Darcy Ungaro: Property, house prices - should your home be an investment vehicle?

Personal finance experts and financial advisers say viewing equity in your own home is not part of a "valid" investment strategy, but ... Photo / 123RF

Opinion

OPINION:

Personal finance experts and financial advisers agree that viewing equity in your own home is not part of a "valid" investment strategy.

Why? Here are just two of the many reasons:

It's illiquid: It's hard to convert property into cash. Consider not just the real estate and marketing commission to pay, but also the gamble you take with market conditions in the future. By partnering with a bank you can indeed "unlock" some of the equity in your home, but what happens if either the lending criteria, or your financial position at the time changes, preventing you from gaining approval?

You still must live somewhere: A good "investment" should put money in your back pocket, without making you homeless. As we've seen over the past couple years though, most properties "make" more per year doing nothing than their owners do. As exciting as that is, you've just observed housing inflation – that's all. Before you sell and spend your gains, remember the next home you live in has increased in value too (and even more if you're looking at higher price brackets).

So (coming from a financial adviser), is it wrong to consider a home an investment vehicle?

No, and before you choke on your meat-free sandwich, let me explain…

Allow me to introduce the "slow-cooked passive property-profit" strategy.

Step one: Stop viewing property wealth as unethical. Karl Marx would never approve, but we still live in a world where returns on capital trump returns on labour. You can rail against this fact, or make it work for you. For the past 50 years and through the banking system, we've observed capitalism on steroids. Too much currency injected into a world with not enough real growth, and interest rates set far too low to cure rates of inflation potentially a tad higher than what the CPI would suggest. This creates a wealth shockwave. Yes, it crushes the "have-nots", and yes, it abducts many from the middle then dumps them firmly in the "lower"… but it's a wave that also propels some "haves" into the upper class too.

Step two: Benefit from inequality arising from step one. Yes, this may be as dodgy as it gets, but if it makes you feel better, you're making money from those moving up, not moving down. Governments of both sides have been doing this for ages by the way, so you know it must work. In aggregate, the "middle" that's propelled into the "upper" (thanks to the inflated assets they own), may create a far higher amount of demand for higher-value homes in the future. Why? Well for one, it's too hard being a landlord these days, and secondly, the capital gains made on owner-occupied homes may be more tax-efficient than owning rental properties.

Step three: After a couple decades of slow-cooking your high-value home at a 7 per cent compounding growth rate per year, you sell. This strategy is made even more delectable if you can maintain ownership of a rental property the entire time that's to be converted into your next home after you sell the mansion. Only own the one home though? No problem, just sell and downgrade to a lower-value home and you're now ready for the end of days. The capital gains released in the process can be invested for passive income in retirement. Simple.

So, in a nutshell, for the slow-cooked passive property-profit strategy to work, do this: Buy an expensive home (based on the land value not the dwelling), own one rental you can move into in the future, then do nothing.

Don't flip, don't renovate to "add value", don't subdivide… just wait.

The "experts" here would rather you stay living in a lower-value home and invest the rest (and yes again, this is technically still likely the best answer!). When you compare both strategies, however, and ignoring all of the risks with illiquidity and concentration, you can get a similar lump sum of cash to spend in the end. The best part about the slow-cooked passive property-profit strategy, though, is that you get to live in a nicer home in the process. Try doing that with a managed fund.

So why does this work? There's nothing that's structurally changed with how the current financial system works. Lower interest rates will inevitably return, and in all probability and although it's not perfect, a system which depends on newly created bank credit and long-term declining interest rates will persist. Property values will inflate again as a result, and potentially continue to double every 10 years. It's been true for almost half a century, so what are the odds it won't hold true for the next 20?

• Darcy Ungaro is an authorised financial adviser and host of the NZ Everyday Investor Podcast.