New Zealand and its on­go­ing prop­erty ob­ses­sion

Nick Ste­wartt

Hawke's Bay Today - - BUSINESS -

IT WOULD seem never has so much been lost by so many in times of head­line pros­per­ity. What does that mean? We’re con­tin­u­ally sur­prised about the in­built mar­ket­ing char­ac­ter­is­tics of prop­erty as an in­vest­ment strat­egy, even to peo­ple who have lost money on it.

We re­peat­edly have peo­ple walk in our door who want to im­prove their fi­nan­cial fu­ture but are also in­tent on steer­ing the con­ver­sa­tion to­wards res­i­den­tial prop­erty as their so­lu­tion.

We as­sume this stems from the coun­try’s on­go­ing ob­ses­sion with prop­erty. It’s on TV; it’s on the ra­dio, it’s in the news­pa­pers and on­line.

It seems ev­ery­one is buy­ing it, mak­ing money from it or ren­o­vat­ing it. The data providers have been push­ing down the tim­ing on their price in­dices from monthly to weekly to daily up­dates.

It’s doubt­ful any­one will feel or care about a daily 0.01 per cent change ei­ther way in the value of a house, but the in­dus­try wants to ac­quire the headspace in the

av­er­age per­son where think­ing about the daily value of a home is im­por­tant.

De­spite the boom­ing mar­ket of the past few years, we’ve reg­u­larly seen in­vestors with prop­er­ties in far-flung lo­ca­tions that were meant to be hot due to some re­gion-spe­cific event.

When that cooled off the one­horse town didn’t look so hot any more. The cap­i­tal growth dis­ap­peared, and the ren­tal in­come be­came shakier. What do they do?

Then there’s those with cap­i­tal city apart­ments, we’ve seen plenty of these too. Can’t lose in the hot cities where the growth has been, surely?

Given the over­sup­ply and un­help­ful peo­ple who some­times fa­cil­i­tate the pur­chase with their hefty fees, it’s an­other area where prop­erty has been a loser. What do they do?

Gen­er­ally with a dud in­vest­ment, you’d want to cut it loose af­ter learn­ing the ex­pen­sive les­son. Walk with the eq­uity and find some­thing more suit­able. The fact that there’s no eq­uity, it’s in the neg­a­tive, makes it harder to cut the ties.

Why is there no eq­uity? In most cases, lit­tle eq­uity was put down, to be­gin with. This was all about spec­u­lat­ing with debt on cap­i­tal growth with­out a buf­fer be­cause col­lec­tive wis­dom says prop­erty only goes up.

The rent doesn’t cover the out­go­ings be­cause in time the in­creas­ing value was meant to make that lit­tle prob­lem go away.

Get­ting rid of one of these duds now means writ­ing a cheque to the bank for the dif­fer­ence. Un­der­stand­able that while some­one’s bleed­ing they don’t want to rip the stick­ing plas­ter off, but these prop­er­ties will be a mill­stone around the neck for some time.

Why does this hap­pen?

De­spite the om­nipresent thought of prop­erty as an in­vest­ment, there is no iden­ti­fi­able in­vest­ment process or in­vest­ment phi­los­o­phy that can be ap­plied across the board to prop­erty.

Ev­ery house or apart­ment is an in­di­vid­ual en­tity, bolted to its location. More­over, the “where to buy” is like stock pick­ing.

Some think they know how to pick the right house in the right area, but it’s a sin­gle en­tity, un­di­ver­si­fied and sub­ject to all man­ner of whims.

Will lend­ing fi­nance stay the same? Are there an­other four apart­ment tow­ers or a new sub­di­vi­sion com­ing?

How long will metal prices re­main el­e­vated for that boom­ing mine the area has hitched its wagon to?

Will or won’t the Gov­ern­ment en­force its reg­u­la­tions on for­eign buy­ers?

Sim­i­lar va­garies fade into the back­ground when an in­vest­ment port­fo­lio is com­prised of thou­sands of eq­ui­ties and bonds from around the globe.

Sure, there are peo­ple out there mak­ing a ca­reer from fore­cast­ing the lat­est prop­erty boom lo­ca­tions.

It’s a lu­cra­tive busi­ness be­ing a paid ex­pert, but it’s more about their ca­reer and ego than any­one’s in­vest­ment.

These peo­ple can sell their re­ports to real es­tate com­pa­nies who use them to speak at con­fer­ences, make me­dia ap­pear­ances and write col­umns. Some will even sell their in­sights to the av­er­age in­vestor.

They iden­tify a place, then three years later it’s time to get out. This isn’t an in­vest­ment phi­los­o­phy; it’s a fee-heavy spec­u­la­tive en­deav­our.

Any in­vest­ment phi­los­o­phy is based on a be­lief in mar­kets. For hun­dreds of years, they’ve re­warded in­vestors for their cap­i­tal, that hasn’t hap­pened con­sis­tently in a remote min­ing town.

That cap­i­tal has to be in­vested with an un­der­stand­ing of the risk fac­tors that have his­tor­i­cally pro­vided a re­ward, that’s not a prop­erty in some “cur­rently” sought-af­ter re­gion.

That cap­i­tal has to be di­ver­si­fied to min­imise risk, tough to do in a sin­gle location. Even with mul­ti­ple prop­er­ties the di­ver­si­fi­ca­tion is in the­ory at best and still re­stricted to one as­set class.

That cap­i­tal shouldn’t rely on fore­cast­ing or tim­ing the right mo­ment in and out of a location.

More­over, fi­nally, that cap­i­tal should be in­vested with an eye on fees and taxes.

Sure, we can be ac­cused of “talk­ing our book” on this, but we’re not short of suc­cess­ful client sto­ries when this phi­los­o­phy is fol­lowed.

Homes are great to live in, but as in­vest­ments, they’re al­ways spec­u­la­tions.

If we could get a cir­cuit breaker for the one-track mind­set peo­ple to have to­wards prop­erty, it would be a wel­come change. Even more wel­come for some in­vestors’ fi­nances.

Nick Ste­wart is the CEO and Au­tho­rised Fi­nan­cial Ad­viser at Ste­wart Group, a Hawke’s Bay­owned and op­er­ated in­de­pen­dent fi­nan­cial plan­ning and wealth man­age­ment firm based in Hast­ings. Ste­wart Group pro­vides free se­cond-opin­ion ser­vice on your cur­rent in­vest­ments.

The in­for­ma­tion pro­vided, or any opin­ions ex­pressed in this ar­ti­cle, are of a gen­eral na­ture only and should not be con­strued or re­lied on as a rec­om­men­da­tion to in­vest in a fi­nan­cial prod­uct or class of fi­nan­cial prod­ucts. You should seek fi­nan­cial ad­vice spe­cific to your cir­cum­stances from an Au­tho­rised Fi­nan­cial Ad­viser be­fore mak­ing any fi­nan­cial de­ci­sions. A dis­clo­sure state­ment can be ob­tained free of charge by calling 0800 878 961.

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