Is a rental property still a good investment option?

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#2198081 14-Mar-2019 15:42

Fred99:

chevrolux:

Far FAR easier, and less volatile, than shares.

Except with shares etc, you don't normally have the risk multiplier of being (close to - for tax minimisation purposes) fully leveraged.

Property investment is more like trading futures.

What if you were able to leverage shares? Then its comparing apples to apples. Shares can and do go down for standard reasons. Property could go down but for very non standard reasons (new motorway, etc). But we all know houses increase in value over time. Leveraging was mentioned later as an option to invest deeper, but the OP requirement was retain the house or sell it (and invest in something else)

OK, I'll leave it at that, could not disagree more, re trading futures.

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#2198089 14-Mar-2019 15:51

The typical increase in house prices historically year on year is about 1.2%.

tdgeek

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#2198106 14-Mar-2019 16:14

irongarment: The typical increase in house prices historically year on year is about 1.2%.

I don't think so. More like 100% per 10 years, non linear. That was the standard guideline many went by. Inflation was higher back in the day, but a real life example is a mate who paid $159k in ChCh in about 2004, 14 years ago, Its worth about 450k now 300% in 14 years, discount the latest boom, there was a boom before that, so 159 to 318 in 10 years, easy.

irongarment

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#2198227 14-Mar-2019 20:41

tdgeek:
irongarment: The typical increase in house prices historically year on year is about 1.2%.

I don't think so. More like 100% per 10 years, non linear. That was the standard guideline many went by. Inflation was higher back in the day, but a real life example is a mate who paid $159k in ChCh in about 2004, 14 years ago, Its worth about 450k now 300% in 14 years, discount the latest boom, there was a boom before that, so 159 to 318 in 10 years, easy.

Nope. Anecdotal stories are not data.

This guy says 1.4% starting from 1962:

https://www.pundit.co.nz/content/how-will-housing-prices-fall

This guy says 1.5%, based on US data starting from 1890, but when you take into account the work you did to get it, about 1.1%:

https://www.g3freedom.co.nz/wp-content/uploads/2016/01/A-Long-Term-Lesson-in-Residential-Property-as-an-Investment.pdf

What you are seeing is a bubble. Which will burst. It's a matter of when. You have been lucky, but, as any good financial advisor will tell you, "past performance is no guarantee of future returns".

Besides, your mate whose house has shot up in value hasn't really made any money. To realise any gains he'll have to sell the house. If he bought a modest 3-bed house in a nice suburb he'll be able to buy a modest 3-bed house in a nice suburb. The exception is Auckland where the bubble has got much bigger much faster. That will burst soon because China is clamping down on currency leaving the country.

solutionz

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#2198248 14-Mar-2019 21:09

irongarment:

This guy says 1.4% starting from 1962:

https://www.pundit.co.nz/content/how-will-housing-prices-fall

I'm not really sure what this guy is on about... however I am pretty tired so only skimmed over it...

Firstly he's talking "percentage points" not "percentage increase" (i.e. from 5% to 6.4% is 1.4 percentage points increase but 28% increase).

Secondly he's comparing to CPI like there's "supposed" to be some linear correlation - well that may be nice but I don't believe there is...

Even if there "ought to be" some huge correction back to CPI, as they say “The market can stay irrational a lot longer than you can stay solvent”

BlinkyBill

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#2198279 14-Mar-2019 21:55

Read Mary Holm. She cites academic research that shows that long-term, property underperforms the market. Most people are over-geared and rely on capital gain versus real yeald - the amateurs. Real return from property over the market, long-term, is hard work.

I got out of residential property years ago, it’s just too frustrating. Making a bit in commercial though, not great but a lot fewer bung tenants. Mostly, it’s the market.

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#2198286 14-Mar-2019 22:07

Maybe.

PS: All other answers above are as reliable as mine.

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#2198290 14-Mar-2019 22:27

irongarment:
tdgeek:

irongarment: The typical increase in house prices historically year on year is about 1.2%.

I don't think so. More like 100% per 10 years, non linear. That was the standard guideline many went by. Inflation was higher back in the day, but a real life example is a mate who paid $159k in ChCh in about 2004, 14 years ago, Its worth about 450k now 300% in 14 years, discount the latest boom, there was a boom before that, so 159 to 318 in 10 years, easy.

