I have many questions about investing in residential property. I have my own ideas about some of the answers, but I wish I could have answers that are more satisfactory and align with property prices in New Zealand and Australia at the moment.

  • If investing in residential property is so lucrative, and involves such a good risk/return trade-off, where is the professional money? With most types of investments, the professional/smart money will find a way to profit. Why is it that that most property investment in New Zealand is undertaken by individuals rather than, say, managed investment schemes?
  • How come if, as a financial adviser, I were to recommend a financial product that involved significant gearing, was illiquid, and did not allow for diversification, I would be negligent, but an investment with these characteristics is fine if it is an investment in residential property?
  • How can people say that “property never loses money”, when there are plenty of examples in New Zealand and internationally where it has? (Remember that values failing to keep up with inflation is a form of losing money.)
  • How does investing in a rental improve your lifestyle? Even if you hire a property manager, aren’t you still likely to receive a call at any time to say that something needs to be fixed or replaced? Or that a tenant is moving out and having the uncertainty of not knowing how long the property will be empty?
  • If the only way of generating revenue from the investment relates to rental income, how can property prices become detached by rental yields over the long-run? (If you invest in a business, there are usually many different ways of generating income, and the potential for generating new revenue streams. With property, you’re usually limited to the one known stream of rental income.)
  • How come the primary businesses with a financial incentive in the property market benefit from property prices going up, and property trading hands? (Eg real estate agents, mortgage brokers, banks and other lenders.) Who has a financial incentive to say that property is riskier than many people think?
  • How did owning a home become linked to idea of “the Kiwi dream”? In what way does owning a house link to a genuine conception of “the good life” (which to me relates to having good relationships with people I care about, having a satisfying job where I feel like I’m contributing, having some degree of freedom with my time, and virtually nothing to do with the things I own)?
  • When the majority of voters have an interest in property values staying stable or increasing, how can a Government really expect to introduce policies that improve housing affordability (ie, decreasing the value of properties) without suffering at the electoral booth for doing so?
  • Why do people equate recent similar property sales as a valuable measure for its actual value? (Consider Robert Shiller’s comments relating to the property market being inefficient. Or consider Benjamin Graham or Warren Buffet’s description of “Mr Market” and how it relates to value investing.)
  • How come the people who make money from property are so vocal when the people who lose money are so quiet? (Actually, I know the answer to that one.)
  • How come so many people who buy property usually think of their capital gain as “the price they sold the property for” minus “the price they purchased the property for” without factoring in the transaction costs they incurred, the costs of maintaining and improving the property, the losses they incurred while they owned it, and forget to factor in the natural price increases resulting from inflation?
  • How can people expect property to increase in value by a rate that exceeds economic growth indefinitely?
  • Why is it so easy for people to think that “investing in property” is a financial end in itself, rather than, say, “having my financial affairs in order so I can live a lifestyle that aligns with my key values and priorities”?
  • Where is the social benefit of investing in an asset that doesn’t create new goods and services for people?
  • How come people think of renting as pouring money down the drain?
  • What makes investing in residential property with the expectation of a capital gain that is untethered to rental yields and household incomes, different from the financial equivalent to musical chairs? (Google “greater fool theory”.)
  • Usually, if people purchase an asset with the primary intention of selling it for a capital gain, they are subject to capital gains tax. If people are buying property that is losing money, or making a meagre return (especially for the risk involved – remember, gearing, illiquidity, and lack of diversity), wouldn’t the primary purpose be capital gain, making it taxable? Even if this isn’t the position of the IRD or the Government now, wouldn’t this be open for reinterpretation at some point in the future, creating a high degree of added regulatory risk?

On the flip side:

  • What other regulatory settings could the Government implement to support ever-increasing property prices, and what is the probability that these are implemented? (For example, favourable capital gains treatment – if capital gain taxes are ever implemented – like in Australia; or making mortgage payments tax deductible, like in the US. Or: people other than first home owners being able to access Kiwisaver funds to invest directly in residential property.)  (Note my previous question about a Government’s electoral incentives.)

Sonnie Bailey

Sonnie is an Authorised Financial Adviser (AFA) and former lawyer with experience in the financial services and trustee industries. Sonnie operates Fairhaven Wealth (www.fairhavenwealth.co.nz).