Investors are taking too myopic a view if they think now is a good time to buy residential property, says adviser Martin Hawes.
By Susan Edmunds
Hawes said New Zealand residential real estate was still over-valued and, in most parts of the country, yields were too low to make property investment worthwhile.
“Rents are still not sufficiently high to compensate for the risk [investors] are taking.”
While centres such as Auckland were reporting rent increases and record sales prices, Hawes said it would not turn into another sustained rise.
“I don’t think these small amounts of growth are going to turn into anything like the boom we had over the last decade.”
Any hints of a housing bubble would be jumped on by the Reserve Bank, because of inflation concerns, and central Government, because of concerns over housing unaffordability.
Hawes said while it was true that bank interest rates made putting money in an account unappealing, there were a whole host of other investment options that many investors appeared not to be considering.
“We’re so connected to what’s going on around the world these days… you’ve got entire new industries developing, industries transforming and entire countries going from being under-developed to development. There are wonderful investment opportunities available.”
Hawes said people who wanted to put their money into real estate should consider investing in the commercial sector through property trusts.
“Many provide dividend yields of 8% or 9% and should give capital growth over time.”
These funds would be investing in top-quality commercial property, he said. Another benefit was that the investments were liquid and could be traded on the sharemarket.
“I think it’s a whole better option. While I don’t like residential property investment at the moment, I get my exposure to property through a trust.”
But Hawes said while he would not advise investors to jump into the real estate market, it was a different situation for first-home buyers.
“Someone who hasn’t yet purchased a home has an ongoing liability to put a roof of their head. The classic response to any liability is to try to match it with an asset.”
He said because that need was so great, it made sense for first-home buyers to buy property as a hedge against future price rises, future rent rises, or both.
“On the whole, buying your own home in a place that you are going to spend a long period of time is a smart thing to do: It is not an investment, it is simply a hedge against housing becoming unaffordable where you are going to live.”
He said it could be argued that people could invest the difference between rent and the cost of owning into another investment vehicle.
“If you did that and rented all your life, the chances are that you will be better off. However, there is a risk that house prices, and therefore rents, become unaffordable. A few people may be happy to take that risk but most of us are not because it is such a big part of our costs.”