The property investor who ignores prices

Graeme Fowler lays out four common beliefs that could hinder success in the housing market.

I’ve been an investor for more than 30 years now and house prices are something I’ve never been interested in, or paid much attention to. I’ve never thought ‘‘Should I buy now?’’ because I just read a headline to say that prices in my area are soaring. Many people ask me: ‘‘What do you think the market is going to do?’’ My answer for the past 30 years has been fairly consistent: I don’t know. I don’t care. Hopefully prices will drop. Why does it concern you? If you did know what was going to happen, what would you do and why? The idea that you can predict what house prices will do at any point in the ‘‘cycle’’ is one of the myths that catches property investors out. Here are a few others.

Myth #1

Generally, investors think that the big cities such as Auckland, Wellington, Hamilton and Christchurch will be better to invest in because they falsely believe that prices rise faster there. When I have talked at property investor associations around New Zealand over the past 20 years or so, I have shown a graph of average prices in all the main cities in New Zealand from 1981 onwards. It will show how much, on average, each area increased in value per year. Over time, they all had a very similar increase in value. From 1981 to 2007 each of these 18 locations increased by an average of between 7.1 per cent (Rotorua) and 9 per cent (Hamilton) over that 16 years. Auckland had an 8.2 per cent average increase per year, which was somewhere in the middle. When I redid all the numbers last year for a weekend property seminar I spoke at, it was all fairly similar. This time, Christchurch had the lowest increase over the past 38 years and Wellington had the highest. Auckland was sixth on the list for the highest rise over the full 38 years. Prices went up somewhere between 7 per cent and 9 per cent a year from 1981 to 2007; however, in the past 12 years all locations went up a lot less and were between 4.5 per cent and 6.5 per cent. Sometimes, one area will increase more for a few years, then stagnate and even drop. But eventually any city of reasonable size (I’ve often said – invest in any location with a population of at least 100,000) will be very closely in line with any other city.

Myth #2

Some people will tell you to only buy property in the best location in each city, not the cheaper areas or suburbs, because you won’t get the same capital gain. Again, simply not true. If you look at Wellington and compare the more expensive suburbs with Wainuiomata, for example, the ratio between the cheaper areas and the expensive areas is the same as it has always been. Auckland is the same; the outer suburbs will stay in line with the innercity prices over time. I was at one of our local Hawke’s Bay Property Investors’ Association meetings a few years ago, and the guy speaking up front said: ‘‘Buy in Hastings or Havelock North. You won’t get the same capital gains if you buy out in Flaxmere.’’ I nearly walked out, and in fact haven’t been to another one since. In 1981, the average price in Hastings was $40,500 and the average in Flaxmere was $24,000. Last year, the average Hastings price was $505,000 and the average for Flaxmere was $300,000. This represents an increase for both of about 12.5 times. Flaxmere has always had the better yields, and in most cases it is a lot easier to rent properties to tenants there than it is in Hastings or Havelock North. If you look at any big city in New Zealand, you will have the better, more expensive, areas and also the cheaper areas where more people rent than own. But the prices move at the same rate with any market price changes, up or down.

Myth #3

The third myth held dear by a large number of investors is that you need capital gains to become financially free. They think that you need gains to increase your equity in order to borrow more. While that obviously does help, it is not necessary at all. The purpose (to me) of investing is to put up a deposit and then have the tenants pay off the mortgage for you over time. That’s it. How many you buy is determined by how quickly you can get the next deposit together. For me in early 2000, I bought and sold (traded) many properties, which created deposits for long-term buy and holds. You may also save money from a high-paying job, a business you own, working extra hours, a secondary job and so on. Depending on how many rental properties you want to own, this may take a few years, or it may take a lot longer. Price increases do help, for sure, but they should never be relied on or planned for. If it does happen, take it as an unexpected bonus that may enable you to buy an extra property here and there. But also ensure that the more debt you have, the lower your loan-to-value ratio should be. How you get wealthy over time is by first of all leveraging using the bank’s money, then waiting until the loans are paid off in full. The tenants pay the mortgages off for you over time. How many properties you own and the value of the mortgages being paid down will determine a lot of your net worth. However, what the prices of the properties may or may not be at the end when the loans are all paid off should be irrelevant. The cashflow is what’s important, not so much the overall value. You have no control over what the values will be, so there is no point in being concerned about it.

Myth #4

Just because your city had a big increase in prices over the past 12 months, two years, five years or however long does not mean it will continue. In many people’s minds, what has already happened in the past equals what will also happen next year, the year after and the year after that! Up until mid-March this year, in my more than 50 years of living in New Zealand, there had never been a pandemic or a lockdown that prevented people leaving their homes for anything but the bare essentials. So, based on that it would be OK to assume that it would never happen. However, it did happen and sometimes unexpected things do happen to all of us. Property is not about timing the market – it’s about time in the market. It’s not about trying to work out what you or anyone else thinks will happen to market prices in your area. It’s also not about trying to work out which suburbs in your area will go up in value more than any other suburb. And it’s not about trying to pick various locations in New Zealand that you think will go up more than any other area. There are still people today who haven’t bought anything and are waiting for a big crash that may or may never happen. All they focus on is the doom and gloom news articles, trying to convince others – but more so themselves – that they should sell everything now or, if they don’t own anything, wait. It is so simple: Buy a property that makes sense based on where things are at today. Does it make sense now or doesn’t it? Nothing else matters.

Price increases do help, for sure, but they should never be relied on or planned for.