Banking on houses

Sunday 30th May 2004

Being a property investor may sound unwise with all this talk of an impending crash, or at least a market downturn.

Many see property investors as people who want to make a fast buck. But that impression isn't an accurate portrayal of the average investor.

A survey by the New Zealand Property Investors Federation and ANZ Bank shows property investors are a professional bunch. And although they like the do-it-yourself approach, they are very experienced.

The survey, one of the biggest of property investors in New Zealand, was designed to gain further understanding of investors, the profile of portfolios held and the investment purchase process.

Federation president Craig Paddon says New Zealand has about 300,000 landlords and that figure is growing as fewer people own their own homes.

Former ANZ Bank chief economist David Drage says one fascinating factor is the amount of experience in the industry.

Most respondents had at least six years' experience as property investors, and 57% had been investing for more than 10 years.

The importance of this, Drage says, is that these people have been through the economic cycle and were investors in the late 1990s when property returns were lean.

The results of the survey were skewed towards the more professional end of the market, as respondents were generally members of the federation, he says.

But what really struck him is that these experienced investors are still buying, despite the market being high.

Asked about the timing of their most recent purchase, 48.9% of respondents answered last year, and nearly 17% said this year - an astounding finding, says Drage, as the survey was carried out in February and March.

It appears that although the market is at a peak, investors can still find good properties to meet their investment criteria.

More than half the respondents (65.7%) said they intended to buy more property this year, and just 4.1% said they planned to reduce their investments.

Investors were also realistic in their reasons for buying property. A combination of income and capital gains attracted 63% of respondents, 26% selected good ongoing rental income as the main objective for investing in property, and 11 per cent said it was the potential for capital gains that drove them.

Another interesting factor was that although the age of investors was reasonably evenly spread, nearly a quarter of respondents were under 40.

This indicates that many people believe owning property is a good option for preserving wealth, Paddon says.

But the big question for investors is, "where is the market heading?"

After a couple of years of some very good returns, commentators are making a range of forecasts, from a moderate slowdown to a major crash.

PSIS chief executive Girol Karacaoglu says that all indications point to a market that has peaked across the country.

He warns about buying a property now for investment or over-capitalising on home mortgages.

"In the next year or two I think the property market will slow, says Karacaoglu.

"The driver is the rising interest rates.

"The only debate is whether the market will come down or stabilise."

Mortgage insurer PMI Mortgage Insurance says property prices are set for a marked slowdown.

By the middle of next year, some regions could be experiencing nominal price increases of 1 to 5% annually, and others could have falls of 7 to 8% annually.

For the view from the coal face it's useful to listen to Property Investors Federation vice-president Martin Evans.

Last year he bought 20 properties after being out of the market for some time, but this year has added only one to his portfolio.

Other investors have a more gung-ho response.

"Roll on the downturn," they say, seeing a shakeout of weaker players in the market and some great buying opportunities.

This is from one of the more active property talk forums on the web:

"I have had all my properties revalued and refinanced, bulldozing the mortgages up against a few properties and drawing a line of credit over the remainder, so we will be ready to go shopping when the Big Crash comes."

Drage paints a more moderate picture. He says the economy has been remarkably resilient and there are few signs the market is cooling significantly.

While some indicators - such as the number of days it takes for a property to sell - the falling immigration rate and rising interest rates suggest the market will slow, it still appears to be in very good shape.

But he has some warnings for investors, especially when the results of the survey are coupled with economic data.

Bearing in mind that the bulk of respondents are investing in property for income, they may be coming under some pressure.

Drage says house price rises have been outstripping gross rental yields for 10 years and with a good supply of new dwellings coming on to the market and population growth (immigration) slowing, there is limited scope for rent increases.

Investors, he says, have to look for areas where there are some imbalances in supply and demand as they then have a greater opportunity to increase rents.

Those with just a handful of properties face a particular risk. Of the respondents, 43.6 per cent had three or fewer properties.

With that sort of concentration, getting one investment wrong can be catastrophic for the whole portfolio, says Drage.

The traditional approach to safe investing is having good diversification across investments. With managed funds and shares it is easy to get the diversification and lessen the impact one poor investment will have on the overall portfolio.

In the property sector, if someone has only two properties and one turns bad, that has a huge impact on overall returns, he says. It puts the acid on investors to ensure their properties are well-tenanted.

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