not only still have house price median multiples of 3, but centrally located modest houses are still ridiculously affordable.
For example:
Houston housing under $125,000 (bear in mind that the zip-codes in this search are central locations):,multi-family-home/price-60000-125000?pgsz=50
Or sorted “price low-to-high”, $60,000 to $125,000:,multi-family-home/price-60000-125000/sby-1?pgsz=50
Gains in investment property in Auckland would be nowhere near as significant without the growth containment policy. Prof. Robert Bruegmann is right to call out the current urban planning fads as causing "the biggest inter-generational wealth transfer in history".
And it is certain that property values would collapse if the containment policy was breached in some way. They will collapse anyway one day - bears being made to look stupid is one of the pre-conditions of a bubble finally over-reaching (and of course crashing) due to late participants giving up on the bearish predictions. Bruegmann rightly points out that late-entrant first home buyers are the ones who suffer the most pain at that point. There really, really needs to be a means by which these young people can sue the establishment for redress. Then there might be a little more caution exercised by the spruikers. 

Since my mind is in this space I will relate housing to my Quanity Theory of Money revision to put a more global perspective of Matthew's article. The rework being the accounting for interest in the money supply, so M.V=P.Q becomes (M.V)+i=P.Q
GDP is the right side of the equation.
3/4 of the New Zealand money supply is residential mortgages. That is money is created as debt and most of our debt is in housing. As such houses have become money like. Since they are money like it can be expected they will assume the qualities of money.
So applying (M.V)+i=P.Q to housing we can apply some predictions this equation provides. One is that interest over time will decline, well that also means the returns for those investing. Since price and quantity are linked on the same side we can see that a restriction in supply will push the price up.
What really got me thinking about this issue is the apparent lowering of velocity in recent years. I often only skim read and tend to avoid the property threads, so some of you will have better data on this. The buying and selling of houses at ever increasing prices is the main method for expansion of the New Zealand money supply. What happens if the rate of sales goes down? ie: the velocity lowers. It seems that a corresponding increase in production or price is necessary to keep the money supply growing.
Edit: If you have an increase in price accompanied by a decrease in yield then risk is increased.

Scarfie...    this is the equation I use...   In "creditism" velocity of money is not important. ( in my view)
It is credit that is important....SO
Money+ Credit = Price + Quantity.   
For me... This has been really useful...    The most easliy influenced variable is credit....SO....  it makes sense that changes in credit growth will be a Central Banks and a Govts. most powerful tool. ( in regards to influencing economic activity)
In fact.... the traditional perspective of supply and demand ...where both supply and demand are measured in quantity and the price relationship between them is described in terms of elasticity...     is not really applicable in the  economic world of "creditism".
Credit  is just as impotant a variable as is quantity demanded and quanity supplied....  This view has made a big differnce my ability to  make sense of the economy....  and the current  subnormal growth...  in the age of deleveraging....   It fits in with Minskys view of a credit cycle .
Just sharing my views....   not trying to change yours.....   (putting interest into the equation does not work for me.)
... In regards to Real Estate...   I look at the total Credit growth in NZ... as well as in a Global context..
Cheers  Roelof

I think that whatever helps bring understanding is valuable :-) It is good that some are thinking in these broader terms.
The point with introducing interest is that it allows predictions, and to a large degree central banks are trapped in a cycle with certain end. All they can influence is the peaks and troughs within the cycle, but they can't change its direction or the outcome. Ultimately if QE results on asset bubbles rather than real growth then central banks become impotent and it will be for governments to take over and create economic activity.
To look at it another way, it isn't the credt that is so much the problem but the interest payments that have to be made on the credit. Our entire money supply is credit.
Oh the other place where central banks are trapped is the downward trend in interest rates. Fekete describes the effects where those taking out new credit at lower rates gain an commercial advantage over competitors paying the higher rates.

Both the Keynesians and the proponents of "Say's Law" hold that a dollar of demand is a dollar of production.
The problem is, wealth is NOT "dollars worth of production/demand".
Wealth is "stuff" - goods and services. 
How wealth is created, and economies grow and standards of living rise, is more and more "stuff" being created. The way it is shared out is worth considering too, but i won't go into that right now.
I hold that the more participants in the economy get "something for nothing", or rather the bigger the share of the circulation of money is "something for nothing" to those who are getting the money, the less actual production of "stuff" there will be.
The way the stuff is shared out will tend to be unfair too, but we too often focus on this and fail to understand what is causing slowdown in economic growth and standards of living increases. 
Leaving resources in the ground does not help either, but for now I am trying to draw attention to the effect of "transfers" and economic "rent". Our major problem is economic rent - the FIRE sector gaining an increased and substantial share of total profits in the economy in return for not creating any more "stuff" at all and in fact the supply of actual stuff is down along with the jobs in creating stuff - this is obvious in housing supply.
I am saying this for Scarfie because he is a thinker.

"Keynesians" can you cite a URL please?   I wouldnt agree with you here that this is a keynesian view but maybe its context, hence please clarify.
I am going to be picky and say that stuff (a good) isnt created, it is in effect converted.  So raw materials and energy is used or converted to produce a final product or good.    That's important because of the energy input, to real production of a real good which is under-rated.  I say this because the so called developed economies after the 70's oil crisis switched to a services industry model (FIRE in affect plus services ie making coffee etc) as that used far less energy per unit of GDP.
FIRE, "transfers" I agree with you here, but not that it is the biggest issue.  I think that traditionally employers and employees think they are on opposite sides of the spectrum and economic fence, and enemies of each other. In fact that isnt the case, they have a mutual enemy who is a parasite and is sucking them both dry, the finanace/banking sector.
The major issue is lack of cheap fossil energy, and indeed other raw materials and there is little we can do about that.
"jobs in creating stuff" and this is the other major issue, too many people needing jobs etc.  True wealth is per capita not per nation IMHO (GDP).
Resources in the ground is in effect wealth of our generations, it is finite and therefore once used is not replaced, we pauper our children by wasting it now producing an illusion of wealth, trinckets in effect. thereofre I dont agree with you here.
but that isnt a surprise.  Otherwise its quite interesting that our view cross on the FIRE/services sector, its way to large and dangerious, actually probably deadly.

I should have said "Keynesian" in inverted commas because I too would believe that Keynes himself did not think the way that the label is being applied today.
I absolutely agree with you that the stuff of wealth is "converted resources". The overlooking of this underlies much of the confusion today over the source of wealth and growth, especially when it comes to quantitiative easing and deficit spending. 
Look, I am impressed that you get this. Can we agree to differ on whether energy is going to run out and finish the whole beneficial creation of wealth via the conversion of resources? What I think you don't get, or you are too pessimistic about, is the exponential gains technology has provided and will continue to do so. If you read "Popular Science" or watch TED talks - and all that kind of thing - you cannot credibly be 100% pessimistic. I think that people from the future will look back on us as just as pessimistically wrong as Thomas Malthus was - or Tertullian. 
Justin Hall-Tipping is a good example of someone who is just as alarmist as you on energy and climate change and so on, but he is a "let's solve it with technology" DO-er, not a "lie down and die because we are going to die anyway" misanthrope. 
"...traditionally employers and employees think they are on opposite sides of the spectrum and economic fence, and enemies of each other. In fact that isnt the case, they have a mutual enemy who is a parasite and is sucking them both dry, the finanace/banking sector..."
I must have said that dozens of times myself. Do you see my point that local economies hamstrung by the worst FIRE sector rackets, will be the first to die due to external shocks? Not the last (allegedly because they "sprawl the least" or something). The Malthusian influence on urban planning is either the number one useful idiocy for the FIRE sector rentiers, or a deliberate ploy to ensure a more rapid demise of more humans than otherwise (while claiming to be future-proofing the urban economy!!). 
I actually agree with you on "trinkets" and consumerism. This has caused us to regard things like automobility and other useful "products" as bad when they are actually good. A system of mobility that combines flexibility, convenience and long range, is good. But too many people look at the chrome, the V8 engines, the mass of steel, and declare Jihad on automobility. 
About the actual quantity of resources on the planet, I still say you have not got the point from George Reisman that I have put to you repeatedly.
I can simply put it like this. If there are approximately a dozen crashed aircraft around NZ that have never been found, and an airliner can crash into the Atlantic at a KNOWN GPS co-ordinate and still take 2 years to be found (finding MH370 will be a miracle), then the earth is simply far more vast than most people are imagining. The assumption that we can find crashed planes and the authorities are incompetent because they don't; and the pessimism over resources, are two sides of the same coin.
As Reisman also points out, those resources are mostly available for recycling - we merely "convert" them, as you said yourself.
Even fossil fuels are part of a closed loop system, naturally the time scale might be too long, but science is going to speed that up or solve the problem some other way. This is all part of cultural and political self-fulfilling prophecy that really determines "the wealth of nations". 
I agree that true wealth is per capita, and I say this true wealth is simply the life that people live - the pursuit of happiness. I would say that capitalism dematerialises this happiness per capita faster than it increases resource consumption. There is a famous quote from Joseph Schumpeter, the genius of capitalism is not that it provides more and more stockings for princesses, but that it provides stockings for all working girls. It is the bringing of myriads of items cheaply to the masses that underlies "the wealth of nations" - inequality and growth, period, are two sides of the same coin. The capturing of too big a share of the spoils by rentiers, = lower growth, period. People getting into the top 1% by providing goods and services in a competitive and rent-free market actually do not cause increases in inequality because their gain is matched by a small gain by each of their myriads of customers. 
THIS was no surprise and was totally confirming, to me: see if you get it:
Capital is not back: A comment on Thomas Piketty’s ‘Capital in the 21st Century’
Odran Bonnet, Pierre-Henri Bono, Guillaume Camille Chapelle, Étienne Wasmer
30 June 2014
Thomas Piketty’s claim that the ratio of capital to national income is approaching 19th-century levels has fuelled the debate over inequality. This column argues that Piketty’s claim rests on the recent increase in the price of housing. Other forms of capital are, relative to income, at much lower levels than they were a century ago. 

I am glad you are finally taking a more critical view of the FIRE sector :-) Therein lies part of the proble in solving an energy or resource crisis,  you are fighting to do so in an environment where the effect on the economy by FIRE is compounding. Also to invent or create complexity takes a surplus, so you can't fix an energy shortage by more complexity. The inefficiencies of the internal combustion engine have been known since almost the outset, but it is simpler and more versatile than its more efficient competitor - the turbine. When the SAS take a firearm on an extended or covert mission they don't choose the most innovative or accurate, they choose the one they can rely on not to fail them in a fight.
Don't get me wrong I love technology and am innovative myself. Just have to keep things in perspective is all.
One of the more useful things for me that you have said on these forums is about the freedom of movement the motor vehicle has enable. Trouble is I think that its time is coming to an end.

"I prefer areas with tight supply, sustainable demand and high incomes to support a growth environment. Call me a Jafa, but the winner will always be Auckland in a capital growth contest in NZ."
Did Auckland win the capital growth contest between the years 2004-2007 during the later half of the previous cycle? No it did not.  Growth rates went from 20% pre 2005 down to 5% as once prices hit a certain level they saturate.  Investors are then forced to focus outside of auckland with their increased auckland equity. 
Probably the most bias and from an investment point of view (in the mould of Ben Graham, Buffet, securities analysis etc) the most inaccurate article I've read on here in a long time. The advise given in this article is not investment advise, it is the recommendation to speculate based on qualitative abstract ideas such as 'tight housing market with supply shortages' which when considered from a purely quantitative point of view collapse (i.e listings per capita in auckland exceed that of p.n is one example I've spoken of before, and flat rents in auckland illustrating no actual shortage, only over excited speculators like this author).

During  2004-2007 Auckland got beaten by the provinces. But it was a one in thirty year event. Now the provinces are sinking....they have no supply imbalance and low incomes (relative to Auckland). Would you like to discuss Whangarei or Northland for example ?

During  2004-2007 Auckland got beaten by the provinces. But it was a one in thirty year event. Now the provinces are sinking....they have no supply imbalance and low incomes (relative to Auckland). Would you like to discuss Whangarei or Northland for example ?

The 'supply-demand' that determines the price consists of number of listings (supply) Vs. number of active buyers (demand).  People look at listings in isolation and say there is a shortage.  Listings are low across a lot of cities in NZ yet only in Auckland are there large price inceases. 
Even looking at listings per capita doesn't give a logical reason for the price rises in Auckland. (Listings per capita are even lower in P.N yet prices have been flat there for 6 years).
The only thing Auckland has over other areas is the % of population actively out there hell bent on 'getting onto the property ladder'.  It's sentiment that the Auckland property market has that the rest of NZ doesn't (Chch having an actual supply problem).
Did you load up on Xero shares too when they were trading over $40 a share also? Using all the 'high growth story' reasons you outlined above to justify continued capital appreciation in the share price? (last traded at $16.95).
Sentiment changes quickly, good luck to anyone using your 9% predicted capital gains figure as a basis for buying into the Auckland market at these levels.

