Lately, the ‘stop being so tough on property investors‘ rhetoric has gotten a little bit much for me to bear.
Fellow property investors – it’s time we started being honest with ourselves. Taking care of your financial future is a good thing and you should be commended for it. You won’t be a burden to the state if you take care of your own finances. At the same time, we have to admit to ourselves that every time we buy a 2-3 bedroom home in a suburban area, competing against first home buyers, we make it harder for those same buyers to secure their first home.
I’m here to tell you we can help, though. We can make a difference. You can secure your financial future and still help more Kiwis get into their own home.
So here’s the deal…
False numbers don’t help…
The Spinoff recently published an article by Andrew King, titled ‘pushing landlords out will only make renting more expensive’.
Andrew is the Chief Executive of the NZ Property Investors Federation. It is his job to fight and lobby for the rights of property investors.
Check out this quote, taken from the article above:
“An average 2.1 people live in owner-occupied housing in New Zealand, but there is an average 3.9 people per rental property. Every time a rental property is sold to an owner-occupier, on average 1.8 tenants still need a home to rent. “
Woah! That is a massive swing. Scary, in fact. Enough to make you do whatever you need to do to encourage more landlords to get involved! The author did not state where this info came from.
I thought those numbers sounded too far apart to be correct, so I checked with Stats NZ directly and they came back with this response:
“Data from the 2013 Census shows that an average of 2.6 people lived in housing that was owned by the household or the household held in a family trust, and an average of 2.8 people lived in rented housing. Based on these 2013 Census figures, every time a rental property is sold to an owner-occupier, on average 0.2 tenants still need a home to rent.”
Right, that’s a little bit less concerning. Looking at the correct numbers, it doesn’t, in practical terms, make much of a difference to occupancy rates if a home is owner-occupied or rented. So maybe if a few more landlords sold up, prices might go down and more people could afford to own rather than be stuck in the rent trap?
So many shades of grey
In reality, there is a lot more to this issue:
In order to make a statement about how an increase in home ownership would affect the allocation of people across houses, you need to consider the people ‘on the cusp’. Or in other words, the marginal renter vs the marginal owner – a family unit that would switch from renting to owning if prices were lower, or mortgage availability was greater. King’s statement compares the average renter with the average owner – which isn’t really comparing apples with apples.
University flats with 6 people are always going to be rented, as mobility is very high. They’re not going to switch to owner occupancy.
Perhaps the marginal renter is a family with 2 adults and 2 kids. If they switch from renting to home-owning, it is not like they will kick out the kids, it will just be that the pool of renters will change and the pool of homeowners will change. In this case, the occupants-per-dwelling would decrease for the population of rented properties, and increase for the population of owner-occupied properties.
What about supply and demand?
According to the Reserve Bank of New Zealand. 21% of all new residential mortgage lending in January 2018 was taken out by investors. In Jan 2016 investors were responsible for 31% of all new lending.
It seems affluent Kiwi’s are taking their retirement planning very seriously. A 3rd of all new mortgage lending seriously. Good on them for taking that step towards financial independence.
But guess who those investors are usually competing against…
In Jan 2018, first home buyers only made up 15% of all new residential lending.
The rest of the ‘new lending’ in Jan 2018 (62%) was taken out by ‘other owner occupiers’. In other words, Mums and Dads and families moving up, or moving City. Since it is general knowledge that investors target ‘first home buyer’ type properties – as these are the kind that are easy to rent out (to all the people who can’t afford to buy), then I believe you can remove ‘other owner-occupiers’ from the equation and come to the conclusion that property investors are the biggest competition faced by would-be first home buyers.
Granted, some investors buy properties that first homers wouldn’t touch (like the aforementioned Uni flats) but for the most part, you’ll see them picking up 2-3 bedroom homes in decent suburbs, as these are the properties which experience the best capital gain (because there are always so many young couples trying to buy them).
If property investors were slightly less active in the market, do you think prices would drop? Potentially making it easier for young families to own their own home, rather than rent?
Want another telling statistic?
Go on, one more won’t hurt 🙂
Of all that new lending taken out in Jan 2018, a whopping 30% of it was on interest-only terms. That means the owners are generally not intending to pay that mortgage back anytime soon.
They are in fact, minimising their costs as much as possible while holding the property, in the hope that it goes up in value over time and they reap the rewards. They are relying on capital gain to provide a return on investment.
30% of all new lending is a large amount. That’s a lot of people chasing capital gain, not income for their retirement.
The bottom line is, first home buyers don’t take out interest-only mortgages (the banks are very hesitant to allow this when you are borrowing 80%). But if a 3rd of the market are able to take out more affordable, interest-only loans (and are doing so), how are young couples and families ever going to compete?
Ok, enough of the negativity, give me some solutions, dammit!
What can we as property investors do differently?
1. We can buy properties that first home buyers wouldn’t touch.
Look for houses with issues, like asbestos ceilings, unconsented additions, or ones that are in such a state that young families won’t take them on. Fix them up and rent them out and enjoy the fact that you will probably have much less competition on the buying side.
2. We can buy investment-type properties.
3 x 1 bedroom flats on one title might not suit a young family but it could be perfect for an investor. Go and compete with your own kind! For some crazy reason, most first home buyers don’t like home & income properties (my partner won’t let me buy one for us to live in). So until proven otherwise, these should be ok for investors to buy too 🙂
3. Sell family-type homes that we are holding as investment properties.
Are you renting out a home that would suit a young couple perfectly? Then let a young couple buy it. Swap it for something that better suits providing a long-term investment income (eg. has a higher yield).
4. Pay down our mortgages.
Don’t buy a property if you can’t afford to be chipping away at the mortgage. If you are going to buy an investment, then buy it and hold it forever. Let the mortgage be paid down over 20 years and then enjoy living off the rent in your retirement. Don’t hold a home just for capital gain. You are buying into the housing bubble.
5. Don’t squeeze every last dollar out of your tenant.
Charge enough to cover all your costs and keep paying the mortgage down, without going overboard. Use the tenancy website to find out the median rent for your area to see how your property stacks up. Allow loyal tenants the opportunity to save more towards a deposit. Just because other landlords are taking advantage of the $50 increase in the student living allowance, doesn’t mean you have to as well.
6. Don’t buy just for capital gain.
It is never guaranteed and it is purely a bonus when it happens. Funnily enough, you start to realise this once you own 2-3 properties. It doesn’t matter how much they increase in value, what matters is the weekly cash flow and how close you are to financial freedom. I would happily own 10 properties worth $100k each, with minimal prospect of capital gain, if they all made me $200 – 300 per week in rent.
7. Invest in our properties.
Don’t buy a home you can’t afford to invest in. If you can’t afford to update the home and improve it over time, then you shouldn’t really be owning it? Do your properties have heatpumps? Do they have insulation in accessible areas? Read: WCC rental warrant of fitness checklist
Do you own a 2-3 bedroom home in a good area with a decent section? Subdivide your property and build another dwelling to rent out or sell, thereby increasing the amount of housing stock available in the market (and further helping to secure your financial future).
Do you have other suggestions? Join the conversation – let me know your thoughts in the comments below.