Christopher Niesche: Investment looks safe as houses - and dotcom stocks

When you hear the phrase "it's different this time", it's a good idea to take a deep breath.

So when people start saying this property cycle is different from the last time and there may no longer even be a property cycle, then that's probably a cue to have a close look at the property market.

If you're in the camp that believes house prices are going to keep rising - like Real Estate Institute president Murray Cleland - it may be worth a trip to the business section of your nearest library to remind yourself what happened when people last thought things were different this time.

There you'll find the shelves groaning under the weight of books explaining why Wall St and sharemarket investing had fundamentally changed and the old rules no longer applied. Using phrases such as "paradigm shift", "thinking outside the box" and "system-based solutions", these books explained why internet stocks were going to keep rising.

Most of these authoritative tomes - unread and now gathering dust - were written shortly before the tech wreck in 2000, when internet and telco stocks came crashing back to earth.

The crash proved that the old rules still do apply - investments are ultimately tied to the income they produce, or at least are likely to produce in the future. The tech wreck came about when the market started questioning what sort of profits, and hence dividends, internet companies would actually generate.

There's no reason why the same fundamentals shouldn't apply to the property market.

The amount of income generated by houses has fallen dramatically as house prices have risen and rents have failed to keep up. According to Westpac, gross rental yields have fallen from more than 6 per cent in 2000 to about 3.5 per cent now - the lowest in the 35 years figures have been kept.

This means that one way or another rental yields will eventually have to rise back to their more usual levels of between 5 and 6 per cent to justify holding housing as an investment.

The question for investors and home owners is how will this happen? Rents will have to rise sharply or house prices will have to fall. And there's nothing to suggest that rents will rise sharply.

Common wisdom in New Zealand is that house prices don't actually fall - they just stop rising and inflation slowly eats away at real property prices, bringing them back into line with market fundamentals. For instance, between the end of 1997 and the start of this boom in 2001, property prices fell by 9 per cent after adjusting for inflation, even though actual house prices were more or less flat.

It's different this time

There's one important difference in this property cycle compared with previous ones.

This time - for the first time in living memory - it's investors and not owner-occupiers who are setting prices and have been doing so since 2003, according to a study this year by economists at Goldman Sachs JBWere.

Goldman Sachs found that there had been "a change in the mix of the marginal house buyer away from the traditional dominance of owner-occupiers to that of investors using high levels of debt".

It is this fact - that there are many more investors than owner-occupiers in the housing market - that has pushed property prices up so sharply, because investors are prepared to pay more to get the tax advantages that aren't available to owner-occupiers.

This leaves the market particularly vulnerable to a shift in investor sentiment. Perhaps a rate rise will make debt more difficult to service or perhaps investors will lose heart if they don't continue to get the capital gains they have been banking on.

Either way, if property investors drop out of the market owner-occupiers will again have the upper hand.

The housing market could grind to a halt, in a virtual stalemate, with sellers not prepared to take a loss on their houses and buyers no longer prepared to pay such inflated prices.

But if the the interest rate rises that Alan Bollard is promising start to bite, investors might have no choice but to sell for a loss and house prices could drop.

Left at the alter

The proposed merger between Ports of Auckland and Port of Tauranga is in danger of falling apart.

Although the proposal was publicly announced only late last year, the two parties are understood to have now been in talks for nearly a year, but they've made little apparent progress.

Now Port of Tauranga looks like it's losing patience with the delay, with chairman John Parker this week setting a March 31 deadline for a decision one way or the other.

Rather than hurry up the other side, this seems to have prompted Auckland Regional Holdings - which owns Ports of Auckland - to dig its heels in. ARH said it still needed convincing of the benefits of merging the ports and wanted more information.

The problem here is that the two ports are operating on different timetables. Port of Tauranga wants to get on with things; it wants to either merge with Ports of Auckland or find some other way of continuing the company's strong growth.

ARH - which is the infrastructure holding company for the Auckland Regional Council - seems in no hurry whatsoever.

It's hard not to conclude that if these were two privately owned companies, they would have either committed themselves to merge by now or gone their separate ways.

It looks like another example of Auckland's messy governance structure getting in the way.

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