Nope. Anecdotal stories are not data.

This guy says 1.4% starting from 1962:

https://www.pundit.co.nz/content/how-will-housing-prices-fall

This guy says 1.5%, based on US data starting from 1890, but when you take into account the work you did to get it, about 1.1%:

https://www.g3freedom.co.nz/wp-content/uploads/2016/01/A-Long-Term-Lesson-in-Residential-Property-as-an-Investment.pdf

What you are seeing is a bubble. Which will burst. It's a matter of when. You have been lucky, but, as any good financial advisor will tell you, "past performance is no guarantee of future returns".

Besides, your mate whose house has shot up in value hasn't really made any money. To realise any gains he'll have to sell the house. If he bought a modest 3-bed house in a nice suburb he'll be able to buy a modest 3-bed house in a nice suburb. The exception is Auckland where the bubble has got much bigger much faster. That will burst soon because China is clamping down on currency leaving the country.

Nope.

No anecdotal stories here. I cant speak for the 1960's. Ive owned property since I was 19. Read the books by Olly Newland and Bob Jones. Ive had properties over that period. Ill take another real life example. A house I know was bought for 33k in 1982, sold 2 years ago, 450k. That house, was offered to be bought at double it purchase price in 1991. I remember when a 350k house was a big deal. I was going to bowl one and subdivide, build 2 at 180k each, sell two for 350k each. That was towards the end of the boom, maybe 2000.

Property rises continually, but not linearly. That example above is about 1400% over 36 years. 33 doubles by 1992, doubles to 66 2002, doubles to 132 2012, doubles to 264 by 2022. That example has exceeded that. Now there was work done so lets wipe that away, that one example is typical. Over time, inflation, interest rates, Govt deposit assistance, demand has continued to move the numbers up. I know for a fact that property was doing this in the 80's.1960's to 80's I'd go with Brian Easton. He is an economist from memory he should know. 1962 to 2002 are different worlds. The inflation rate in the 80's onwards is legendary. As were the interest rates. Break that 40 odd years down you would see that. Later on he talks about now, boom over, prices drop. That's now and the future. Everybody knows the house prices are flat and will remain flat, maybe drop a few points. GFC will drop maybe 10 points. Thats a small number but its a huge number. Its called a crash, even though many will not be affected.

Your other points.

The other link doesnt understand. It compares to inflation. ???? You used to get 3% in your savings account when inflation was 10% how did that go? Inflation is part of the property investment game. Most ventures dont survive inflation, wages are but one. If inflation is high as it has been for some time back then, everything goes up. It takes $1 cash to buy a $1 product. It took 10 cents to buy a $1 part of a house. Leverage. That house $1 doubles in 10 years, its now $2, Not bad for 10 cents. 100% capital gain is actually 1000% on that 10 cents. Over 10 years. Who cares about inflation???

Bubbles in housing dont really burst. But if one is highly leveraged, that can bite big. Average people who worked and saved hard to but a house for cash but bought 6 of them.

You are right about my mate. Who cares if the house tripled in 5 years, its all relative as you have to buy another to replace it. Unless you moved from AKL to Gore, then it works! :-) Bubbles are usually when prices crash. But houses aren't like sharemarkets. If your house crashed, your mortgage is the same, t doesn't matter. In some ways the sharemarket isn't that different, there is a crash, that really nice company that halved in price is still a really nice company, and it WILL recover the share price. Smart share buyers dont mind crashes.Its easier to recover than grow share value.

The latest boom, long over. But still happening as people go form AKL to smaller AKL (Hamilton, etc) then to a smaller AKL, they are still benefiting. Prices won't crash , thats my opinion, just remain flat for 5 - 8 years. Those that bought late are vulnerable to interest rate increases but RBNZ knows that. Any that do lose all their equity and more are best left in the houses to continue paying the mortgage, it helps no one to foreclose them. It would however probably hurt the AKL economy as a lot of PDI will be not spent, it will go to the baks. But then again, the number of sales competed to AK population is probably insignificant.

