Investors thinking of selling up and reaping big money because of the high prices being paid for property could find themselves in a Catch-22 situation, says Sharon Cullwick, executive officer of the New Zealand Property Investors’ Federation.
Where else are they going to put their money, with returns from the banks so low and the share market so up and down, she asks.
READ MORE: Find out if your suburb is rising or falling
Cullwick says there are some myths around property investors being super rich and driving up house prices because the vast majority only own one other property – these are the so-called mum and dad investors, who are often just trying to take care of their retirement.
Start your property search
Of around 290,000 property investors in the country, 90 per cent are mums and dads, so any changes to the LVR, which are being mooted by the Reserve Bank to dampen soaring house prices, won’t make much difference, Cullwick says.
“It won’t really affect those people because often they’re just borrowing against their own house, but also for the larger property investors that do it more as a business it won’t really affect them either because house values have gone up so much lately.”
Cullwick thinks there will be an even higher percentage of mum and dad investors coming into the market because they are only getting a maximum of 1.5 per cent return in the banks and property is an alternative which might give a higher return.
But she cautions would-be investors against getting too swept away with the idea of high returns.
“I know with property investors that see it more as a business, they’re looking at returns and at the moment you’re not getting a return on your money.
“You are getting a capital gain, but a capital gain is just a bonus and not every year you get one. In the Hawke’s Bay (where Cullwick is based), for example, it’s been 13 years and no capital gain.”
‘Don’t go chasing rainbows’
With rents so high, people might expect to get a good return but not only have house values gone up so much, making an buying an investment property much more expensive, so has upkeep.
Where once you might have spent $600,000 and fetched $1200 a week in rent, that return has dwindled because of increasing other costs.
“I know the interest rate, which is a large proportion of your costs, has significantly reduced but all your other costs are still the same. Your water rates are still going up, your council rates, regional rates, and all your other expenses and now we’re having to put in heat pumps to bring houses up to healthy homes standards, which is good, but there are also costs involved in doing that.”
Cullwick says she buys for returns but is not buying right now, and she advises people to look carefully at where they might still get good returns.
“I always say to people ‘don’t go chasing rainbows’ so look in the suburb that you’re in, but you might have to look at alternative ways of making a return.”
One way is to buy two houses on the same site and some investors are looking at infilling houses rather than buying another house, although there can be significant costs associated with building.
She says most investors don’t buy outside of their own area but people could look to other parts of the country. She is, however, wary of lower-priced markets, such as Christchurch, for providing big returns, and she also says people need to factor insurance into their sums.
“Some people prefer investing where there’s a large population, because they think with a large population you’ll always have growth, and some people prefer to shop in their own areas.
“If you’re starting out I would really shop in your own areas. It depends, too, whether you’re going to manage it yourself or have a property manager looking after it. If you do get to the stage you’ve got quite a few in your portfolio it’s often worth looking after them yourself but if you’re looking after one, with the new Residential Tenancies Amendment Act coming through and Healthy Homes and things like that you’re better off paying someone because they are completely up to date with all the legislative changes.”
Upswing in section sales
But that can cost between 8 and 10 per cent of the return. The cost of investing is so high now there are well-established property investors selling up, she says, but where often investors might use the money to travel overseas travel is not possible right now and they have limited options of where to put the money.
“It’s really difficult to know which way to go at the moment.”
Cullwick thinks house prices won’t get any cheaper in the short term – but she thinks there must be a crash coming because prices are simply getting too high for people to afford.
In Christchurch, Colin Lock, the managing director of Hoon Hay Professionals, has noticed a change in who is buying scarce sections in the city, saying a significant proportion are investors.
He is the listing agent for Prestons Park, a big residential subdivision, and says there has been a “massive” upswing in section sales since lockdown.
Christchurch has seen a surge in investor activity this year. Photo / Getty Images
One group buying are people who can’t get a return on funds in the bank who are cashing up and looking to investment property, and another group are downsizers.
“Typically, we would sell between 100 and 120 sections a year – we’ve sold 180 since lockdown.”
The investors are generally from greater metropolitan Christchurch, but there have been Aucklanders buying property, including a family who bought a house sight unseen who plan to rent it out.
Lock says the yield off a $1 million property in Auckland might not be there but in Christchurch, for not much more than half that, people can get a brand new property.
Value growths have been constrained by the amount of land made available immediately post-earthquake and even now it is still very hard to get hold of a section, he says.
Investors are especially attracted to land which has been remediated to the top level because they are dealing with a known quantity and can also have a good, safe house built which will attract a good rent – and there is a strong rental demand in the city, Lock says.
Of a portfolio of 600 rentals, his business has only two to five available each week so the vacancy rates are very small.
