The lustre seems to be rapidly disappearing from traditional residential property investing:
In larger cities, yields are too low to make a cashflow profit,
It is now harder to offset the cashflow losses against other income,
There is now limited or no capital gain in some areas,
Investors face higher compliance costs and additional costs for heating and insulation,
more favourable tenancy terms for tenants have been proposed, and
There is the possibility of a capital gains tax.
Over recent decades, the residential property investor has enjoyed a golden ride. Banks have been willing to lend money, house prices always seemed to increase enabling even more money to be borrowed, a favourable tax regime existed and rental increases could relatively easily be passed onto tenants.
However, we are now entering a new era - one where residential property investing needs to be assessed as just another part of an overall investment portfolio rather than the sole component of retirement plans. Buying and retaining an investment property should be looked on in the same way as buying any other type of investment.
One major advantage of property is the willingness of banks to lend against it. Obtaining 80%, or higher, lending for a business, a managed fund or some other investment would be almost unheard of.
The government and industry commentators all state there is a shortage of housing and if conventional economic theory was to be slavishly followed, then house prices should continue to rise. Unfortunately, we are facing the converging of a number of factors which point to house prices remaining static nationally and actually falling in selected areas over coming years. The demand for rental housing, or owner-occupied housing, varies from region to region. If a region has high house demand and regional rent prices, and house prices are affordable, then assuming funding can be obtained, house prices should increase over time.
In regions where house demand is high but the rents and purchase costs of a home are unaffordable and beyond the reach of the average renter/buyer, then rents and house prices will have to fall to meet the market or they will slide sideways for a few years. Already, demographic changes are occurring. People are exiting high-priced regions, immigration is slowing in the likes of Auckland, and traditional renters are looking to stay at home with parents, delaying having families or just cramming more people into a dwelling. Over time, the market will adjust to what it can afford.
A potential capital gains tax will spook many property investors. If the intention of owning investment property is to primarily make a capital gain then expect to face some form of future taxation. However, if the intention is to buy and hold the property for the long-term and receive a better income than if you had the capital invested elsewhere, then that will likely drive a different decision-making process around what sort of investment property to buy and where it should be located.
The writing is on the wall with regards to residential property speculation. If property investment is to be one part of a well-diversified portfolio, then think carefully about the risks and expenses in owning such an investment and assess the cashflow profit against the risk adjusted return of other investment opportunities.
The team at Milestone are here to help you work through your property decision making.