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What drives the property market?

Friday, August 29th 2008, 3:06PM 7 Comments

by Philip Macalister

Here’s a question, I’m not sure of the answer to: Why have house prices increased so much in recent years?

Is it because credit had been easy to get? Has it been because of investor behaviour?

Then there is this question: Has the market been fuelled by the tax system?

There has been a lot of hot air over these types of questions recently. What is clear is that the Reserve Bank has increased interest rates over recent years with the main purpose of slowing the housing market down. RBNZ governor Alan Bollard has made it clear that was one of the objectives of these increases.


He has also acknowledged monetary policy is not the most efficient tool for managing the markets, and the bank and officials have looked at other ideas, such as ring-fencing losses from property (so people can’t offset them against other income), and a mortgage levy (which is supported by economists such as the BNZ’s Tony Alexander).

The good news, from the perspective of investors, is that the government doesn’t look like doing any of these things. Reports were done and they went as far as the Office of the Prime Minister, however, as the NZ Property Investor magazine reports this month, they aren’t going anywhere.

Why? Not surprisingly there is little political support for changes. The only real support out there is from the Green Party, and that is for some sort of capital gains tax.

Not exactly a policy one would talk about, especially this close to an election.

While people still debate whether property investment has a tax advantage or not, I come down on the view that, yes, there are some advantages. The main one though is that it is one investment where people are prepared to leverage their capital. This is fine when the investment increases in value and many people have made lots of money this way.

What’s probably more pertinent now, is that previously other investments such as managed funds were at a significant disadvantage to assets like residential property. With changes to tax laws and the introduction of the portfolio investment entity (PIE) tax regime and things like KiwiSaver, the differences are less than they were before.

It’s hard to see the rules around property investment changing too much and while there may be some advantages, there are other aspects to the game which make it a hard business (eg: managing tenants).

The other thing to remember is that property investors aren’t just buying an asset, they are setting up a business and running a service providing accommodation to others. This, I think, makes it quite a different type of investment.
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Comments from our readers

On 29 August 2008 at 4:14 pm Residential Landlord said:
At last, someone has actually mentioned that residential landlords actually provide a service to the community. Well written! And if the Government was to use any of those mechanisms suggested it is likely that it would not be worthwhile investing in residential property and then who would provide the accomodation - the Government ?
On 29 August 2008 at 7:45 pm Craig Pope said:
Firstly I am a property investor, albiet a dormant one at the moment. I have also recently sold my mortgage broking business.

One huge reason why prices have risen so much is banks and lenders have widened (and kept widening them) the 'goal posts'. They all relaxed their criteria because the market was increasing so quickly.

I am playing devils advocate here but 'BIG deal' landlords are providing 'a service to the community'!! So does alot of other small businesses out there and they still have to pay company tax. Property investment is a business so you should get into it to make money and pay tax like every other small business - and pay off debt - not rely on tax breaks. And to be fair there are some pretty ordinary landlords out there - certainly not providing much of a service. I am sure there would be alot more good landlords if they actually had to provide a good service to make a profit like a true business.

Some will argue that there would be alot less houses available for rent without tax relief - that is possibly true - but house prices would then be lower and more people renting would be available to afford to buy rather than rent.