  1. Please remember that this is a housing discussion surrounding home ownership vs renting in the first instance.
  2. I said 9% in Point Chev, or similar suburbs. I further said use 6% to be conservative and you get the same result.
  3. I don't get your Xero analogy. I am talking about the physical process of people moving into an area (demand) vs building accommodation (supply).
  4. Auckland has a genuine net supply problem. If you dig into the Unitary Plan and demand story, you will find this out. Central government critiques of the AUP say so, - it's not just me that thinks this and makes this stuff up. 
  5. Some relevant points for you to consider in this regard:-
    1. Auckland has over 50% of NZ's population growth (demand) in one place that has a very constrained supply, due to council planning rules (Zoning and metropolitan urban limits).
    2. 2/3 of Auckland growth comes from organic growth (net births and deaths). Currently Auckland is growing on the base population of 1.5m at  over +4%. At 2.5 to 3.0  people per household, how many new households are required ? Answer: 20,000+ annually.
    3. Add to that net migration, the bulk of which (over 75%) sticks to Auckland.
    4. Auckland sheds population through internal migration, but this is vastly exceeded by the benefit of net migration and net births and deaths.
    5. Against this demand, we struggle to produce 13,000 houses, and the unitary plan is still 2 years off ( although we have the special housing areas which are helping.)
  6. Canterbury is an anomaly being a quake town. You cant compare this to Auckland. It does not have Auckland's demand problem. I think it is a bubble quite frankly. 
  7. Ok its all a bubble, but the bubbles with better fundamentals don't crash as hard and recover faster, much faster. That's why I like Auckland for property investment.

Answer to point 3 above, which will give insight into how I view points 1-7 (under 5.) above. Auckland 'housing shortage' has been talked about for the best part of 5 years, so it's nothing new.
Like Auckland, Xero is growing it's 'customer base' at a very good rate.  It currently doesn't earn a lot (compared to its value (market cap)) based on current customer base.
The future growth of customer base (and income from it) got priced into the share price, others saw the SP move higher and jumped on board too, effectively a viscious cycle where increasing SP causes more increasing SP as sentiment/confidence strengthens, and while fundamental reasons (growing customer base) started the price moves from a low base ($7 per share), further moves higher were based purely on sentiment and speculation that SP will go higher still(all the way to $45).  The company became grossly over valued and subsequently corrected more than halving in value. It was a good buy at $7 due to the customer growth, but a terrible buy at $45.
My point is, talking about how much customer growth is occuring in Xero is fine, but when the share price is already at $40, this factor is already priced in, and then some.
All the talk about pop. increases in Auckland and too  few new builds have led to this factor ('the shortage factor') being priced into the price of auckland real estate from 2010 onward.  Ask someone on the street if they have heard of the shortage of housing in auckland, they prob have, theres a hint that this factor has been 100% priced in, and that sentiment is very high, prehaps peaked.  What happens when sentiment changes?  Instead of 1 in 10 aucklanders actively looking to buy (because theres a shortage, must act now!), you have 1 in 50 looking to buy, your demand just dropped 5 fold, but the same number of listing are on the market, prehaps more as people look to cash in in fear of price falls.

ACtually looking at whats happening with Xero they're about to blow if they're not careful.

They have been taking on all sorts of costs (penetrating new markets, sucking up to new audit systems).

The CEO is now on record saying they can't make a basic accountant system work for $50/month and that they need to be expanding into other services, and trying to catch the 299-399 business value and to do by integrating more business services (eg Customer Relations Management tools)   But that will bring them into direct conflict with the large, deep pocketed, well established business provders.   
 They going out of a niche market where they were fresh and agile, and almost alone.  Into a very well defended mature market, and with little new things to offer.

They got their explosive growth by having basic computer friendly, not-accountant orientated systems, and a SOHO price tag.

If they can't get their own business speciality to work, how long are they going to last in the shark tank?

Im not so sure $50/month was that bad, but that the market paid for and now expects huge profits from a model that never promised it. 
You are right on the other sectors/shark tank I suspect.  These already have good players in them and many low cost open source offerings. So he'll have to provide a lot for his $299 a month if thats what he needs/expects.  I mean 6 times what he expects right now? glad I dont work for them.

Thanks for that, most interesting.
I always wondered about how viable xero was, now I am even more unsure.   Just those simple numbers shows how hard a task getting from $50 a month (which less face it accountant types are tight asses) to $299 a month is going to be.   So to get $299 a month he's no longer targetting one man bands, and small clubs who save on buying a PC/laptop to do their accounts or even 10 man ones I suspect. 

I beieve you have misunderstood the CEOs $50/month figure. It was not about Xero itself, rather it was Rod addressing independent software vendors who sell Xero add-ons.  They need to go deep in a specific field e.g. CRM integration, to capture high value from a small customer base.  If you go wide and provide small value for a large customer base, they are going to find their market eaten up by Xero themselves as they add basic extras.

I suspect however my comment is still valid, ie thier market value far outweighs their income stream per customer.

I know what you're saying but you just watch the shelf price of Xero's current offering.

If the current services are still available at the current rate (or less) then you were right.

If the current services go up in price, or bundled services packs are forced on to existing users (usually at higher prices), then I am right.

From what I read I think xero has a problem. It needs way more than $50/month from a customer. $50 a month targets a lot of one man bands, get to $300 a month and thats a whole  new customer base and the numbers of those is a lot lower.  So I dont think its going to add those basic extras for free myself.

Like any good expansion company, it's going to paint itself into a corner.

developers and software engineers, even sales people... all good when you're a startup and new to the market.  As the market is more filled then the expansionist system starts to run out of low hanging fruit (easy resources).  

What do you do with developers once the core product is mature?   To pay them, they need to seek more opportunities but that adds to cost.   But they're not adding value, so the cost of providing the core product is going to go up, or lose vlue (commodity maturity)

How is this any different to any other software company.  Windows XP was mature, but MS kept employing people to develop and sell new versions and people kept buying it even though XP does everything you need.  Developing new features doesn't add cost, you employ the same people to do the same thing to develop the next version.  Costs are the same.
At least with SaS you have a regular income stream rather than peaky release based income.

Those "better fundamentals" essential involve a more and more raw deal for the population closer and closer to the bottom of the income distribution. More and more of them will be lifetime renters. Look at the UK. Is this what we want for our children and descendants? A rentier/serf economy and society? Cities 3 times denser than Auckland (which is already comparable to Amsterdam), housing still just as expensive even though it is smaller, lower quality and older, a high proportion being flats that still cost more than a family house in a median multiple 3 market, mortgages that take 3 times as long to pay off, etc etc?
It is all very well providing "social housing" as the solution - 33% of Poms were in it by Margaret Thatcher's time and understandably this is one of the areas in which socialism "runs out of other people's money". But the population cohort that does not quite qualify for social housing, is worse off than most of those who do, when your property market's "fundamentals" are rigged by urban planners. 
Low land costs, low housing costs, business-friendly regulations, and low-cost resources including fossil fuels extracted locally, are making southern and heartland USA a standout economic performer in the “first” world, and this is a subject that attracts vicious counter-attacking from lefty/greenie ideologues every time someone points it out.
Boeing has opened a plant in North Carolina (Seattle asked for it!) and Airbus has one in Alabama…! While the Detroit-based carmakers have been in endless strife, no-one ever reads anything about the Honda, Nissan, Mercedes, and other automotive plants in Southern USA. And all sorts of spin-offs are becoming evident, such as respectable knowledge sectors springing up, making these local economies no longer a kind of “low wage industry attractor” as critics have maintained.
In any case, why forego anything in your economy that provides income for someone that otherwise might have even less of it? It is all very well to assume that high-urban-density “knowledge economies” are the path to success – they are not, they are the end result of a path to success that goes back centuries. The UK has forced all its cities to be high density, high-land-cost for decades, and the result in most cases is closer to Liverpool (Britain’s Detroit) than to London. London is what it is in spite of the urban planning! New York is really the world’s greatest “global” city and it spent decades sprawling at low density for dozens of miles in several directions. The far lower land costs compared to London actually enable far more people to participate in the agglomeration efficiencies.
There is a sneaky escape clause for the high-land-cost successful “global” local economies though, in that the lower-income jobs end up increasingly done by immigrants from the third world who endure living conditions similar to what they were used to in their countries of origin so as to be located in a thriving economy. But is this really what westerners want for their own descendants? 

  1. Please remember that this is a housing discussion surrounding home ownership vs renting in the first instance.
  2. I said 9% in Point Chev, or similar suburbs. I further said use 6% to be conservative and you get the same result.
  3. I don't get your Xero analogy. I am talking about the physical process of people moving into an area (demand) vs building accommodation (supply).
  4. Auckland has a genuine net supply problem. If you dig into the Unitary Plan and demand story, you will find this out. Central government critiques of the AUP say so, - it's not just me that thinks this and makes this stuff up. 
  5. Some relevant points for you to consider in this regard:-
    1. Auckland has over 50% of NZ's population growth (demand) in one place that has a very constrained supply, due to council planning rules (Zoning and metropolitan urban limits).
    2. 2/3 of Auckland growth comes from organic growth (net births and deaths). Currently Auckland is growing on the base population of 1.5m at  over +4%. At 2.5 to 3.0  people per household, how many new households are required ? Answer: 20,000+ annually.
    3. Add to that net migration, the bulk of which (over 75%) sticks to Auckland.
    4. Auckland sheds population through internal migration, but this is vastly exceeded by the benefit of net migration and net births and deaths.
    5. Against this demand, we struggle to produce 13,000 houses, and the unitary plan is still 2 years off ( although we have the special housing areas which are helping.)
  6. Canterbury is an anomaly being a quake town. You cant compare this to Auckland. It does not have Auckland's demand problem. I think it is a bubble quite frankly. 
  7. Ok its all a bubble, but the bubbles with better fundamentals don't crash as hard and recover faster, much faster. That's why I like Auckland for property investment.

Sorry, - Auckland grows from net births and deaths, and net migration. But it sheds population internal migration (baby boomers downshifting, people getting competed out of the city). This accounts for the difference. I have not published the total story, - this is a comment thread !
I've got some good data on this, - give me 24 hours and Ill give you some better numbers to back this up. There is lots of census data analysis supporting this.

  1. My apologies Ostrich. Its not +4%, but it is roughly 2/3 of our growth according to treasury's critique of the AUP in 2013.  I stand on the rest of the statements though - and while you say that the demand may not be as strong as previously forecast by statisticians (which is interesting), - it is still better then the rest of the country would you not agree from a demand perspective supporting the capital growth story for house prices? Auckland has reached a tipping point and is a self propelling economy in its own right and is growing. You cant say that of the rest of NZ.
  2. Do you think that the aged shape of the population will impact on households size in Auckland (dropping it below 3), as baby boomers and empty nesters start to downsize their Mc Mansions ? Will this have an impact on household size and trend it to be smaller, affecting household size on average ?
  3. On the supply side, land prices are soaring. For example 350-650m sections went from $100/m to $325/m  within 25km of the CBD between 2002-2012 - and this trend is not slowing down. I'm using the report from the 2013 Ministry of Business Innovation and Employment critique of the AUP for data. Its a bit old but still on point. Land prices would not go up if there was muted demand, (so that is curious against apparent low household formation).
  4. I find that to get a tenant in Auckland takes 10 minutes. A queue forms for my properties when they become vacant. That is not the case for most areas out of out of Auckland, other than for Ch Ch, which is an anomaly.
  5. A question for you Ostrich: I have feedback  that 75% of inbound net migration sticks to Auckland for the short term at least. Less than 50% of outbound net migration is from Auckland. (That second number is hard to prove.) So the argument goes, if we had balanced net migration of say 100,000 people in and 100,000 people out of NZ, that would mean 75,000 settle (at least short term) in Auckland and less than 50,000 people leave from Auckland. (They go from the provinces and small towns). Therefore balanced immigration on these example numbers mean Auckland get +25,000 people. I take your point this does not square with household formations and net growth numbers. Can you comment on this proposition that 'balanced migration' would still mean a net gain to Auckland? I'm interested to get to the bottom of this point as it is an interesting discussion in the context of where Auckland's demand comes from. IE Auckland gains from net migration into NZ< and sheds population internally (is my understanding of population movement).


It's not the supply imbalance, we just don't have the same level of interest to foreign investors - c.f. dairy farms which also are rising in price when by all rights they should be dropping in price but external interests are holding the prices up.

Attractiveness over shares boils down to 2 things:
1. Property investment is leveraged 1-5 (20% equity);
2. 6.5-7% growth rate in value.
1st of all I'm not sure about the idea of an expected return of 6.5-7% on property. This almost equals historically the average return of equity markets. Comparing the risks, I say anybody would agree property return should be lower. So is this growth rate sustainable/something you can count on?
2nd, indeed the only thing attractive to me about property investing is the leverage. It's not easy for average Joes like us to be able to lever in an investment. However if you broaden your horizon to international markets (surprisingly easy to achieve), you can use futures to boost leverage in the share market. A S&P 500 index futures contract has an initial margin of appx USD 5000, to bet on USD 100,000, so a 20 times leverage (you can of course set aside more margin to lower the leverage/risk). Remember you are almost betting on the entire US economy - I think is a lot safer bet than on a sector of (apologies) tiny NZ.

