Short supply drove high demand until it reached an unsustainable point. Now we have a situation where few can afford to buy a house (or even qualify for what must be quite a rigorous financial stress test at this point with the onerous CCCFA requirements), and those who bought with the intent to sell and make a buck in a few years may be stuck between a rock and negative equity.
In the data to March 2023, house values had dropped 13.1% from their median a year ago. According to Real Estate Institute of New Zealand (REINZ), most homes purchased between March 2021 and December 2022 will likely be worth less now than when they were purchased.
Certain regions are feeling the burn more intensely. OneRoof data placed Wellington’s average property value at -22% year-on-year, with the suburb of Wilton down -30.3%. That’s an incredible dip in 12 months.
So instead of increasing their equity (essentially the ‘profit’ – what’s left of a sale after paying off the mortgage) as the value of the dwelling increases, would-be sellers may find themselves looking at a situation where the value of the loan exceeds the value of the property. This is what’s referred to as negative equity, when you’re making losses instead of gains; or as the Americans call it, ‘jingle mail’.
The losses applied to both owner-occupiers and investors. And of course, the bank still needs to be paid in full regardless of market conditions; that’s what was agreed upon in the original contract.iii
With the latest OCR announcement fresh from RBNZ and another 25 basis points gained, it’s looking like it’ll be much of the same for mortgage holders. The major banks (Westpac, ASB, ANZ and Kiwibank) all have floating standard mortgage rates of over 8% now. Those who went with a fixed rate are likely looking at something with a 7 in it, or at least a high 6, which is obviously better than 8% but not ideal for anyone.iv
New Zealand is obsessed with property as the only ‘safe’ route of investment to accumulate wealth. Buy land, God’s not making more. It’s bricks and mortar! What could be safer than an investment you can see with your own eyes?
Diversification. That’s what.
The problem with investing everything you have (and securing a million dollar mortgage to cover what you don’t) is that when downturns happen, you have no other option than to hope things will come up enough that you have equity at the end of it. It’s all your eggs in one basket. Long-time followers of this column will know how I feel about that.
At a glance property investment makes sense; over time inflation drives up the price of everything, including property. What you own today should be worth more in the years to come.
That’s not always the case. When a housing bubble pops, things tend to go downhill fast and stay that way for a while. Ireland is a good example of this; an OECD graph of nominal house prices over time shows it took 15 years for prices to recover and surpass what they were following the 2007 housing bubble burst. So from 2007 to 2022, you were looking at a potential loss on your investment. That’s a long time to hold on to a ‘sure thing’ investment if you’ve no other hope for lining the nest.
With a dud investment, anyone would want to cut it loose after learning an expensive lesson. Walk away and find something more suitable. But in this case, getting rid of an investment property in the future could mean writing a cheque to the IRD (remember the 10 year bright-line test) or as is the case for some now, to the bank for the difference. Others may even need to lean on the family or in-laws for it.
This is not to say you should never buy property if the situation is right for you. Putting a roof over our heads is essential, and the desire to own that roof is entirely understandable. Putting a roof over other people’s heads as in investment is not for everyone. If you were sold a property as some kind of passive wealth scheme, you might be waiting a while for it to pay off in the current economic and political climate.
All of us try to save and invest to the best of our abilities to protect our financial future. We tend to invest according to what we hear or read about, or as suggested by our close family & friends, bank managers, real estate agents and sharebrokers. But none of these people think on your behalf to see if an investment suits you and your family’s goals, your risk profile and your time horizon. None are a fiduciary. The best way to get an answer is to get a second opinion on your investments from a financial adviser who is a fiduciary and focuses on goal-based financial planning.
Taking the time to seek a second opinion on your financial health can only give you more confidence to continue your same path or steer you towards a better journey. There’s an old saying: cheap advice is always the most expensive.
So, what’s to lose?
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke’s Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 306.
· 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.