Its all interesting stuff. Its all numbers, and the factors that help or hinder prices. The sharemarket has a lot of emotion, that can be a wild place when people buy on optimism from a seller who sells due to pessimism.

neb

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#2198298 14-Mar-2019 23:00

Paul1977:
What are peoples thoughts these days on a rental property as an investment?

One general comment, if you're going to use it purely as an income source then get it managed, don't get bogged down in dealing with things yourself. Sure, you lose a percentage of the income, but then the management agency deals with finding good tenants, 3am phonecalls when there's a burst water pipe, getting repairs done (they have tradespeople on call who can often do the repair for less than you'd pay just for the callout), complying with rental laws, checking up on tenants, and worst-case taking them to court if things go sour.

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#2198302 14-Mar-2019 23:11

DaMuzzMan67:
I know lots of people have contributed to the discussion already.

And we've got one different opinion per person who contributed :-).

tdgeek

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#2198310 14-Mar-2019 23:37

Paul1977:

What are peoples thoughts these days on a rental property as an investment?

While you already have the property, I'll discuss if you haven't.

Right now, I would wait.

Downsides.

Prices have peaked. They might stay flat for years (as few buyers due to the salary/price multiplier) They may drop (If and when Kiwisaver takes off, or goes from a whimper to something more) Interest rates might rise (dampening demand and prices)

TWG. CGT recommended 33%, probably half that, but if you become and investor, more than just one unit, it doesn't matter as its taxed anyway. You can access the gains without selling

LEGAL If the houses can be compliant without costing a lot thats fine. This can change, for better for for worse.

April is TWG, rental law is this year maybe, interest rates should remain low for 3 years. GFC will happen one day.

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#2198346 15-Mar-2019 05:58

neb:
DaMuzzMan67:
I know lots of people have contributed to the discussion already.

And we've got one different opinion per person who contributed :-).

Because we're basically talking economics and as they say "if you ask three economists a question you will get five different answers".

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#2198350 15-Mar-2019 07:16

solutionz:
neb:
DaMuzzMan67:

I know lots of people have contributed to the discussion already.

And we've got one different opinion per person who contributed :-).

Because we're basically talking economics and as they say "if you ask three economists a question you will get five different answers".

That's true

Take shares. Shares often mirror the opposite of property. Shares are great lets sell the houses and buy them. The benefit of shares is they are liquid. The problem is they can rise too much due to public desire so they become over priced. Rumours can help or hinder the price artificially. But if you have a company that is solid, innovative and grows, the share price will rise, because at the very least, the asset value has risen (net asset value/share volume)

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#2198449 15-Mar-2019 10:22

irongarment:

This guy says 1.4% starting from 1962:

https://www.pundit.co.nz/content/how-will-housing-prices-fall

So many problems with this report. He deliberately fails to compare house prices to incomes. Despite that measure being used by both the UN and the World Bank to measure housing affordability.

He instead compares house prices to consumer prices. Which implies that if food, petrol, electricity, clothing etc increase in price. He thinks that would mean that housing is now more affordable. (How does having less money to spend on housing make it more affordable?)

Fails to consider the introduction of Working For Families tax credits.

Fails to consider the introduction of the Resource Management Act or the Auckland Council Unitary Plan.

Blames the price increases on excessive bank lending due to quantitative easing in the USA. And says that was fuelling speculation. Yet doesn't explain why the NZ banks were just fine during the GFC, compared to lots of overseas banks. Which implies that there actually wasn't a speculative house price bubble in NZ.

Fails to consider the marginal costs of building new houses. And the marginal costs of a landlord to offer an additional house to the rental pool, that wasn't previously available to rent.

And yet my last point is exactly what the OP is considering.

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#2198482 15-Mar-2019 11:45

And fails to consider people changing their behavior based on the ratio between house prices and rents.

Rents were still quite cheap during the mid 2000s due to subsidies that landlords were receiving. National removed some of them in 2008. Then rents started rising, even though house prices were stable / falling at the time due to the GFC. Rising rents helped to restart the housing boom. As more people bought their own homes to avoid paying rent. But the lower average number of people in owner occupied homes combined with very few new houses being built due to the GFC. Meant large rent increases. And massive windfall gains to landlords who had already owned their properties for 10+ years. While rising house prices constrained new landlords from entering the rental market.

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