Actually they were not at the bank's door, they were at Council's office wanting to skin the Mayor for the rates increases. 

What's with this?, "I have many self-made multi-millionaires as clients who made their money in buying residential property. In fact one of my staff members just made his second million (in equity), buying houses in Auckland. He just turned 30."
So we all know examples of those "self made" dealers in drugs, gadgets, fads, jewellery, investments of all types to hoards of implusive and impressionable fashion victims and wannabes.
Why is your slickly marketed fleecing machine more right?

My apologies if I sounded off as a 'slickly marketing' machine. I genuinely believe in making money through property investment. I like telling the world it works because if you  do it right, it does create you money.
You raise a good point though, - what makes my "slickly marketed fleecing machine more right" ?
The phenomimal supply imbalance Auckland has. Read  my reply to Simon above, explaining the supply imbalnce caused by restricted supply and massive demand in Auckland. 

Just be very clear that you are not making money Matthew, but taking it from somebody else. Housing is not productive and it does not produce wealth, it just redistributes it. The net effect is no different to a criminal theft. Get familiar with the term unearned income. You may think it won't effect you adversely, but think a bit harder because it does.

That's why taxing "capital gain" that way isn't appropriate.  They're not making money or wealth; they're relying on the market shifting in value and devaluing around them faster than the depreciation on the property.

I wouldn't call it criminal theft.   Not losing money as fast as everyone else isn't theft.
Taking money or property without the owners fairly given permission is theft.  They entered into the trade fairly.  The money devalued.  No-one is forcing the property to stay up in value, nor forcing the future owners to pay more than they're willing to pay.

And as I'm finding in Palmerston North, the risk factor mean the income is earned, even if it's not manual labour (from the same time period, basically means "earned" revenue vs levies and tithes and subscriptions.)  Trying to tie income back to such sources is inappropriate, as much of the population is unable to generate or survive on earned income for their entire lives.  Although I agree we should concentrate on seeing more disposable income available to such sources* and shift tax-type burdens to the unearned income streams - and at the same time encourage incomes through wage, and to bring more of those incomes into the center of the bell curve.   The discrepancy between the 60+k wage earners to the rest of us is just ridiculous.

The way I see it Cowboy is that you need to have an acceptance or admission of what is unearned income, then you can have the discussion about which your society will accept. You are right, there will likely always be some but it has just got out of hand.
Also keep in mind that theft is all about the intent of the one taking.

It is not theft. However, when there is a racket in staple foods, as often happens in primitive economies with oligopolies, people do "willingly pay" the prices involved and some people starve to death.
Not "theft", no - but no less immoral. It is called "racketeering". Often it has "enablers" in government who distort the markets in the first place by way of favours to the racketeers. 
Why do we stand for it in housing?

That assumes that there is a finite amount of money in the world. Actually "the majority of money in the modern economy is created by commercial banks making loans"
So houses are getting more expensive because banks are creating more money in the form of debt - which is only sustainable as long as interest rates stay low. Agree with your point on productivity though.

Using the point of PDK, money is just a proxy for real goods. In this case debt is a claim on the future. Someone somewhere hopes to obtain something real for the paper or digital claim. Whenever talking about money issues it helps to clarify things by substituting a commodity for the money, such as bushells of wheat. In my argument with Don Brash he undermined his own argument when he did this, quite ironic really.

money is the proxy.  but the proxy is unlimited (it's just a number).

thta's the realvalue of property, is it's not a proxy, so while everyone elses numbers are being sliced smaller and smaller the property holds it's value, which is why it is incorrect to call it income.

Labelling it as unearned income or income through capital gain, sweeps the real problems under the carpet - that the money system is degrading (the proxy tokens are being devalued at a continuous rate).  Using macroeconomics new tokens should be introduced at a rate proportional to the introduced value/goods/energy/time, this would hold the value up, while not create scarity inflation.

That's why I keep speaking up when you bring up unearned income.  
A trader in houses, makes a profit, pretty much same as second hand car dealer - that is "unearned income" because they don't significantly add value or work to the product, they're just a middle person in the transaction.

Whereas the capital gain from environmental changes, isn't even unearned income because there isn't even a middle man or trading effect of buy for sell.  the property gains _purely_ on the devaluation in the currency; it's not a profit trading because the underlying asset hasn't changed at all (and often has got older/lesser!)

That still does not mean it is not a toxic effect on both the economy and social justice, to be avoided. As I said to Scarfie further up the thread, the more "unearned income" there is in an economy, the less "stuff" (goods and services) are produced to BE shared around in the first place, besides the sharing around being unjust. 

The assumption is correct in that money is an IOU or proxy for work/energy, which in effect is finite.
That debt is a future call on energy that has not as yet been made available.  So question what if that energy isnt going to be available?
No, houses are not getting more expensive due to the banks creating money, ie what you are saying is printing inflation rather than due to speculation requesting that debt.  So I'd suggest it is the opposite. The bank creates/gets the money (and capital for the leverage %) after it is leant out due to the demand for it, or it responds to demand and doesnt create it. 
That debt btw has to be paid back at some point with work/energy, if you cannot pay that, then the asset you hold is worth a lot less. When people realise this its going to be ugly.
"only sustainable" as long as people believe they are or will make money.  Like the Emperor and his new clothes when someone points out the obvious and it dawns on enough people that is the truth then the game ends.

"it responds to demand and doesnt create it." - I  agree with that, but see it more a matter of semantics. If banks had more restrictions on creating money through loans, houses would be less expensive (see the effect of the recent macroprudential policies for evidence). I quite like Steve Keen's recommendation that the maximum size of a loan is proportional to some multiple of the estimated rent - not sure how pratical it would be to implement though. 

If banks had more restrictions, then the houses actually get more expensive.   It's not a supply and demand thing (sliding scale) , it's because of the fundamentals involved, of which S&D is only one.

the majority of houses aren't trade goods, so in that aspect they don't fall to a S&D curve, as the proportion on the market at any one time is small.  Increase Demand (and price) and more of the old steady state stock become available.  Increase Supply and there is enough financial reserves available to soak up the production for a considerable time...and because current house sales set house prices it is in the interest of those people to keep up the price.

(as a side note: Mr Wu (I think his name is) in Wellington, brought so many do-ups in a couple of regions, and at a sharp price, he actually ended up depressing the price of his holdings.  He got wind when the bank called him about his security was dropping !! )

And your policies aren't "evidence" they're theories.  Ones which frequently appear to be wrong.  Keens BS would assume all people were buying using the same business model - if I have two good businesses generating solid income, and independant income elsewhere....then why should I be limited to a ratio of rental ?


I don't follow your argument at all. How can making lending more restrictive make prices go up (when the majority of buyers use loans to purchase property)?  Further, I do think there is now quite a bit of economic "evidence" (i.e., empirical studies not theories) that macroprudential polies work and it seems likely, at least to me, that the recent restrictions put in by Wheeler indeed slowed the growth of prices in the housing market.

Actually, this is very puzzling - but in countries (mostly still developing), where there is no credit at all for most people, housing price median multiples tend to be around 15+
Of course around half the population is excluded completely from the formal housing market, but those who do manage to buy in, do so with the savings of themselves and family. That has involved many many years of hard work and savings substituting for our many many years of hard work and paying back the mortgage.
Of course the underlying reason is a rigged property market. Here we call it urban planning, but in regard to the third world we call it "corruption". 

I do  like Steve Keen's  ideas, he's been one of the economists that has been spot on and explaining why.  The LVR ratio however is probably a good enough tool, it cooled the FHB slice of teh market, the other slices will need different tools like ban foreign ownership,  and make net imigration == 0.

Part of the problem with current immigation policy is that it either picks up all their unuseful extended family, or takes quality jobs opportunities from NZers, or brings in money-up individuals who contribute to the property inflation problem.

How do we incentivise investors and developers to build property, renovate it or supply it, to improve the supply of housing without letting them make money ?  Are they really stealing  or are they performing a much needed service and getting paid for doing it ?
If the government increased the land supply faster, the developer's pay rate would drop, - but the investors and developers are not in charge of supply rules. Suggest you blame the people in charge of land supply, not the developers and investors. Without the people that build the property and maintain it, where would we be ?

Did you actually look it up Matthew? It isn't a hard concept to grasp but clearly you don't given your answer.
There are only two types of work, that where you produce something and that where you don't. Those that don't rely on someone who does to live. Reall there is work and there is jobs.
Yes it is like stealing if you don't do any real work to earn the food on your table. Where would we be? Same as people have lived for thousands of years, they build it themselves. I know developers have this inflated ego that they are important, but they creaming it at the expense of others.
But this is all about finance and property investors are simply a part of that chain, until you understand that you understand nothing. Finance at the moment has politics in its hand. But like it indicate at the top, this is essentially a ponzi game and we are in the final throes of trying to find new meat  to feed in at the bottom, that is why the money spilling out from China is welcome. Good luck with your illiquid investments when it comes to an end.

Anything that increases the supply of houses is clearly productive and should be encouraged. I personally have nothing against property developers and wish they had an easier row to hoe. What is not productive is the selling of used houses to each other in the search of capital gain. So much productive capital tied up in doing nothing - not to mention the decreased purchasing power caused by too much money being spent on paying for housing. I see high house prices as a cancer on our economy (and yes, I do own my own home because renting with a family is not practical in Auckland).

Here is something I have been saying for some time.
As long as the supply of housing is elastic - which is always the underlying cause of house price median multiples stable at "3" - the following happens.
Subsidies to first home buyers enable more first home buyers to buy houses. 
Lower interest rates also enable more people to buy houses, and more houses to be built. It also allows faster repayment of debt, increases discretionary spending in the economy, and stimulates the economy.
Immigration and population growth creates economies of scale in housing production and tends to lower the price. 
Negative gearing - the ability of landlords to write off operating losses against other income for tax purposes, incentivises the supply of rental housing. So does the absence of a CGT.
If housing supply is inelastic, as in Auckland since about 1995, then all the above cause house prices to rise and nothing good to come of it.
Upzoning and building up, also happens to increase site rents rather than decrease floor rents. 
What we are talking about is simply one of the biggest systemic rentier-sector frauds on the rest of society, in modern economic history. 

Scarfie, the insinuation that property investors are "stealing", that any proceeds from that activity are criminal theft and they are not doing any real work seems harsh. Such comments attempt to turn this into an ethical debate which it is not, or at least it shouldn't be.  It is the role of government to intervene if business practices are (or should be) considered illegal or unethical but as it stands, property investors provide a valuable contribution to society.  For those that trade properties, they are adding value to property by making repairs or improving its appearance.  For those that retain properties long-term, they have their capital invested and maintain those properties to ensure that tenants have a safe and healthy home to live in.  I am sure you are right in that without these investors, house prices would be lower but would they be low enough that everyone would be able to buy their own home?  I doubt it.  Not without considerable government intervention and investment to build and supply these houses themselves.  Therefore we need property investors to provide this service.  That doesn't make them better than everyone else or justify an inflated ego, but they shouldn't be attacked for their investment choice either.
If you are going to criticise property investors for "creaming it as the expense of others" then with the same breath you should also be criticising all commercially successful companies and anybody who invests in them including share traders.  The ugly reality is that, in the words of Gordon Gecko, "greed is good".  Without it, we would still be living in caves.  If you choose to believe that businesses/investors shouldn't seek to make as much profit as possible within the confines of what is legal and ethical then I suggest you give up all of your possessions and become a Hare Krishna.
I am a small-time property investor and I am proud of it.  I intend to continue investing in property until it ceases to be attractive to do so.

Every so often someone new comes along and tries to defend their property investment behaviour, just like a thief always tries to put up excuses as to why his theft is justified. The reality is the same for the theif as it is for the investor. Just get over that.
I realise it is a bit unpalatable, and makes a few uncomfortable, but it doesn't change the absolute truth of the matter. Some of course are morally bankrupt and have no guilt, those are the ones that are the real problem.
I am studied in Architecture Sgtsosidge and the reading material and research is there for you if you want to know about honourable ways to provide housing.
The Sgt in your handle, does that imply time in the armed services (like me)? Have you ever experienced the collaborative approach to work? It is something quite different than what mostly graces the pages of

"the absolute truth" because you are of course the undisputed authority on these matters? No, you just have an opinion like the rest of us.

Your architectural studies may have introduced you to ideas, but I assume they are just ideas? Have you fully embraced these ideas/ideals? If so then you are surely earning barely enough to make ends meet. I respect that and it's no wonder you resent those who are aiming to generate personal wealth. But you can't realistically expect everyone to think the same way or judge them unless you truly live a selfless life.

