‘Expectations need to be reset’: Is the golden age of property investing over?

Currently, most investors who purchase property rely on capital gains for their returns.

But there are warnings that anyone expecting a repeat of the capital growth of recent decades is likely to be disappointed.

About 20% of sales are going to real estate investors. But Opes Partners economist Ed McKnight said data shows about 93% of sales require investors to “top up” the mortgage, assuming the entire purchase price is borrowed.

He said rental yields – the ratio of rent an investor receives to the purchase price of a property – had fallen significantly over the years.

In 2000, if someone purchased a national median-priced house, they would have paid about $170,000, while renting it would have been about $200 per week, based on the national average.

Today, the same property might be worth $770,000 but rent for just over $600.

“Historically people were looking for 10 per cent yields but it’s very, very difficult to get that level now. Fewer than one in 200 properties in New Zealand are getting a rental yield of 10 per cent or more, the average is closer to 4.2 per cent.”

That means most investors rely on capital gains for their income, he said.

“Even if the rental yield was 5 per cent, if you borrowed all the money to invest, you’d probably be paying about 7 per cent interest currently.”

He said investors accepted the obligation to top up their mortgages.

Seven ways to ease mortgage stress

Many people hope that as interest rates fall, house prices may rise and investments will receive better returns.

Nick Goodall, head of research at Corelogic, agrees that investors are buying stocks for long-term growth.

“If you bought an investment property today, it’s hard to know how you’re going to make that money based on the interest you’re paying on the mortgage.”

But he said the debt-to-income ratio could change the trajectory of capital growth because it linked the rate of house price increases to incomes. In the long term, he said house price growth could fall from 6 per cent to 7 per cent, or even to around 3 or 4 per cent a year.

“Investors can’t grow their portfolios quickly because their incomes have to keep up with debt levels. Expectations need to be reset.”

ANZ senior economist Miles Workman said changes such as the government’s plans to free up more land and increase housing density were also likely to make housing more affordable than before.

“Perhaps there will be a new paradigm shift. Housing supply will increase and capital gains may not be as strong as they have been in the past.”

“Some people think it’s a fairly well-understood investment avenue and maybe the sector is relatively safe, but that doesn’t necessarily mean that this dynamic in terms of capital gains will continue.”

Goodall said there were still ways for investors to make real estate work, but it usually required finding properties where they could improve in value or increase rents, or finding “pockets of value”.

But right now, it’s particularly important for investors to ensure they can find tenants, as higher mortgage repayments make vacancies harder to fill, he said.

He said rent increases were likely to slow because they were closely tied to tenant incomes, which had been rising rapidly but were now slowing.

“Yields may improve, but not by much, unless we see a sustained period of no significant house price growth.”

Goodall said attitudes towards property investment were changing. He said while property investment was previously seen as one of the few ways New Zealanders could invest for retirement, there were now more opportunities.

But he said being able to borrow money to buy a home was still an attractive option for some.

If a stock investment doubles in value, an investor might double their money, but if someone borrowed 80% of the cost of their investment and then it doubles in value, they could get back their initial investment many times over.

Nick Gentle, property investor and co-owner of iFIndProperty, says it’s often easy to spot a good time to invest only after the fact.

“I started after the global financial crisis…Looking back now, there were a lot of opportunities but it was hard to spot them. The more experience you have, the better you are at spotting opportunities.”

He said people who break even now with investments will see the situation improve over time.

“The last cycle lasted more than a decade and we are now in the second year (of this cycle). More people will come back. On the other hand, baby boomers will start to sell their properties. Many of them have owned their properties for a long time but have not done much to improve them, so there will be a lot of opportunities to repair and improve old homes.”

Infometrics chief forecaster Gareth Kiernan said the housing market would “almost certainly” see a surge at some point, driving house prices up more quickly.

But whether investors can hold on and wait remains a question.

“It’s hard to see what the catalyst will be at this point, given the soft labour market, slowing net migration and limited signs of interest rate cuts. If it’s another three years or more before meaningful house price growth emerges, the question starts to become whether investors can afford – and have the courage – to keep adding to their mortgages while asset values ​​move sideways.”