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Does Property Investing still make Sense?

Sam Stubbs thinks so – but not necessarily in the way you would assume.

5 December 2023

The recent drop in the value of homes across the country may have come as a surprise to many property investors, who for a long time had seen the property market go only one way.

And for those who leveraged up to buy investment properties when mortgages were 2-3 per cent, who are now paying twice that rate and seeing the value of the house they bought go down, it will hurt. But despite this I believe housing investment will probably make sense for quite some time yet.

The first reason is based on supply and demand. For 30 years successive governments have struggled to build enough state houses for the demands of a rising population. According to Statistics NZ data, dwelling consents per 1000 households averaged around 30 from 1920 to 1980, but have been around or below 20 since then. And the big shortfall was in state housing consents.

Keeping house prices high may start to become more problematic for politicians going forward. Home ownership rates peaked in the 1990’s at 74 per cent, but are now down below 65 per cent. This means that while many voters may embrace rising house prices, a vocal minority of those who can’t (or don’t want to) afford them could get louder over time.

But the property price party is far from over yet. Political parties from both sides of the aisle still get higher approval rates when property prices go up.

Over on the supply side, things are challenging. Many New Zealanders prefer to live in a stand-alone home (with urban sprawl sometimes making for a long commute), and build costs for homes in NZ are very high. It’s now common for an average Kiwi home to cost $4,500-plus per square metre to build. That makes the average new home an expensive reality for many. As a nation, I don’t think we’ve embraced large-scale housing, especially apartments, as a lower-cost alternative.

Housing demand

We are simply too small for modular and manufactured housing to get traction. Last year our net migration was 90,000, twice the rate of growth than 25 years ago. Nothing the incoming government has said indicates that they want immigration to go down – which indicates housing demand will continue to increase.

The second reason I’m bullish on housing is around tax. Kiwi homeowners have been able to leverage and buy homes for decades. Until 2015 when the bright-line test was introduced, mortgage interest was deductible against rental income, and capital gains (regardless of how long you held a property for) were tax-free.

The rules have changed since then, but they still don’t apply to new builds, and property investment remains popular – with a 2021 study by Valocity showing that just over 600,000 properties (out of 1.7 million) in NZ are investment properties. This equates to roughly 14 per cent of the adult population owning one.

So there we have it: high demand, expensive build costs, and advantageous tax treatment; all reasons for property investors to be feeling positive despite the challenges around current mortgage rates and capital values. But despite the potential for individual and smaller scale property investments to remain advantageous, I’m not so sure it’s so productive for the country.

But what can a fund manager like Simplicity do (in our opinion) to help make a difference to NZ’s housing challenges? Simplicity’s new Homes and Income Investment Fund aims to provide an alternative to traditional property and fixed income investors, with aspirations to fund up to 25,000 homes over the long term.

Via our KiwiSaver and Investment funds, Simplicity already invests around 5 per cent of our total funds under management into three areas related to the residential property sector: shares in Simplicity Living, a build-to-rent home developer and operator; first home mortgages (new and existing homes) for qualifying Simplicity members; and community housing bonds and other fixed income investments.

Simplicity commitment

Over $340 million has been invested in residential housing-aligned investments across NZ to date, with a total of 1,518 rental homes completed, funded or in development through Simplicity Living and community housing providers.

Via its new investment fund, Simplicity aims to meaningfully increase the supply of homes across NZ while generating competitive risk adjusted returns for investors over the long term. The fund will target to maintain 40 per cent in cash and equivalent assets to provide liquidity so investors will have full access to all their money at any time, with no withdrawal fees or penalties.

In my opinion, this is just one small piece of the puzzle in helping to address what is referred to by many as a “housing crisis” in NZ. But I see it as our chance to show that you can make money and do good – and, of course, still be involved in the lucrative residential property sector.

The information provided and opinions expressed in this article are intended for general informational purposes only and are not financial advice or a recommendation. Simplicity NZ Ltd is the issuer of the Simplicity KiwiSaver Scheme and Investment Funds. For Product Disclosure Statements please visit Simplicity’s website: simplicity.kiwi.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.


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