Don't try and turn this on me, for that is a complete fallacy of argument to do so. But then I am used to that from those that have no defensible position.
The funny thing is that those whose sole focus is on wealth close themselves off to the best in life. The error is in thinking about what you can take rather than what you can give.
Unearned income isn't an opinion but a well established truth that dates back to Aristotle, a founding father of the western democracies no less. It was also mentioned by Ciscero and also gets a mention in the Book of Isaiah. Perhaps it is in other religious writings? It is an ancient truth, but that doesn't stop the arrogance or immaturity of people trying to create their own reality.

Sorry, I am not trying to turn this on you.  Rather I am trying to get you to look at yourself before judging others and accusing them of stealing simply because they invest in something you don't support.  My point is that nobody in this world is perfect and that includes you and I.  You may take the moral high ground in some areas but I am sure others could poke holes in your behaviour on other matters.  My sole focus is not wealth, but it's certainly something important to me.  I believe my current quality of life must be balanced with wealth creation which will allow me to continue this quality of life for myself and my family no matter what comes our way.  Property is, in my opinion, a perfectly respectable means to achieve this.  It is certainly no move evil than investing in businesses which are (or have the potential to be) successful and expense of existing businesses.

It's a bit of a toss about where the stealing is coming.

If a person sells investment shares and plants pines...what they they created?  nothing, because the area would grow plants anyway.   but those trees are "unearned income" to the foresters.... but without those trees, then the forestry workers wouldn't be able to earn income...and the people managing them and selling them fuel and equipment wouldn't make their "unearned income" to live off.

Humans with paid for machines might come and take some of the wood away.  Is the profit for the damage not "stealing from the earth".

It takes lots of time and energy and lifeforce to create the tree.
And more to process them into lumber, and byproducts to subsidise the lumber factory....all of which is paid for by "unearned" investors.

To produce.... a stack of timber.

Which is then trucked - owned by a truck owner making "unearned income", paying for fuel and road fees which subsidise the national roading system through "unearned income". For a driver who makes a little earned income while he's away from his family.

For the timber/lumber to sit in a yard.  Where it is absolutely no use to anyone. 
A pile of dead capital which does nothing.

Which is then merchanted to a builder, making a profit aka unearned income. which remunerates the owners of the dead capital, paying them an unearned income from their investment in the brand and store.

The builder builds a house (with a bunch of other trades people, paying a bunch of earned income to quite a large number of people who add nothing to the house or its result)   The tradespeople make earned income.

And it still isn't any use to anyone...not even to the ground or dead trees.  It's still just dead capital.

Because the emergent property is what is being sold - living space, shelter, safety, location.

that's what the buyer is paying for.  But all those things are _produce_, they aren't the earned income.  The earned income is in the time and labour in constructing the house and writing reports and putting in infrastructure.... but those aren't what the person is paying for.

earned income produces dead capital.
dead capital represents wealth store which people can make choices with.

Choose to live in this house?  Choose to sell this house and go somewhere else.

re-selling the house does not reduce it's true value : it's true value is not the labour inputted into it, it's not the space, or even the location.  It's value is what differentiates it from it's component stack of lumber - that ability for it to service peoples' needs.

"Earned income" is just a very poor measure from a time when market and value were poorly understood, and it was thought that there was something spirituality virtues about physical labour (that god would reward).  It is kept alive by simpletons who don't understand value or wealth, and by people with communist-style leanings because it gives them a false sense of equality.  That somehow everything can be produced by labour and value relates to labour..... the first trip to a supermarket with refrigerated produce should be enough to convince any abled minded person that there is value in non-earned labour which is of worth to the customer AND the producers. (no more hawking your own fresh rotting produce at the market).

Likewise anyone who is old, young, ill, disabled, with less than perfectly marketable skillsets, will realise the importance of having some unearned income.

Yes, I know what unearned income is scarfie, I also know how poor the model is which uses it.

First you say respectable, then no more evil. So some uncertianty there, if I have made you think then that is all I can ask. FYI I came onto the website to learn why GFC happened, I didn't expect to find what I did or take the journey I have.
Take yourself and hour or so to watch "The Most Important Video You Will Ever See"
When you understand exponential growth then we can talk more clearly about investments that make a claim on the future. Pretty important depending on what sort of life you want your kids to have.

Guys: please see my explanations above, of the properrty sector functioning in a toxic rather than beneficial way in response to demand side stimuli, when housing SUPPLY is rendered inelastic by regulations.
BTW it is ALL about greenfields growth, upzoning and building "up" has not made ANY city in the world affordable. HK's median multiple is 15+

No it doesnt creat money, in effect you speculate that there will be someone willing to pay more than you did sometime in the future.  This is known as the greater fool. However like musical chairs if you are left with over-valued asset(s) when the music stops you are out of the game, selling at firesale prices.
The interesting thing is when enough specualtors like yourself exit en-mass and prices collapse. what happens then, do you keep your "ill-gotten" gains?

Ill gotten gains ? Nice.
As I said, who will build and renovate the housing stock if investors and developers  are not doing it ? Who will provide homes for people who chose to rent ?
Given I hold everything I buy, how do I get that label speculator ? I'm a long term investor and home owner. I agree the music always stops for a while. You are 100% right there. But that is part of the property cycle and long term investors know that. What is your point ?

Ill gotten gains ? Nice.
As I said, who will build and renovate the housing stock if investors and developers  are not doing it ? Who will provide homes for people who chose to rent ?
Given I hold everything I buy, how do I get that label speculator ? I'm a long term investor and home owner. I agree the music always stops for a while. You are 100% right there. But that is part of the property cycle and long term investors know that. What is your point ?

Mathew in my cursory read of your post you mention supply but you do not discuss it further.

Market conditions could turn quite quickly. Politicians from all parties are proposing different methods for increasing supply. A councillor in Christchurch Raf Manji even suggesting the government buy swathes of farmland to get that affordable supply onto the market.

Property investors need to be aware that more competition may change market conditions significantly. Historically on various metrics housing was much more affordable in NZ.

Have you really informed people of this risk?

Is the councillor aware of how illegal that is?

It is not illegal for local government and is certainly not illegal for central government. It is also not unethical. All parties win. The home buyer gets an affordable home at the most competitive price possible. The farmer gets compensated so they can buy another farm elsewhere. The developer makes a reasonable return.

Why should this process be illegal?

Here is something I have been saying for some time.
As long as the supply of housing is elastic - which is always the underlying cause of house price median multiples stable at "3" - the following happens.
Subsidies to first home buyers enable more first home buyers to buy houses. 
Lower interest rates also enable more people to buy houses, and more houses to be built. It also allows faster repayment of debt, increases discretionary spending in the economy, and stimulates the economy.
Immigration and population growth creates economies of scale in housing production and tends to lower the price. 
Negative gearing - the ability of landlords to write off operating losses against other income for tax purposes, incentivises the supply of rental housing. So does the absence of a CGT.
If housing supply is inelastic, as in Auckland since about 1995, then all the above cause house prices to rise and nothing good to come of it.
Upzoning and building up, also happens to increase site rents rather than decrease floor rents. 
What we are talking about is simply one of the biggest systemic rentier-sector frauds on the rest of society, in modern economic history. Not theft. But in primitive economies, where it is much more prevalent and in many more essential items besides housing, we call it corruption and racketeering and oligopolies. 

If house prices rise at 7.5% per year and incomes rise at 3% per year then in 30 years then a house costing $600k now goes to $5.25m and an income goes from %60k to $146k. I.e. 10 times income to 36 times income. Good luck selling it.
5% return on shares? I get more than that in dividends each year then capital growth (untaxed) on top of that. Share market returns average around 10% per year in total returns E.g. DJIA since 1900 - 9.4%pa, last 20 years - 9.6%pa, last 5 years - 13.4%pa
Also note that interest on loans for leveraging shares is tax deductible in the same way as interest payments on rental properties.

Agreed, but: how do you fund the leverage on shares ? Most shares tend to retain income to avoid paying dividends, - (not all stocks but many of them tend retain the income). So if you leverage stocks, you have to fund interest until you sell. 

if you use leverage to get into a self-occupied dwelling you have to fund the interest on that also, don't you?

Fair enough.
But speaking of Joe Average, how does he/she invest in a leveraged international share portfolio. pick winning stocks and feel safe about understanding the layers of prospectus and risk inherent in that process? Is this not an expert game, vs the discussion on point of owning a home vs tipping your money into the share market ....

Picking winners is a losers game on average. Invest in a low-cost global tracker such as Vanguard's VT  which is diversified over every industry and every market (6632 stocks and a 0.18% annual fee) . 5-year price performance of 10.9% plus an additional 3% a year in dividends.

Good advice. Along with: start as early as possible even if you only have a modest amount. Add to it regularly. Don't try to time the market. Re-invest dividends.
The market has had good years and bad years since the Dutch East India Company became the first publicly traded stock 400 years ago. No one has ever proved they can accurately predict when the good or bad years will be. The longer one delays on starting their portfolio, the greater the chance they will miss out on a really good year. 2009, when the screaming of doomsters was loudest would have been a great time to enter the market. Ah, hindsight, if only....

Problem with that scenairo is it relies on having freely available (and significant) cash to put into the scheme, even during down times (such as redundancy, job collapse and bankruptcy).
 Making money when you've already got a plentiful and steady supply isn't that challenging.  I can show you a similar hedging system that works in FX that uses similar principles - rather than cash out you just keep "regularly investing" until the market cycles.   If you're hedged and you never lose, then building a sizeable portfolio isn't a challenge.

  Getting it to release more than you put in is always the challenge...and for that you can't be "contributing regularly" (as it requires net withdrawl regularly)


Pls advs how you stay ahead of the market doing this.

It's the shares equivalent of putting money under the mattress.  Sure you don't lose it, but then it doesn't get ahead either, and the whole time you're losing to inflation.

You don'the try to beat the market. 11% per year over 20 years is an 800% increase. In any given year only 20% of professionals manage to beat it. Over several years the number ahead of the market trends to zero. Given that active fees are much higher, you are better off being passive. There is a huge body of research on this.

If you're not beating the market, then you're losing to inflation.  Might as well just invest in Auckland housing.

Some kiwis really need a financial education on how to invest in *not_houses*

The market goes up much faster than inflation - over 7% more on average. E.g. S&P500 is up 13% this year vs inflation of 1.5%

Oh I very much agree,   but S&P isn't the NZX, despite government games to "encourage" business on the NZX.  So at least houses is investing in NZ.  But it would be nice to having work investing in NZ, and something other than slow moving, high exit price, housing.

Last time there was a big push for retail investors, there was a big fall within a year wiping out many ma and pa investors.

It is not the overall average income that counts. It is the average income of people who are in the market for property. Chances are a person or couple looking to buy the 600k property already have an income around 146k. 
When I was just married in 1976 we rented a bungalow in Martin Ave, Mt Albert. The lovely old landlord would call around every Thursday to collect the rent and have a natter. The rent was $28pw and the place worth then about $25k. The landlord would implore us to buy our own place ASAP and stop paying money to his already well-off self. He said property would keep increasing in value for a very long time. I repied that if that happened then one day a house would cost (I picked a seemingly ridiculously large amount) $100,000. He scoffed and said "hmmmph $250,000 more likely". 
I thought he was mad. As it turned out we were both well off the mark. That property is currently valued at $1,060,000. And today it takes us only a matter of weeks to earn the number of dollars required to purchase it in 1976.

You miss the point - whatever you earn now, affordability gets 3.6 times worse under these assumptions.

Assumptions are just what they are, predictions or guesses, and have no bearing on what will actually transpire. One could just as well guess/predict/assume that the incomes of first home buyers will rise 2% faster than house price inflation over the next 30 years and things will be much easier for them.  Who knows? Not me, not you.
My point is that the average wage has become outdated and irrelevant with regard to house prices First home buyers tend to be in the mid 20's to mid 30's age group. Incomes for this group rise way faster than the overall average wage. This effect will be more as a higher percentage of the population become superanuants whose income increases by about the rate of inflation. 
Example: Son and his partner have just bought a new build for $540k, 4.5 x their current income. Their incomes will almost certainly increase by 50% or more over the next 5 years.
All his 30 something friends have rapidly rising incomes for the last 5 years, many of them making over  100k and a few much more than that.
And yes, I know the world could go to hell in a hand basket, it could all turn to custard or whatever. Someone will turn up shortly to tell us peak oil is going to rain on the parade.
Que sera, sera, and all that. 

Vera, you need to come up with a new (or better) definition of "First Home Buyer"
It's soooooo 20th century, it's so yesterday, soooo out of date
It no longer fits the bill
Most new arrivals (migrants if you will) who immedialtely acquire a house on arrival also fit the definition of "First Home Buyers" in the New Zealand context

I agree. So does Vera. She's doing a spot of gardening at the moment and later we'll being sharing a bottle of 2014 Tohu Sauvignon. Sensational!  :)


I'm a 60's child.   Several of the posters here are older than me.
That means we entered the workforce around the 70's and 80's and early nineties.

