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Darling or Demon?



Real estate is a darling or demon investment, depending on your perspective. Like many investments, timing is all important but there is one constant – and that is that property should always be regarded as a long-term investment. This is something worth keeping in mind as we head into 2021 with predictions of a market slowdown and possibly a recession.

I find economist Tony Alexander a reasoned and sensible analyst, particularly when it comes to property investment. See Tony's View 11 March 2021.pdf (tonyalexander.nz) for a balanced view of buying property as an investment. Those who get hurt in real estate are often those who do not or cannot hold for the long term.

Speculators have been demonized in recent years, with short-term property acquisitions reportedly making sums of more than $1 million in around 12 months for some punters, though purchases that are not the owner’s principal place of residence are subject to taxation on sale if they fail to meet brightline rules. See The bright-line property rule (ird.govt.nz). Ordinary mum and dad investors have also been active, some looking to secure property for adult children who were unable to obtain finance or to offer unconditionally. Others, many driven by FOMO (fear of missing out) have paid high prices for property and will be pinning their fortunes on a continued rise in house prices.

With interest rates hitting all-time lows, the investor frenzy has had a marked influence on prices as investors at all levels seek to find better returns on their money. Older property owners (those aged 50-65 especially) with equity have been active buyers post-lockdown with a heightened market presence from October-December.  We are still seeing investors in the market in Dunedin, though their activity is expected to decline, particularly when new LVR rules come fully into effect from 1st May this year, requiring a 40% deposit for investment property. LVR restrictions at a glance - Reserve Bank of New Zealand (rbnz.govt.nz). There are many arguments for and against this move. I would just comment that this measure is unlikely to affect older investors who have strong equity. It will affect younger, less well-heeled investors trying to move up the property ladder.

So, will the current rather staggering rise in house prices continue? Predictions are that as interest rates stay low and supply outstrips demand, prices will continue to rise till at least the middle of the year. The Dunedin median sale price is now established in the $600,000s and looks likely to stay there or better. Predictions can be dangerous. Even the experts, such as Tony Alexander, admit they got it wrong last year in not foreseeing the housing price frenzy. Better, I believe, to look at history and trends. We are coming up to six years into a price rise cycle (starting in Dunedin from late 2015). From the early 1970s, rising price trends have lasted 4-7 years. That suggests we may be near the end of the current cycle though I will continue to advocate that there is no time like the present for any good property purchase.

“The best way to make a small fortune in racing is start with a big one” – Nascar driver Junior Johnson (1931 – 2019)

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