In these tough times if you are buying a house as an investment that is great. Rather than buy three houses and take a loss (a loss that will still be larger than your tax refund). Buy one good home and put the surplus income you have into paying off principle - that is the best way to build equity in today's environment.
On 30 August 2008 at 11:14 am David Garratt said:
In all of the talk about increases in property in the last few years, I have heard virtually no one talk about the generational dynamic that I have seen influence the housing market in my area (I am a real estate agent in Wellington's Northern Suburbs)and I believe, has influenced our country nationally.
We all talk about the baby boomers but there is another generation that is beginning to influence the housing market - the babys of the baby boomers - they are hitting there thirties and though they have put off purchasing and having children until now - they are creating another baby boom currently and have contributed to the housing boom.
These thirty somethings are now the drivers in my market for first homes.
As a generation, they have much greater horizons than their parents - they want the toys, and the trips, and the education, and the houses (yes houses plural).
They are cynical towards politics, religion, and many other institutions. They have an sneaking suspicion that there will be nothing in the barrel for them on retirement unless the govt of the time reintroduces death duties or they provide retirement for themselves (many of this generation talk about kiwisaver as if it is a joke - I hear this all the time in my line of work).
The young couples that I have encountered of this age who are looking at buying their first home are already talking about the rental investment they are going to buy when they pay off some debt and build up some capital.
They have seen their parents or parents of friends benefiting from investment in property and already have the basic mindset of investors before they start the journey.

How this influences the property market in the next 10 years remains to be seen, but I do believe that an increased awareness of this generational group will be important for the success of all types of businesses and services.
On 30 August 2008 at 4:54 pm RGH said:
DG's point about the X generation now becoming active in the market must be having a big effect, but I'm not sure they were around when prices first started escalating around year 2000.

I think the main drivers have been a combination of local political events and world-wide financial developments i.e. availability of funds at cheap cost.

The end of a long period of house price stagnation during the 80's and 90's (brought on by the Douglas 'reforms' and followed by Birch's ECA and very tight interest rate control ala Don Brash), saw a more relaxed Reserve Bank attitude (Cullen's influence) and a depressed housing market suddenly exposed to increased demand.

This increased demand seems in hind-sight, to have been driven by high immigration, low interest rates, and the ever-increasing willingness of banks to loan against 'bricks and mortar'.

With increased demand and cheap house prices, the existing stock of houses soon became exhausted and developers got back into action. Suddenly, the price of building a new house gets reflected back onto used-housing, and we all know the price of a stick of pine has never gone down since trees were first milled and sold!

First-time landlords (actively encouraged by competing banks offering advice and cheap finance), farmers investing in real estate with their fantastic export earnings, a flood of immigrants (many from the UK with plenty of cash), and the normal demand of 1st home buyers now able to loan almost all of the price of their first home at cheap interest rates, complete the picture and set the scene for a rapid escalation of property values.

With the sudden rise of house prices, this starts to self-perpetuate as existing house owners suddenly have increased equity, and their bank is more than willing to help them become mum and dad property investors, able to fend off the successive Governmental failure to address the lack of suitable superannuation schemes and tax policies. These people are not setting up a small business as suggested, they are just being logical and utilising a very property-friendly tax system.

And so we arrive in current times. But alas, the international finance sector and source of all these cheap funds has suddenly and unexpectedly haemorrhaged! Interest rates rise, and trouble is not only on the horizon, but actually here.

That's it , I'm personally exhausted.
On 3 September 2008 at 3:19 pm Jeremy said:
Well said RGH. I fit into the category where the increase in my equity encouraged me to borrow even more to invest. Many of my friends did the same and now own one or more investment properties. Reports of bad experiences on the share market (rapid price drops, Enron etc) helped the positive view of bricks and mortar. Still does. I am up for the next cycle which I think is actually closer than people think. I am pretty sure that 7 to 10 years from now, houses will be worth double what they are today. I'm prepared to bet on it.
On 5 September 2008 at 7:05 pm Melanie said:
What is the attraction of property? The so-called baby boomers are often unwilling to invest in assets that they can not see & touch - things that can suddenly disappear!! And it's not surprising - as a generation we have been stung too many times. We worked hard (with high taxes) and struggled into our first homes, some paying high interest rates up to 19%. That worked out OK when inflation matched it & greatly increased the value of our homes. But our shares suddenly disappeared in 1987. Managed funds (often sold along with life insurance) of the day came to very little. There was very little help for families from the government either - no handouts when we raised our kids. Now some have seen tens of thousands disappear along with dodgy directors in finance & property companies. Even the BNZ had to be bailed out by the government at one stage! Personally I would not trust anyone to invest my money for me via one of these kiwisaver schemes - likely a lot of those funds will disappear as well. So it's property or gold under the bed! I'm not really that cynical - but just trying to make a point about people investing in what has worked before & avoiding mistakes of the past.
On 23 September 2008 at 1:17 pm Tim said:
Property investment in New Zealand has fuelled price increases so that now it is very difficult for young people to own their own house.