Incomes (especially outside Auckland) definately don't increase by 50%.
Such increase is very unusual (an "outlier") and hopeful people setting up the countries macro-economy strategies (and government salaries) aren't under the belief that your example is normal.

Mathew, while I agree wholeheatedly with your conclusion that owning is far better than renting, your analysis seriously underestimates the real situation which is that ownership is so definitively better, but delivers that conclusion based on the wrong reason ie capital gain over rental inflation.
If we assume inflation is 2% (and rents and opex follow that, but house prices may exceed inflation depending on location), then
for your house 1 in Sunnynook, assuming a tax rate on savings of 28% - an owner is $568,619  better off than a renter in 2024 or $466,466 in today's dollars.  In this case even if house price inflation only just matches CPI then renting and owning would be about equal after 10 years.
for house 2 in Pt Chev - an owner is $1,083,765 better off than a renter in 2024 which is $889,065 in today's dollars.  If house inflation was just 2% (matching CPI) the owner would be $50,500 better off.
for house 7 in Rotorua, which showed it was better to rent than buy, add rent inflation and you would be $4384 better off owning assuming a 17.5% tax rate on savings.
If we consider a more realistic small town/city scenario: a $200,000 house that would rent at $300pw and have opex of $4,000 initially, then with just CPI house inflation (2%) and a 28% tax rate on savings: owning is $85,865 better in 2024 dollars, which would leave you 61% richer than renting after 10 years!
Consider house 2 in Pt Chev again with a more realistic 50% rise in real terms over 10 years (6.2%pa incl CPI) then you will be $598,884 better off owning in 2024, which leaves you 94% richer than the renter by 2024.
On both the revised scenarios it is much better to buy than rent, but more importantly buying in an area with lower capital growth but with higher rental yields is not such a huge disadvantage as your calculations suggest.
Overall failure to include inflation in rents (in Mathew's calculation) seriously skews the conclusion towards favouring low yield high capital growth investments which are risky and volatile.
My guarantee is that you won't see capital values rise 136.7% in Pt Chev in 10 years (ie 9% pa) if rents in the area only rise 21.9% over the same time (2%pa)!
Investors need to focus on areas with both rental and capital growth, rather than just hoping on capital gains.
(The above calculations are for illustrative purposes only but are to my best intentions correct.   Note that I am also a property investor and was formerly an Investment Analyst at a large multinational and have a background in Mathematical Physics, and also regularly comment on this site - but not for a while.  I previously (a year or two ago?) emailed David Chaston the spreadsheet used to perform the above calculations).

Also, what are the predicted losses if at any time in the next 10 year period something happens that stops capital flows to NZ and requires higher OCRs to attract that capital back, meaning sustained higher mortgage rates co-incident with low gdp wage growth and high unemployment?
Leverage is a double edged sword, a 10% drop on a 1.2mill Pt. chev house is 120k of your money gone not the banks

Isnt this a normal part of the property cycle Simon ? Of course house prices will drop for a period when interestrates go up or a chnage of liquidity or economic conditions occur, - but shares carry this risk two.

Also, banks don't lend based on future capital gains, so basing an investment strategy on capital gains and not income is a road to nowhere.

you aren't likely to rent a $200k house for 300pw. in smaller towns.

Are you an expert cowboy?  Clearly you don't know much about smaller city markets.  7.5% gross is an easy rent to achieve.  In markets I know inside out (Timaru, Dunedin, Invercargill) it is easily achieved without trying.  Even in Chch it can still be achieved (prior to the EQ it was very easy to achieve).
Eg $185k rented at $295:
$209k rented at $340:
I could go on and on...

Also achievable in P.N which is my current hunting ground..

Check out the Westpac Property Investor Report.  All cities including Auckland have suburbs where average yields close to 7% or above is achievable.
If those are the averages there will be cases where higher yields have been achieved.
Just because Ponsonby and Mt Eden detached houses achieve only around 4% gross does not mean that the whole country has property valued at those levels!
To suggest that small towns can only achieve 5.7% gross returns is a bit naive from Mathew.  (Though some small town properties probably achieve much less return, those are not really a good comparison as they are not likely to be suitable as rental properties (ie too flash, or too big)).

Chris J.  You are wasting your breath.  You are not going to lift their horizons past south Auckland.

It's rather disingenuous for the author of this article to publish results based on an inaccurate calculation method and then use figures for small towns that are at best misleading (there are houses in Rotorua advertised in the $150k range which claim rents of up to $290pw), all to draw the conclusion that buying low yield properties in the big city is best.
The 2001-2007 boom proved otherwise.  Small towns vastly outperformed Auckland in terms of capital gains.
Although constant house price growth in Auckland is assured (we do own several inner Auckland houses), overall investment strategy must consider income over pure capital growth.  To suggest otherwise is dishonest, misleading or just plain naive.
In terms of simply whether you should own or rent, I would say that almost invariably it is better to own than rent IF you buy a house with land.  If you buy an apartment or a brand new or highly renovated house, it all depends on how much that property will depreciate in relative terms during your ownership.
Of course if you are wealthy enough to own a flash house without debt, such considerations become irrelevant.  However if you want a flash house or apartment and need a massive mortgage, it actually may make sense to buy a more modest house with land in a similar location and rent it out while you rent a luxury home which is relatively depreciating while your home is relatively appreciating in value...

"advertised"  is the same as "not happening".

All those houses on the market at (3g) 250k....
doesn't mean the prices is at means the price _is_definiately_below_ 250k .
advertising 250 or 300 pw... means that the tenancy is unfilled at 250 - 300 pw otherwise it wouldn't be advertised anymore.

Looking at auckland in that property report all good yields are from apartments.
The only 'house' thats yielding well is Wellford, which is 80km and an hours drive (in off-peak) north of Auckland!

The IRD is well aware that operating loss offsets against other income has ballooned steadily. This is classic bubble symptom - capital gains expectations no more realistic than those in any Ponzi scheme.

What the previous person just quoted were three bedroom student flats.

Where are you going to get 3bd place for 200-240 in PN?     3bd is 270+

Last one I got was just under 200k rented for 290. Awapuni, highbury, tokaroa, in the nicer parts/streets away from any state houses make good buying esp with all the extra help FHBs are getting (soon able to withdraw all kiwisaver for deposit), at the lower end of the market FHBs get their 20% deposit gifted to them (kiwisaver, FHB grants), once sentiment changes you'll see many FHBs competing for very few homes under the 300k mark. International students on the up, student cities are a good bet esp if the investment is justified on a cash flow basis alone as is the case in palmy

Good comments Chris. The rental inflation adds to the story and I dont mean to skew the data .( I did mention  I excluded it in my assumption set for reasons stated), but you cant say that that leveraged growth does not help the story either. The two go hand in hand (leveraged  growth and rental income). In addition, have you looked into what happens to rents and capital growth for small town NZ, Vs Auckland ? The growth in rents is not equal. Nor is the capital growth equal in my experience in these areas. Perhaps someone has some stat's but I have found rents go up in the main centres faster, and occupancy rates are higher, - based on assets I own.
For this reason you would not catch me owning houses in the provinces or small towns for investment as a rule, -  rents are flatter / occupancy rates lower, (undermining the rental growth potential you project) and many small town areas  are 'low capital growth  - low net yield environments' (generalising - I know there will be exceptions). Low growth - low net yield areas are a disaster from a total return perspective , when compared to the likes of Auckland for returns.
I say net yield, because the gross yields in small towns can look attractive. For example $200 p/w rent on a $100,000 property is a 10% gross yield at 50 weeks occupancy. But take out $6,000 of rates, insurance, management and repairs, and you have a net yield of 4%. Worse than a targeted investment property in Auckland even in 2014 - everything I buy in Auckland is over 6% net when I have added value to it, and some of it is over 7% (with a bit of effort). Ok - a good investor can get the cash yields in small towns if they are savvy and beat the 4% above, - but will their town grow in value ? Does it have tight supply ? Is there a demand story ? Will income rise and facilitate rental inflation ?
In relation to the discussion of leveraged residential investment returns from property, on that topic I don't advocate high growth low cash flow (negative gearing)  and I am not trying to intentionally skew data by ignoring rental inflation.  I prefer to target niches in Auckland with high cash flow and high growth expectation. You can get cash flow in Auckland, but you have to work for it.
You can build a minor dwelling on the back of property to improve cash flow.
You can target areas like South Auckland that have better cash flow in some areas. South Auckland capital growth is actually very high if you look into it, - a 10 year capital growth rate of just over 7.5%.. Eastern bays was closer to 7% for the 10 years to July 2103 (sorry that's the most recent data I have - maybe someone has updated data). 
In  example, in the last couple of months I purchased a property on Jervois Rd in Ponsonby. It has a net yield after operating expenses, of 6% and under the AUP can be built up to 5 levels from the existing 2 level potential. The increase in density and character of area will make this asset high growth in my view, and 6% net yield as a holding income is not to be sneezed at. I have lots of examples like this that my clients buy and I buy routinely in Auckland. I have one just like it also recently purchased in Glen Eden, - netting 7%+. These numbers defy the averages that economists speak in, but as I say property investors don't invest on the average of the market. They target niches and buy carefully. Home owners can do this too buying rezoned property.
Pt Chev Example
As I said you can change my growth assumptions to be as conservative as you like (within reason). Change the capital growth assumption to 5%, it still beats renting the house in my model, all other factors equal. Add rental inflation as you say and it is doing better. Reason: The impact of leveraged return at 5% growth vs non leveraged share investing at 5% after fees & taxes  (as modeled). The leverage effect on the ownership return, exceeds the differential cash flow of renting vs owning. ($45,000 vs $39k in this example. per annum at 5% both ways.)
And as you say, all numbers are for illustrative purposes. Who knows what the capital growth rates will be ? My best guess would be somewhere in the middle between 5-9% for Pt Chev. But along the way, the property cycle will do its thing, house prices will devalue for a while, and then rocket again. Its a long term trend.
Last comment: what I don't want out of property - is property that is worth the same (or less) in 10 years as it is now (or near to it.) Whats the point of investing or owning if you are not getting ahead ? Just look at the rest of NZ vs Ch Ch and Auckland over the last four years. Auckland is well over its 2007 former peak value and circa 50% up on the GFC trough value. Compare this to the rest of NZ who are not experiencing significant growth (except Christchurch). And don't quote 2004-2007 as evidence that the small centers out perform Auckland, - it was a 1 in 30 year event. For the prior thirty years, if you painted the letter box in Invercargill, Gore, ( Insert small town name or small city name) - , you were over capitalising the house :)
Whats the point in having assets that cashflow themselves, that don't go up in value ? You need both returns. High and rising rents and capital growth.
I need to get back to work.....

I've been posting here since 2006 so I'll likely still be around in 5 years time.
Lets get clear on our differing points of view so we could look back in 5 years time and see who turns out to be correct.
I'll take P.N values based on QV index Vs. Pt Chev values using the same QV index.
in 5 years time I say P.N index will have increased in % terms by more than (or not decreased by as much as) the Pt. Chev QV values, taking today as a starting point.

I'll take Auckland Vs Palmerston North : IE Auckland gets more growth in average house price over Palmy.
You have the advantage, because Auckland has already boomed and is arguably peaking. You get the counter cyclical investment.  But I think Auckland (rightly or wrongly) is going to go up further, and Palmy will stay flatish. Auckland is going to get it, because the media are thrashing " Auckland Auckland Auckland" into NZ, and it is driving kiwis to Auckland. They are buying and investing, driven by speculation and greed. We are going into a bubble and there is no stopping it.
So I'll take the bet. I would be more confident if we made this a 10 year bet. 

That was refreshing, seems to be a heck of a lot of folks out there with blinkers on, although kiwimm got me thinking, can't keep going on like this forever! Meantime, ride the wave.

Hmm, lets assume asset class 1 returns 9% and asset class 2 returns 5%.  Now tell me which one is the better investment?  
What if asset class 2 in real life returns 10%?

Actually its 5% after taxes and management fees.....
And I'm negotiable on that 9%. Call it what you like - 5-9%.  In context of the discussion, Rent vs Own - it does not matter if you make them both 5%. Leverage gives property an unfair advantage,

iv)  income from dividends is taxed...

but rental comes from taxed income (dividends, income from  trading, paye wages) exactly the same as capital repayments.

But capital repayments (on the domocile) end.  rental does not.  The different (rent not paid, especially if interest is reduced by paying off at optimum rates) results in release of tax-paid income.   something which you don't get from capital   (and to re-iterate, if you're looking forward to receving a capital are trading and thus owe tax on your profit).

- -
An important way of look at the process is that the equity in the house, will _always_ require tax to be paid on it.    thus capitalising the rental-expense, as a means of building that equity is something that needs to be done as soon as the length of the contract is acceptable.  Leverage will always cost interest, equity-building will always cost you tax.  Find the sweet spot and don't complain that it is going to cost, because it always will, it's about reducing that cost that's teh important part.

