KEY POINTS:
When it comes to investment, I'm a fundamentalist and judge the value or worth of an investment, or the state of a whole market, by the income it gives. With shares, the income is from business profits. With property it's rents, and with bonds and deposits it's interest.
As a fundamentalist investor seeking value derived from income, I'm no great fan of momentum investing, or technical analysis.
Technical analysis is studying charts and graphs to try to pick patterns, and so future direction. This may have some use for speculators and short-term traders but not for long-term value investors - give me a set of accounts any day.
My fundamentalism is making me deeply suspicious of the residential rental property markets, because yields are too low to attract any investor concerned with fundamentals.
Investments always find their value according to the amount of income they produce. This may take some time - an investment market can be out of line with its income returns for months and years, as property has been in New Zealand.
Eventually, all investments find their level according to the income that can be derived from them. For investment property, this is expressed as a yield, which is simply the annual expected rent as a percentage of a property's value.
For example, a property valued at $400,000 with an annual rent of $20,000 per annum would have a yield of 5 per cent. After the cost of rates, insurance and maintenance (and allowing for vacancies), the yield might be nearer 3 per cent, far too low to justify investment.
This works for owner occupiers as well as investors - they are looking to substitute the rent they are paying as renters for the interest and other costs of ownership.
While rent is dead money, interest is lifeless as well (rent and interest are the costs you pay for the use of an asset).
In the same way as property investors, prospective homeowners are continually comparing rents with house values as well - and the equation for ownership is coming up short.
Property values have been bid up during the past five years or so - but rents have remained relatively static. The result is that for investors - as opposed to speculators and traders - there is no value to be found in residential property.
For value to return to the residential property markets, one of two things has to happen - either values have to fall or rents have to rise, or there is a combination of both.
Rents are showing no sign of rising - in a lot of markets they are falling. In time, they will rise but this will take some years to play out. This suggests values have further to fall.
Each week best-selling financial author Martin Hawes will share his strategies to help you grow your wealth. You can email your questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz
