Netrealty

Property investment and property cycles

Property investment is generally hard to get wrong in New Zealand and Australia provided you hold the investment property for seven to ten years as the property market is cyclical.

When we talk property, we mean a house on a section not an apartment. Apartments are a different beast as they don’t come with much land which is an important component to property investing. The simple principal is the land appreciates and the dwelling or house depreciates over time, however the land appreciates faster than the dwelling depreciates. The dwelling is still an important component as it gives the property a cash flow from the tenant to service the mortgage on the property.

As we all know property prices have traditionally gone up in most locations around New Zealand and Australia. If you buy in or near a location with population growth you will enjoy a capital gain in the value of that property over time.

Getting the timing right can also be a big advantage in getting the capital gain sooner rather than later and then having enough equity in that property to then buy a second or additional properties to build one’s property portfolio.

An example of this scenario is if you purchased a property in Auckland around 2007, 2008. Just before the start of Global Financial Crisis (GFC). Between 2008 and 2011 property prices in Auckland dropped on average by about 12% over that three-year period. This was a minor correct by global standards. The primary reason was New Zealand and Auckland had a net loss in population with a lot of people moving to Australia to work in the mines.

That drop-in value was recovered in 2012, 2013 as population growth turned positive and values then went up exponentially from 2014 to 2016 with some of the largest population growth New Zealand has seen annually at approximately 70,000 pa. Many commentators are now suggesting Auckland’s capital gains will be sub 10% for 2017 as we head into a period of smaller capital gains.

The thing is if you purchased a property in Auckland in 2007 you will have only enjoyed the same capital gain over a ten year period as someone who purchased in a similar property in a similar location in 2012 a period of just five years.

The point we are making here is property capital gains historically are cyclical and there are often periods when the gain is significant and, also a period when it can be minor or even negative. The good news is if you hold a property long enough (about 10 years) it will double in value.

Often there are economic indicators that will show when a market may get double digit capital gains for three or four years and a property could double in value over just five years. The primary drivers is demand exceeding supply with people moving to where there is employment and a high level of economic activity. Obviously people need accommodation relatively close to where they are working with good amenities for their families.

 

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