Mathews numbers are pretty much correct for how our system works - one of the legacy's of which is increasing high house prices that are becoming more and more unaffordable.
As there is a converse relationship between capital growth and yield, it would be good to see what the numbers would look like if capital growth was lower and yield higher as happens in places with stable house prices?

Hear, hear!
People’s ability to pay rent is in practice, constrained by what they can pay here and now out of their income. Landlords cannot “follow the house prices upwards”. House prices are affected by people’s ability to save money (and get assistance from family and other connections) and to borrow money.
The ease of credit actually makes surprisingly little difference – even in markets like South Korea, or many developing countries, where there is very tough credit and people pay cash for most of the purchase price of a home, house price median multiples can be well over 10 – worse than anything that happened in California.
It is the system of urban housing supply that determines who will be included and excluded in actual ownership of homes; and even the prices paid. Credit merely determines what proportion of this will be paid for by saving and what proportion by borrowing.
The property rentier/speculator class are in many cases taking up some slack in the “housing” of people excluded from ownership, by continuing to rent out properties at an operating LOSS because they are chasing capital gains. But obviously in some countries, the main outcome is informal slum housing. A lot depends on how developed the nation is, whether it has had a phase of strong increase in democratisation of home ownership in the past – always the result of suburban automobile-based growth – and is now returning to Victorian-era conditions of rentier versus serf; or whether it is a still-developing nation that has never known anything else.
But there is no lack of investment in rental housing in the case of the many cities with stable median multiples of 3, either those who used to be that way for decades, or those that still are. Obviously yield is adequate in those markets without the expectation of MUCH capital gain. See my comment right at the top of this thread regarding "normal" gains ahead of inflation, for real estate. 

“…I very much agree with your points about the supply side, I mean I think that’s a huge issue in housing and in a sense if we’re too rigid on the supply side then fundamentally housing prices have to be higher.  That’s not a bubble, that’s fundamental, that’s not good though.  Because really in a country this size and the land we have, I can’t see how we shouldn’t be able to have fairly inexpensive shelter really and I wonder whether we’ve unnecessarily given away a natural advantage we have. But anyhow, that’s really beyond my area of expertise.” - 
These comments were, supposedly made by the Governor of the Aussie Reserve bank,... about Austrailia

We don't have inexpensive shelter
(a) huge amounts of regulations and no pressure to sell push up prices.

 "a country this size" with the NZD limitations doesn't count in Auckland.  Much of the growth comes from several foreign investors and investment vehicles - they don't use NZ money, they're globalised - so when Japan or US print, they get get extra cash (outside of the NZ refusal to increase cheap money).   This is like opening a special limitless super-low interest loan for foreigners to pour money into Auckland.   the local economy is so slow and steady, that it acts like "bricks and mortar" for foreign cash, and so holds it's value.   The foreign govs keep increasing supply and the Auckland holdings hold their value as the foreign assets lose value.   But for NZ that's like WW2 attempts to inject money into each others economies to cause crashes.    Until the RBNZ puts a stop to it, it lets the foreign parties print as much NZ assets as they want.

For the example where you compare the benefit of leverage (Property vs shares) on what basis have you come to your income and growth numbers?
I would have thought the long run dividend yield for the shares would have been closer to 6% (not 4%) especially if you are talking domestic equities.
Also from a forecasting perspective isn't it more realistic to assume that over the very long term the capital growth from a property is going to be more aligned to the long-run rate of inflation or at best inflation + a small nominal margin?
I wonder how the leveraged return would look based on historical long run market data.

"I would have thought the long run dividend yield for the shares would have been closer to 6% (not 4%) especially if you are talking domestic equities."
In reply I was modelling 5% after tax and management fees ? If I change that nu,number to 6% it does not make much of a difference against the leveraged return..
Regional vs Main Centre Growth
Have you looked at the 20 year capital growth rates of Auckland and property around NZ ? The rates  exceed inflation, but not everywhere. There are big regional variances and time frame distortions. One anomaly was 2004-2007 which the regions and small towns won hands down on growth, Eg Property  in Invercargill went from as little as $25k to $120k in parts of South Invercargill. But it was a one in 30 year event (in my opinion). A correction, catch up if you like. And the market over corrected in places like Whangarei.
If you look at the last 4 years, the hangover of that growth is still wearing off with the regions and small towns lacking growth still. As said above, while they might be lovely places to live - many places lack population growth and have loose land supply, which undermines capital growth potential. But experienced investors will get reasonable cash yields if they know what they are doing.

Dividend yield for NZ shares runs aroung 5-6%. Tax is negligble due to the imputation credit. On top of that you have capital gain from the increase in the price of shares - this makes up the total return of around 10% on average. Management fees are zero if you own shares directly or 0.65% to hold the top 50 shares in an ETF.

Imputation credits are purchased from IRD from the pool of funds available for dividends.

So if I buy Xero shares (they seem popular) or biotech stocks, I should see a capital gain?

And from what I've seen very few NZ companies payout above 5% of shareholding value regularly,   If they do it would explain why the non-Auckland economies are in trouble, and government/commerce commission should look into why large dominant companies can poull such large profits from the struggling economy, when many smaller oraganisations and individuals struggle.  (ie it implies the companies is perferring at 5 - 10% inflation (growth) when the average of the economy is at 0-1.5%...  if one part is 10%, and average is 1%.... then everyone else is doing really badly !!!

I was interested to compare how the cities had performed, so I dragged out some 1990 real estate mags and took a selection of properties and calculated what they would be worth today and the annual return.  Note I only had a west Auckland Property Press and as Aucklanders will know the inner west has outperformed the inner east so that needs taken into account.  Also in Dunedin and Invercargill I only had a "United Realty" mag which didn't have many listings and most were mid market tidy properties.  Also note Dunedin and Invercargill fell in value during the 90s so gains in 2002-07 were greater.
Massey 4 bd new house $355k - 2014 $750k 4.6%pa
Glendene 4 bd exec home $279k  - 2014 $900k 5.0%pa
Ponsonby new townhouse $265k - 2014 $850k 5.0%pa
Mt Albert 2 bd unit $145k - 2014 $475k 5.1%pa
Henderson basic 3 bd $128k - 2014 $450k 5.4%pa
Epsom new grammar zone townhouse $355k - 2014 $1.4 m 5.9%pa
Herne Bay renovated 3 bed villa $498k - 2014 $2.2m 6.4%pa
Herne Bay renovated 2 storey villa $625k - 2014 $2.8 m 6.4% pa
Eden Tce 2 bed cottage $139k - 2014 $750k 7.3%pa
Epsom 2 bed bungalow on 954m2 $320k - 2014 $1.8m 7.5 %pa
Mt Eden bay villa $209k - 2014 $1.25 m 7.7%pa
Mt Albert do-up bungalow small site $133k - 2014 $800k 7.8%pa
Ponsonby unrenovated bay villa in the avenues $245k - 2014 $1.6m 8.1%pa
Grey Lynn 2 flat bay villa $155k - 2014 $1.2m 8.9%pa
Burnside new 4bd exec house $416k - 2014 $950k 3.5% pa
Halswell new 4 bd house $239,950 - 2014 $575k 3.7%pa
Merivale renovated character with tennis court $695k - 2014 $2m 4.5% pa
Spreydon 2 bd 1980s unit in block $86k - 2014 $270k 4.9%pa
Hoon Hay brick 4bed $127,500 - 2014 $475k 5.7%pa
Linwood average bay villa $67,500 - 2014 $350 7.1%pa
Spreydon 2 bd bungalow on 842 m2 $82,950 - 2014 $450 7.3%pa
St Albans 3 bed bungalow on full site $77,950 - 2014 $425k 7.3%pa
City Rise modern 5 bd house $250k - 2014 $650k 4.1%pa
Mosgiel 4 bd b and t $88k - 2014 $275k 4.8%pa
Mornington tidy 3 bed bungalow $79k - 2014 $250k 4.9%pa
Caversham tidy 4 bd villa $55k 2014 $230k 6.1%pa
Kew 3 bed 1960s $61k - 2014 $180k 4.6%pa
North modern 4 bd $115k - 2014 $370k 5.0% pa
South tidy 3 bd cottage $23k - 2014 $90k 5.8%pa
South large tidy 2 flat villa $40k - 2014 $140k 5.4% pa
From that exercise you can see the gains are mostly around 5-6% pa wherever the property was except that modern houses actually increased less and the inner Auckland suburbs that have gentrified have increased by about 2%pa more (although this could have been a one off gentrification gain) and inner Christchurch property has gained not much less than inner Auckland over the same time period.
So the conclusion is that you need to be very careful forgoing rental income in favour of capital gain because it may only be 1-2% more capital gain for perhaps 4-5% (of the capital value) less in annual income...

Great post.
Certainly is not the case of auckland running at 6-9% and everywhere else running at 0% as Matthew has tried to paint.
Some auckland suburbs (good, 'growth' suburbs as the spruikers call them) under performing capital gains of some dunedin/invercargill suburbs over that 24 year period.

Just a correction the first listing in Massey should be $255k in 1990 not $355k.  The annual increase at 4.6% is correct.  Sorry for the typo.

can youi imagine trying to buy land and build a house for those southern figures......

Why are you using CVs ?
Why have you excluded South Auckland from this Analysis and just looked at prime city fringe and high capital growth suburbs ?
You are not comparing apples with apples. I'm saying all of Auckland is high growth, and property investors are smart to pick the high growth suburbs with cash flow (in Auckland).

  • How about posting Otara, Manurewa and  Mangere? 
  • Further, are you looking at CV's or actual sales ? I have a property in Northland with a CV of $1m that I paid $350,000 for. Its probably worth $600,000 as a market value on a good day. People are not buying houses in Northland, they are in Auckland. But the QV stats would say Northland and Whangarei are performing. I dont think CV's are a valid market analysis in this context.
  • The difference is I can sell my house in Auckland for 20-50% above the new CVs. The smaller centers are often sold well below CV.
  • Also Auckland CV's went up 34% on average this month. You missed that bit,
  • So Auckland CVs are 34% up on your numbers, and still 20 - 50% above that number in real market value terms. Literally all of my Auckland portfolio values at above the new CV's.  Small town CV's are in many cases conversely above the  real market value.
  • With respect, CVs Auckland vs rest of country are way off reality.

Another thing, - try selling your property in the small centres during a housing crash. How does that go for you ? Answer: very badly. The assets are more volatile in value.
Try selling in Auckland during a housing crash. There is always a buyer.
The stability makes Auckland more bankable and safer. 
BTW I had a dozen properties in Invercargill. Paid $25k-$30k for them when the reported stats you quote said they were worth $40k. I know that market and you cant sell those properties for $140k in this market. They have sunk in value - the CV's are rubbish. Way above market. Try getting a market value on some of those properties and the comparative Auckland properties.
I accept Ch Ch CV's are fair or conservative.

Matthew, firstly I am not using CVs.  I am basing the 2014 value on my professional opinion, which I would say is fairly accurate, but even if it is 10% out, it would only make less than 0.4%pa difference to the annual return over the period which would not alter the result and would make "bugger all" difference given some may be over estimated and others underestimated slightly.
Secondly, I only had a Western Suburbs Property Press, so no South Auckland.  You will find the Eastern Auckland suburbs performed much worse than the West Inner as you may recall that in 1990 there were plenty of million dollar Remuera homes that probably struggle to sell for much more than $3m or so today (just an example).
To be honest if you were buying South Invercargill at $25 - 30k you were possibly buying the ones that had been $5 -10k in 1999 - 2002.  We purchased a few in Dunedin the cheapest being $13k.  That property has returned me net of all expenses over $60k since 2001 and is worth $110ish now.  Others purchased in the $20s have returned similar amounts.
I'm not sure how long you have been investing for (whether you jumped on the band wagon in 2003 or not) but I can assure you that all markets including Auckland have downturns.  There was a point in 2000 where some people were selling at quite considerable losses in prime Auckland suburbs.  I know that Christchurch was a terrible market in the 1990-1991 period, 1998-2001 and 2008-2010.  We bought some properties during that time at less than half what the previous owner paid...

The bigger gain in centrally located older houses in Auckland, is because urban boundaries make all urban land values inflate by a similar FACTOR - and the older depreciated structures in the old suburbs near the centre of Akl were not worth much even 20+ years ago. So there is commensurately more gain on the initial purchase price than for a newer property further from the centre.

I have been a renter for almost 10 years which probably would have cost me around $182,000 I have paid out to landlords, (wow that figure is quite high when I write it, average of $350 per week).  What have I actually got from it, nothing, still no house ownership, still paying rent to somone else and when I retire I still wont have ownership and will still have to pay rent.  I have always thought that renting was the way to go, but now after reading this article and looking back I would have been better off buying a home.  Matthew you have opened my eyes to home ownership, get on the property ladder asap, it maybe to late for me now though.

Go take advice Tony. Please don't do anything rash, I suggest you talk to a financial advisor or someone who can run the maths on your specific household position. I am glad the debate has been constructive for you.

Thanks Matthew, yeah this whole property thing has got me thinking about my financial position, maybe even buy a rental property as well so someone can pay me instead, thanks heaps.

Great legal side step by Matthew, Tony76. So after taking his advice don't blame him if you buy at the top of the market and it crashes.
Matthews advice is true for today and foreverything that has happened in the past, and this present system is the reason why we are in the unaffordable housing mess we are in and that is why Central Govt. is trying to change things.
Crystal Ball anyone?

[ Commented edited. All opinion on is of a general nature, using illustrative examples. It is not advice. Please do not jump to conclusions that specific personal advice is being given; it is not. As such Matthew Gilligan is quite correct to point readers to get proper qualified advice for their persoanl circumstance. A comment stream is not advice and you are being superficial to suggest it is. Ed]
In fairness Mathew should state that past returns in property investment and his predicted future returns are underpinned by the current regulatory framework. This regulatory framework is being debated by all the main political parties. Changes to regulatory framework are possible and this could result in a more competitive elastic housing supply response. Housing inflation could stabalise. This would change the property investment market from chasing capital gains to rental returns.

To the editor. I think the investment advice should not just take into account individual circumstances but also the general risk that the current regulatory framework regarding urban development is hotly debated and could well change. If the regulatory framework changes then future projections based on previous historic data is no longer valid. It is my opinion that this 'risk' should be explicitly stated by Mathew Gilligan as he clearly stated he was an ACA which is a professional body that acknowledges it has ethical responsibilities to the wider community.
As a registered nurse if I wrote an article giving health advice that ignored known risks I might find myself in professional difficulty. Do accountants face a lower standard of ethical responsibility?

and yet the risk of peak oil is ignored.
ie lots of risk are simply not bothered with, either because of in-competance, or lack of knowledge.
or both

Wanna Ehrlich/Simon bet on this, Steven?
Did you see the present decline in oil and gas prices coming?
Do you see anything?
If there ever actually is a peak oil whereby the prices rise faster than incomes, that time will be delayed enough for technology to have solved the energy problem completely. We are most of the way there already.
"...Saudi Arabia has some of the lowest "lifting costs" in the world. Some estimate that it only costs the Saudis less than $5 to extract a barrel of oil from its fields. This is stark contrast to the much higher costs in rival countries and offshore and of shale producers. This permits the Saudis to withstand a protracted price slump far easier than other countries. The Saudis can use this ability as a weapon to achieve its strategic ends..."
But Sheikh Yamani famously convinced the Sauds to extract and sell the oil before the day comes when it WILL be left in the ground - as he said "the oil age will come to an end not for lack of oil, just as the stone age came to an end not for lack of stones"

You know sometimes I think you might just get it then you reply like this, proving you do not.
Yes, Matt Simmons did, rinse and repeat.  Every time the oil price gets too high, about 6% of US GDP the USA and world goes into a recession.  Matt Simmons also said generally he thought it would take three dips like this for the world to figu e out the problem is oil is too expensive. So this looks lile the second dip, one more to go.
"rise faster" check 2004 and on.
"solved completely" as Robert Hirsch said in 2005 we need a decade plus to do this and we are now a decade later with nothing done. It is interesting because every time we get a price dip or the production plateau  keeps on going we waste that time in doing nothing to prepare.
Oh and solved is multi-stage. So time is the key, first off we need time for teh scientists to find solution we can afford, they have not yet.  Then we need time to commercialise it and then mass produce it.  The last stretch one alone is 10+ years taht's the time it takes to build on the size and number needed to repalce oil calorie for calorie.
Old Saudi fields maybe used at $5 but not these days. Saudi's strategic ends are over its no longer the swing state.  Saudi's costs are rising, its internal consumption is growing at a huge rate and it needs to bribe its populace to keep them quiet.
Im surpised on that comment, in taht he's say something that stupid.
So Im not sure what you are looking for on that bet, that the price will go lower? and how low? stay down for how long?
Simple answer no one knows because the demand and hence price is dependant on the the state of the world's economy.
What I am sure of if this isnt a serious recession oil will quickly recover to $85. If it is a 2nd Great Depression then $35 is quite possible and maybe for years.  I am also sure we will see the equiv of $100 oil again, unless we never recover and have 30 years of Greater Depression mk2, by then oil will be gone anyway.
Im not sure if you are hoping for cheap oil? if so then we'll see OPEC and the other oil producers in dire straights, eg mexico's budget is substantially oil, no good oil price, no budget. That could get really ugly.

That feeling is mutual - sometimes I feel you are getting it too.
BTW, this site is an econ and financial one. You seem to be slowly grasping some of the econ concepts that matter.
We can agree to differ on whether energy really is going to "run out" and still agree on what are the right local policies. I hold that the right local policies in most things are going to be the same whether resources are going to run out or not. Urban intensification is the wrong policy from all angles. 
I wish you would get this and stop acting as an enabler for the FIRE sector racketeers and their urban planner cronies. 
I actually have no idea even after years of arguing with you, what you think are the right policies for a future energy run-out. Compulsory sterilizations of all women? Shutting down most of the health sector so that more people die younger? Please tell us, and stop wasting your own and everyone else's time with arguments that circumvent the actual point being discussed. 

It is a question whether regulatory change or a crash will come first.
It is all very well for Matthew Gilligan to argue that we are in a new normal where rentiers are empowered, and that strangled housing supply guarantees this. And it is all very well to assume that the establishment will try and restore bubble prices as if they are the new norm, after each crash phase we go through.
But each crash will be damaging, and the distortions from both the malinvestment in non-productive dirt and from the crashes, have to be worse for the economy than reforming back to stability and low economic rent in urban land values.
I simply cannot believe the ethics of people who "get it" that supply and urban planning IS e problem, and whose reaction is "yippee, some of us can get rich at everyone else's expense out of this, and we better make sure the government won't spoil it for us, by manipulating the issue so they are afraid to reform it". Something is very rotten in the state of godzone.....

Tony76 instead of feeling arm twisted by this blatant marketing ploy to join the NZ ponzi real estate game you could campaign to stop the ponzi. Plenty of political parties are promising to fix the situation, you could actively support one that you think will be the most effective. Or you could start you own campaign. Overseas they have generationrent organisations that might be appropriate for your situation.

I thought it an interesting harbinger that Stephen Berry ran for the Auckland Mayoralty and came third behind Brown and Palino, with no profile and no media coverage - on a "housing affordability" policy ticket. So some kind of message must have been spread to get young voters out for him.
John Minto on the other hand, came fifth, with reams of slavishly sympathetic media coverage. 

This is a really well thought out piece from Matthew and I do agree with everything he's said.
There are other reason's why I feel that property out weighs shares over the long term.
Compulsary Savings:
Often when saving for retirement its easy to not put away that extra few dollars in the rainy day jar if the budget gets tight, but if a part of the retirement scheme is a cash flow rental property it should just tick over year in year out.
Kiwi's understand it:
Property is in our blood its not hard to understand how it works and appreciate its simplicity.
Want and need:
Everyone has to live somewhere, populations do move round and suburbs come in and out of favour but its close to unheard of for a propertys value to drop all the way to zero.
Surely Matthew is one of the property industries better thinkers and I hope this article in some way slows down the media and economists fairly blatant bashing of landlords.
Steve Goodey

Steve do you agree that a property in Auckland should be worth 1.5-2x the equivalent property in the Wellington region? (Your original hunting ground if I recall?).
Value is relative, nothing wrong with buying auckland property 3+ years ago, but the values gone from that market and when looking at markets outside of Auckland, they are now cheap in comparison.  Time to buy outside of Auckland.
Some 'growth story' points for P.N:
*biggest hospital (with recently announced expansion) between hamilton and welly
*army and airforce bases
*Fonterra site ever expanding
*Massey university, growing all the time, and bringing in big numbers of international students in times like these
*New in land port to be constructed 2 min south of city next to main trunk line that is still integral to freight movement within N.Z.  Central location key to being a great distribution hub, seen with NZ Post shutting down everwhere else and expanding in P.N.
*FoodHQ, AgResearch, and many other research institutions forming and operating with Massey Uni.
*Very low supply of housing, lower number of listings per capita than Auckland even
*Strong and diversified Ag based economy based not just on dairy (as in taranaki/waikato) but strong numbers of sheep and beef also (can't stock pile this in china and then stop buying to cause big price moves as seen in the recent milk powder auctions).
*Consistent population growth around the 1% mark.
*Govt. FHB grants and kiwisaver withdrawal increases disproportionately benefit cheaper areas (cap of 350k being significantly higher than latest median of mid to high 200k) where the 'free' money represents a larger % of median house price = multiple buyers bidding once sentiment changes.
*Most affordable housing for any city this size in NZ (and I've looked at them all), I see PN as being the best value real estate market nationally.
And if you're like me and don't like betting money on speculative growth stories (like what I've outlined above) you can still buy in PN with yields good enough to have tennants pay the place off in 20 years.

Hi Simon,
I think Auckland house's are worth what a willing buyer and a willing seller are prepared to agree on as a price on that day.
I agree that some prices have become quite crazy compared to their GV's or to peoples expectations but who are we to say that these massive upward value shifts are over or if they are the new normal.
Auckland is a big city these days even on the world stage, it has relatively few high rise properties and people still live within 15kms of the CBD in one family stand alone house's.
That's incredibly rare in other countries.
Auckland had a large rent bulge in the last 3/4 years and values have followed that as they do in a free open market, now Wellington is having a rent movement upward too.
The only thing that will change this is if the government steps in to try and stop it.
In which case the market will normally react by raising higher and faster (Yes the opposite of the intended result).
If you get a chance read the Investment Biker by George Soros, he discuss's counter cyclical investing in government controlled markets.
The LVR restrictions impossed on New Zealand have to a degree worked but now the reserve bank is terrified to remove them because of the pent up demand they have created.
The next few years are going to be very interesting and very profitable to those ready to ride the market.

Pull the leverage and it's all over for the mortgaged property debt slaves - depositors money is much safer in the stock market now, well since OBR. Japan has stepped up the QE racket and the Yen carry trade in in full swing.

I suggest having a look at aussie to get some perspective on Auckland as a 'big city'.

Its not. It's adalaide size. Lots of stand alones within 15km there.

People are getting a bit silly thinking auck is in anyway or ever will be a london or paris. It's too isolated and the world will only have a few mega financial capitals like London, new York, and Auckland is a joke if youre trying to compare to these.

More perspective: melbourne. Population of entire N.Z, 3 times auck size.

Stand alone house and land starting at low 400k in sprawling melbourne suburbs:

The comparisons really need to be between:
Globally exceptional, growth-contained cities - like London and Hong Kong
Globally exceptional, non-growth-contained cities - New York used to be this, Houston is probably the best candidate now
Non-globally exceptional, growth-contained cities - Liverpool would be my model, or several other UK cities
Non-globally exceptional, non-growth-contained cities - try Atlanta or Kansas City
Basically, farmland is so low-cost everywhere that it makes stuff-all difference to the cost of finished housing as long as there is no growth boundary/racket quota.
Fringe houses need be no more expensive in Auckland, or Vancouver, or Sydney, or London, or Hong Kong, than they are in Kansas City or Houston, than cellphones or cars. 
Centrally located property is a different story, and the bigger the city the bigger this effect. However, the multiplier from fringe to centre can be as low as a factor of between 7 and 20 - but it makes a massive difference if at the fringe, there is already a factor due to the growth boundary, of 20+ (in most of the UK it is a factor of 100-300).
NO city in NZ is a globally exceptional city. We are kidding ourselves if we think Dorkland is. Dorkland house prices are expensive because there is a racket being run in urban land and Kiwis are ignorant, suffering from small-man syndrome and a Walter Mitty complex when it comes to our importance in the world; and crazed with greed when a fast buck can be made. This will not end well.
In this internet day and age, people should be getting on RE sites from around the world and getting wised up. There is property in the New York urban area that is significantly better value than Auckland, and NY is not an "affordable" city in the US context. Its prices were around the median multiple of 3 for decades though, and it sprawled for miles. It has only run up against growth constraints, largely unintended, more recently.
Auckland is really a city you should compare to Indianapolis or Nashville. But even Chicago (pop 14 million) is significantly cheaper than Auckland, as is Philadelphia (pop 6.5 million). When you use cities like Indy or Nashville (which are economically stronger than Auckland, and faster growing, BTW) the house price comparo looks as utterly insane as what it really is. 
Rome is cheaper than Auckland. Lyon (pop. 2 million) is cheaper than Auckland. Berlin and Munich are cheaper than Auckland. The French Riviera is not quite as expensive as Auckland. We are stark, raving bonkers out here. 

 I routinely see clients getting net yields of 7-8% in Palmy Nth if they know what they are doing. Student flats, boarding houses, - and the like,
But I still would not go there, as so many houses have big sections and can be sub-divided at low cost. This represents loose land supply. I prefer areas with tighter land supply where you can also get the yields. As I said, I'm getting 6-7% net yields in Auckland on everything I'm buying in this market. You have to work to get it, but it is there if you hunt for it. Maybe the AK market is a bit ahead of itself and it will likely  stop for a while (crash), - but the tight supply story will make it recover faster and grow more in the long run. You are getting cash flow plus capital growth in Auckland.