Owner occupiers have significant benefits such as being involved in community groups, children are more settled and working persons are likely to stay with an employer for longer. Owner occupiers are more likely to develop the property to best suit their needs, which has a flow on effect of supporting the local building/trade suppliers.

As discussed generation X want more education, travel, toys than past generations, and has left a gap in demand since 1990’s. This has been picked up by many baby boomers that bought using equity from the capital gain in their own property and has started a reliance capital gain.

Many property investors are buying properties at yields of 2-4% with the expectation that capital gains will still give them above average returns, and the hype around the market has lead to this eventuating.

I believe property investment should be an income asset, run like a normal business providing a service for their tenants, with the amount of capital appreciation controlled in some way.

Capital gains in the last ten years have been predominately a shift of wealth to the older generation, and the effects of this are yet to be fully seen.
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Lender Flt 1yr 2yr 3yr
ANZ 5.19 4.15 4.09 4.49
ANZ Special - 3.65 3.59 3.99
ASB Bank 5.20 4.15 4.09 4.39
ASB Bank Special - 3.65 3.59 3.89
BNZ - Classic - 3.65 ▼3.54 3.99
BNZ - Mortgage One 5.90 - - -
BNZ - Rapid Repay 5.35 - - -
BNZ - Std, FlyBuys 5.30 4.45 4.35 4.55
BNZ - TotalMoney 5.30 - - -
China Construction Bank 5.50 4.70 4.80 4.95
China Construction Bank Special - 3.19 3.19 3.19
Lender Flt 1yr 2yr 3yr
Credit Union Auckland 5.95 - - -
Credit Union Baywide 6.15 4.95 4.95 -
Credit Union North 6.45 - - -
Credit Union South 6.45 - - -
Finance Direct - - - -
First Credit Union 5.85 - - -
Heartland 6.70 7.00 7.25 7.85
Heartland Bank - Online - - - -
Heretaunga Building Society 5.75 4.80 4.95 -
Housing NZ Corp 5.19 ▼4.15 ▼4.09 ▼4.39
HSBC Premier 5.24 3.35 3.35 3.35
Lender Flt 1yr 2yr 3yr
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 5.65 3.85 3.95 3.89
Kiwibank 5.80 4.30 4.34 4.74
Kiwibank - Capped - - - -
Kiwibank - Offset 5.15 - - -
Kiwibank Special - 3.55 3.59 3.99
Liberty 5.69 - - -
Napier Building Society - - - -
Nelson Building Society 5.70 4.69 4.79 -
Resimac 5.30 4.86 4.14 4.19
Lender Flt 1yr 2yr 3yr
RESIMAC Special - - - -
SBS Bank 5.29 4.85 5.05 5.49
SBS Bank Special - 3.69 3.69 3.99
Sovereign 5.30 4.15 4.29 4.55
Sovereign Special - 3.65 3.75 4.05
The Co-operative Bank - Owner Occ 5.15 3.65 3.59 3.99
The Co-operative Bank - Standard 5.15 4.15 4.09 4.49
TSB Bank 6.09 4.65 4.59 4.85
TSB Special 5.29 3.85 3.79 4.05
Wairarapa Building Society 5.70 4.85 4.99 -
Westpac 5.34 4.15 4.09 4.49
Lender Flt 1yr 2yr 3yr
Westpac - Offset 5.34 - - -
Westpac Special - 3.65 3.59 3.99
Median 5.35 4.15 4.09 4.19

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