REINZ urges Reserve Bank to let well alone
Residential property investment shouldn't become the whipping boy for the problems of other investment types, says the Real Estate Institute
Tuesday, February 1st 2000, 12:00AM
by Paul McBeth
Residential property investment shouldn't become "the whipping boy" for the failure of other investment types to produce returns that investors found attractive.
That's the view of Real Estate Institute President Max Oliver, who has seized on the results from ASB Bank's latest Investor Confidence Survey (see earlier story). The survey asked people to rank the form of investment they thought was currently most likely to give the best return: residential property came in as hot favourite.
Oliver said the Institute was pleased that there was a resurgence of investment interest in residential property and hoped that the Reserve Bank would not take any action, aware that the Bank wasn't in favour of people over-investing in this area.
Chief Manager Investment Services for ASB Bank Roger Perry said the survey was forward-looking and, because it asked people to pick from a number of investment types, also reflected a perceived balance of risk. Perry said people seemed increasingly concerned about world sharemarkets and the US market in particular.
"They generally don't understand as much about equity markets or about managed funds, so there's a knowledge gap. They come back to what they're most familiar with and real estate seems nice and safe."
However, Perry agreed that many investors failed to appreciate the full costs and risks associated with investing in real estate. "You don't revalue your property daily so falling values are either hidden or you can turn a blind eye to it."
"There's a risk with borrowing as well. If interest rates go up, you've got a leveraged investment and people do have to be careful about that."
Perry said that improved sentiment about property investment was part of the feel-good factor.
"Employment opportunities are picking up, the economy is improving and so people expect returns to improve for residential property."
However, Perry said the property market had made gains in previous decades thanks to external factors: inflation in the '70s and '80s and a migration boom in the mid '90s. He said that it had done pretty badly over the past couple of years (too many new houses, a migration outflow and recent interest rate hikes).
"I think that the property market will have a catch-up, but in about 18 month's time when the migration outflow stabilises and the supply overhang alleviates."
Meanwhile, Max Oliver said the Institute was the first to acknowledge that residential property wasn't among the highest performing investments and that there were plenty of pitfalls in residential property investment for rental purposes. However, he said the real attraction wasn't the prospect of capital gain, but the opportunity to leverage existing home equity into a second property as a form of long term savings with minimal risk.