Still got to have the cash to buy in at Auckland levels.  Most of the country doesn't have that kind of wage.

You need 350 sqm net of access ways for each separate dwelling to be able to subdivide in PN.  Further restrictions on access ways and parking space, you need 36 sqm of outdoor space attached to at least 2m of the living area, the outdoor space needs to be north facing. Sub division is not easy in PN, and it does cost a lot, and that is before the second house is even built.  I access most new listings for subdivision potential and they are fairly rare. I have one that may have potential but the costs to do it, plus build a new house would be set me back close to 400k and this sort of spend will only be justified once PN house prices increase at least 50% from here (median price still mid to high 200k at present). So no supply response will happen from subdivisions until significant price moves higher happen.
The district plan also highlights restrictive factors for rezoning any rural land as residential, the most important for PN is the provision around productive land, I.e if you can farm it then it will struggle to be re-zoned for housing. Recent rezoning has occured out towards ashurst on the north side of the city, a good 10k from cbd and the best schools (PNBHS PNGHS), other expansion is on the hills east of the city, infrastructure requirements and land prep mean these properties are mostly 500k plus.
PN is completely off the radar of the govt. for housing accords etc, as its the most affordable city of its size in NZ.  If I was worried about supply getting lose I'd be more concerned about Auckland where the Govt. is getting control of supply itself and doing everything it can to increase it. If land-house packages start getting rolled out at 500k, 600k, even 700k this will cap price rises of second hand homes at these levels, and I suspect what will happen once supply and developers get moving in auckland is a long period of flat prices which could be painful if you have neg geared and banked on 6% plus capital gains.

Also historically interested parties involved in PNCC decisions have influenced the "shape" of PN...which just happens to fit with their own property interests.  Fortunately this is lessening and we're seeing a lot of periphal growth on three sides (not Longburn) but this is challenging for new builds as you say.    Tikitiki boxes out Kelvin Grove way, 3bd hardibox will go for very low 200's , hardly worth bothering with but good rental.    MacMansions between PN and Fielding are still progressing steadily.  And the Summerhill Drive/Aokautree is likely to be covenented to higher quality housing in line with recent development work.  Doesn't really make brownsite work worthwhile, and does take pressure off apartment demand.

Your first sentence says it all. This is how even in a hicksville in a pretend-first-world economy at the bottom of the South Pacific, houses can be too expensive. 
Equivalent "cities" even in Germany are not a lot different in prices to PN. And in the USA - spare us. 
Little Rock, Arkansas:

Simon, out of interest. What does a 1 into 2 simple subdivision cost for all council costs and civil works on average in PN ?
It might interest you to know that depending on where and what (it varies due to reserve contributions which relate to a % of the land value),  in Auckland a basic subdivision will cost you between $75k and $130k. With the average cost in the mid-point of that in my experience. This includes drive, services, and council fees. 
I really do hope Govt take control of land supply and flood the market. The bigger the boom, the bigger the crash. I would prefer they slow it down with an increase in supply and migrant buying controls as being discussed at present. Steady long term growth is what we want. Not massive boom-bust cycles.

Council costs, civil works and cost to build in p.n unsurprisingly are not a lot different to auck.

That's the real point.

Auck prices are now at (actually blown past) the limit to trigger a significant supply response.

P.n property is at least 50% away from making developers even bother looking, so that's what we will see over the next 5-10 in P.n as seen during the later half of the last cycle 2004-2007.

I say 5-10 years but human and market nature compresses this as people get spurred by sentimemt and overshoots are likely, hence auck still rising past rational level

Indeed.  Why take the risk of investing in shares or doing anything remotely useful, when you can just exploit those unfortunate enough to be born after you.

Agreed. I've purposely left off commenting on this just to see how long it took before someone as much as touched on what housing is actually for. It is for people to make their HOMES in, something that is not really possible the way renting is done in this country.
I can't stand how these "investors" try to justify their behaviour by saying that everyone who rents chooses to do so. If that were the case it wouldn't be so bad. but it isn't, is it? Not by a long stretch nowadays.
I look forward to the day that residential property "investors" are forced to pay commercial interest rates or perhaps individual home owner/occupiers can claim housing costs against their tax.
I look forward to a day when negative gearing is outlawed.
I look forward to the day they have to charge rents at a rate the market will allow minus handouts from the government.
I look forward to a day when foreign residential property "investors" are banned from the market.
I look forward to a day when the majority of kiwis again own their own home and every man and his dog isn't planning to become a residential property "investor" as they understand that it is no good for society as a whole.
Failing all of that, which under this government there is no doubt it will, then I look forward to the day that residential property "investors" have to offer long term transferable leases to people, who can actually  look at making a home even if they are forced to rent. A day when maybe after having most of their income going to the "investor" they then have to suffer the ignominy of being told how to live their lives.

Amen to that.  The longer in-action continues, the more likley the masses will take matters into their own some point they will awaken and organise a mass rent revolt. What else can we expect when the rort of the landlord and landbanker continues unabatted? 

The NZ Herald is finally on to it.
Note the specific real estate agent comment.

Because I don't get the mega-wages the top percentage of the company gets.
Heck I don't even get the average wages....

So how am I supposed to be investing in someone elses business??  Especially when I'm still paying interest for my own (home, car, wedding, education, dentist/doctor bill, food...)

If I invest in homes, I know I can use it.
And if I have another then it's something I know about, if I give my money to a business then they'll just use it to pay the rich wages at the top (that I never get to see) and then dump the company (eg Muir)

Ah the looking backwards as we walk forwards investment argument.
Two words,
Peak Oil.

Three words: urban growth boundaries
Peak oil is irrelevant to urban land price issues. IF it is true, it is relevant to a lot of other factors, that might flow on to the operation of urban property markets. The various effects on the economy, will capitalise into urban land values, or if peak oil causes income to decline, that will be reflected in lower aggregate land prices overall. But that is irrelevant to housing as an investment, apart from the reality that some cities will be toast first. Especially cities with urban growth boundaries and inflexible urban planning that is sucking needed capital for investment in new technologies, out of the local economy. Cities without growth boundaries will make the cleanest adaption to the new post-peak-oil normal if and when it comes.

Its not irrelevent as the massive contraction of the economy peak oil will cause will leave the land bankers high and dry.  Not to mention FHBs.

That was my point - it affects the whole economy, and affects urban outcomes only that way, not directly. It does NOT make urban land rationing valid, so stop bringing up "peak oil" to derail that particular argument!!
You might as well argue that any evil at all is justified "because we are going to run out of oil one day". If there was an oligopoly in essential food and a rip-off by rentiers, would you say "don't reform that, peak oil is coming". Or if Jews were being rounded up into extermnation camps, would you say "don't reform that, peak oil is coming".
Your constant harping on "peak oil is coming" every time we discuss an evil that needs reforming, is just as mindless and exasperating. And the evil that needs reforming, is something that makes coping with peak oil, if true, harder not easier. Your logic only adds up if you WANT the most damage done and the most people to die when your blessed Oil Crash happens. 
Your mate PDK was the same - he would survive on his lifestlye block, thank you, but the proles are to starve to death in apartment blocks. Niiiiiiice. 

Good article on the power of leveraging!!! 
Leverage is everywhere if you look for it.......Central Banks, Banks, Governments, Bureaucracies, business, do-gooders and criminals and just about everyone in society uses leverage to obtain some sort of advantage........

So if leverage is everywhere, why are Kiwi's reluctant to leverage their way into the stock market?

Well lets see,
a) 1987,
when many NZers lost their shirts.
b) The share market was never reformed to make it transparent and arguably its got worse.
c) It is way more complex today and ultra fast today.
d) I think most simple people want an asset they can touch.
e) Its not so easy to leverage into shares
f) The NZ share market is gutted of value IMHO.
g) Its full of sharks gambling there will be a greater fool and given c) mom and pops are cannon fodder and nothing more.
So I bailed some years ago....too early as it turns out but thats life (better than too late).

Why limit yourself to NZ?
Australia is bigger
UK Euroland and US are massive.
Anything is tradable.
CFDs overcome the multiple currency issue

I assume you are talking the NZ stock market........of which I have very little to do with as it's not part of my investment plans and I certainly wouldn't use leverage as in debt leverage in the stock market in NZ.
If you trade in e.g. Australian shares you can also trade in the Australian options can leverage by using options and futures etc .
Instead of using my money to buy 1000 shares in XYZ  I can use options and control far more shares by the number of options contracts I can purchase.
People can get wound up in the ownership issue when in fact it is what you control that is far more important......hence a Government controls the people, the RBNZ controls the OCR, the bureaucrats control their desigated area etc I said leverage is everwhere!!!
When it comes to real estate most people actually think about the physical real estate......but it is actually the instrument they use behind the real estate that makes or loses the money.

What are your entry points (company site/price) for options in Aus?

I was looking at the BNZ services years ago, but it went tits up and I haven't been to go near siomilar services since.

@ Craig. Why are investors reluctant to leverage into shares.......?
I think because although 1987 is a getting back a bit now it cast a very long shadow. Lots of highly leveraged portfolios crashed and burned. 2008, however, an even worse financial crisis saw the property market only correct about 12%.
The NZSE still has alot of work to do to overcome a widespread scepticism regarding the governance of listed companies. The feeling abroad is that directors are there to part investors from their wealth rather than grow it.

I am interested that you use that term "the power of leveraging".
Leveraging might be beneficial in the overall if it involved productive investment rather than chasing Ponzi gains in non-productive asset values. In the latter case, it is an economic WMD. 

PhilBest.... the "power of leveraging" can have positive and/or negative benefits and that very much depends on the skill of the user./s.
NZ is technically a communist country..... people are leveraging to try and stay ahead of the system.  Free people, free market, free trade, are State propaganda statements......not one of those FREE things I mentioned work like the wording and recognised meanings applied.....
What we have going on in NZ (we are not the only country with this problem) is Marxism - Socialism and I would call that Communism!!........and people are going to continue investing in asset classes like existing housing as it is a flight to safety investment in an under-supplied that you can leverage easily......has incompetent  and high numbers of State/Council employees involved,....Government accommodation supplements.......
I quite like a hghly leveraged economy as the RBNZ can't up interest rates like years of old and the Government gets limited opportunity in regards to taxation income. 

Unusually for me (like raegun) I have made no comment so far. As I see it there has to be a point when the music stops and unlike previous times when the effect was minor , we now have a market with a lot more "gun happy " investors.
These are :
1. Overseas based often Asian buyers who are notorious for quitting in droves once the signal occurs.
2. Over geared investors who cannot afford to hold in a downturn
I would also like to turn to shares. You can use your  house mortgage to invest in shares and obtain the gearing advantage. If you think you are good enough, you can use CFDs and make (or lose) many times the amount you can with property. Shares are so easily liquid that you can do it in a very short time. This may be why people shy off because the moves are too quick for many people to conceive. Also the gearing is not 5:1 but often up to 100:1 on market indices. (here my information is a year or to out of date as I have not had an account live in recent times). You certainly do have to pay your taxes as a trader and presumably the IRD has to credit your losses too.
Then there is the forex market, but that is another story.

If you buy and hold shares for the long term then previous "crashes" become irrelevant. Try and find 1987 on this graph (sorry, only price, not total return so vastly understating returns!)

Also note that if you hold the index then you never go to zero so you never get wiped out. When a crash happens, buy more as shares just got cheaper.

In fact, $100,000 invested in 1987 before the crash would now be worth $1,285,000 based on S&P500 total return. According to the RBNZ inflation calculator, a house costing $100,000 in 1987 is worth $518,000 now
(Note: I am using the S&P500 as the benchmark as it has the best avaliable data and it comprises many multi-national companies so is a proxy for global performance. I do not consider NZ shares to be diversified enough for safe long term investment)

And with some quite conservative gearing the numbers would have been at least one level of magnitude greater, had you the intestinal fortitude to run with it.

Great article Matthew and entertaining feedback.
In reply to kiwimm, if you invested that same $100k into property in 1987, with 80% leverage (that most can do with property), you could have brought $500k of property. Now I apologise I dont have the exact figures, but pretty well the value has doubled twice, even on the the way to 3 times since then, especially in Auckland, so that has now turned into $2 - $3M, take away your $400k of lending, that is still far superior to the above example based on the S&P500.

The difference between Shamubeel Eaqub and yourself is Shamubeel can see strategically, and longer term you by your comments cannot.

Shamubeel also understands economics - his insights are not based on Malthusian unreason, but on economic inevitabilities. Actually, economics is really just common sense. If you don't get it, you lack common sense. Modern economists with money-printing and deficit-spending theories also lack common sense. The profession has suffered from a similar loss of common sense as many others in the decadent phase of our civilisation.

He would do better to get out of his academic bubble and get some experience in the real world.