There is mounting pressure on property investors. Photo / Michael Craig
New Zealand has traditionally been a nation with a property obsession but there are signs that could be waning as more people jump directly into shares as the screws tighten on property investors.
In the last six months property investors have faced a clampdown by the banks on lending with deposit/equity requirements bumping up to 40 per cent while the Government has extended the bright-line test from five to 10 years, meaning investors will have to hold on to property for longer or face paying tax on their sale gains.
From October property investors will be hit again as mortgage interest deductibility will start to be phased out over a four-year period until it is no longer allowable on existing properties.
But for those looking to get into share investing access has got easier with a proliferation of online investment platforms allowing Kiwis to enter the sharemarket with as little as $5 in their pocket.
Michael Webster, a property investor for 20 years who also trades shares for a privately owned hedge fund, believes New Zealand's property obsession is slowly shifting.
"I definitely think it is and the reason I think it is, is because it [share investing] is so much more accessible. It wasn't for a long time because everyone got scared by the 1987 sharemarket crash and everyone remembers that - even those not alive at the time because their parents and grandparents have told them stories."
Webster, who got out of residential property about five years ago but is still invested in commercial property, said younger people were leading the way into share investing.
"It is definitely increasing in popularity especially among younger people."
Data from investment regulator the Financial Markets Authority from a survey released in June shows the percentage of Kiwis who own shares directly has risen from 17 per cent in 2019 to 21 per cent in 2021 and 60 per cent of those investors have got in via an online platform like Sharesies, Hatch or Investnow.
Meanwhile the percentage of those who own residential investment property fell from 14 per cent in 2019 to 9 per cent in 2020, although it has bounced up a little to 11 per cent this year.
Of those who made investments in the last year 19 per cent said they had invested in residential property, up from 15 per cent in the prior year. But 55 per cent said they had bought shares - a big jump from 46 per cent.
Jose George, New Zealand managing director of Canstar - a financial product research and rating firm - said the recent property tax and interest deductibility announcements had prompted some to reassess their property investments.
"We have got to a bit of a point where some people who have always invested in property are sitting back and saying: "is property it going forward? That is incidentally the same time as of people are also looking at shares."
Data crunched by Canstar shows property price rises in 2020 edged out the S&P/NZX50 gross index with property up 15.5 per cent while New Zealand's benchmark share index rose 13.92 per cent.
Those returns include dividends for shares but not rent given property owners typically have to pay out for a range of costs from that income including the mortgage, rates, maintenance and insurance.
But over 10 years the returns on New Zealand shares have been by far the stronger performer with property prices rising an average of 7.73 per cent a year compared to an average 14.74 per cent in New Zealand shares.
The factor that weighs heavily in favour of property is that it can be highly leveraged allowing investors to borrow heavily from the bank and ramp up their returns, and interest rates have never been lower than in the last year.
Put simply, if an investor puts $200,000 in as a 20 per cent deposit on a million-dollar property and house prices go up 20 per cent over a year the investor has doubled their money with a $200,000 increase in value.
That same $200,000 invested in unleveraged shares with a 20 per cent increase in value will only make the investor $40,000. But leverage also means if property prices fall substantially an investor can be left owing the bank money if they are forced to sell up.
In the year to June 30 average property prices shot up 30 per cent but economists are now predicting property price growth to be in the single digits.
George said Kiwis liked the tangibility of property but most of the returns came from capital gains rather than the income they could get from renting it out.
"Whereas for shares the dividends are attractive as an income. Rental yield has never been great and will be even more impacted by the change in interest rate deductibility.
"Everything that has happened in the last few months for the average property investor has been a rude shock."
Sharon Cullwick, executive officer at the New Zealand Property Investors Federation, said she had not heard of many investors selling out of their rental properties to get into the share market.
"We haven't seen too many leaving the industry. We have seen some of the larger players selling one or two properties [to reduce mortgage debt levels]."
She said many investors were still working out what the tax deductibility changes would do to their portfolios.
"That will take time. The Government still hasn't said exactly what is happening."
Cullwick said what could see people change their minds is if capital gains fall away.
"If we stop having the capital gains and if interest rates start to go up - that is two negatives straight away."
She said people may start to pull back then.
"A lot of the mum and dad investors are buying a house for $700,000 and they are getting $500 a week rent - that is not enough. If you are an investor normally for that price you would want to be getting $1400 a week to make it pay for itself over time."
That meant investors were counting on capital gains to make the investment stack up, Cullwick said, and capital gains were by no means guaranteed.
"I live in Hawkes Bay and we had 13 years with no capital gains."
Cullwick said if she was a new property investor again she would be hesitant to get into it while the market was so hot right now.
"Especially with all the changes coming through and knowing that the Government seems to be hell-bent on changing things overnight. So I think it is quite a big risk. It is more of a risk than it ever has been getting into the industry now."
Shares also have their own risks and one of the reasons many have been hesitant to get into them in the past has been the volatility of the investments, with shareholders able to see the value of them going up and down daily.
Hatch co-founder Natalie Ferguson, who is both a residential property and share investor, says while shares do go up and down in value the longer-term trend has been upwards.
"Take a look at any quality company like Apple or Nike or any of these companies that have been around 10-15 years. If you look at the last year it looks like the share price is all over the place but zoom out to 10 years and the trend is up."
That won't be the case for all companies but investors can much more easily diversify across a large number of shares through managed funds and exchange-traded funds which buy a basket of shares. Unlike property, share investors don't have to save a huge deposit or have equity in an existing house to get in.
Joseph Darby, chief executive at financial advice firm Milestone Direct, says ideally investors would be in both shares and property depending on their individual circumstances.
"They are quite complementary."
Darby says shares are very liquid while property is not meaning they can be sold more easily. Shares and managed funds also allow investors to diversify outside New Zealand which means if New Zealand's economy goes through a rough patch they can still get strong returns elsewhere, he said.
But he said it was hard to beat the leveraging advantages of property.
"Once you have got the capital and assuming you are young enough and can meet the payments - property leverage is pretty hard to beat."
Rob Everett, chief executive of the Financial Markets Authority, said investors appeared to be moving on from their property obsession "to some degree" although some were also investing in shares to get into property.
"There are still some people who haven't reversed out of this obsession with property quite as much as we might think.
"I've always said a better-balanced investment sector would have more people interested in capital markets and fewer people putting all their eggs in the property market and the conditions are virtually perfect for people to look elsewhere.
"We just hope when the downturn comes [in the sharemarket] the proportion of people in there enjoying themselves at the moment will stay and will be into investing for the long-term future and they won't all disappear the moment there is a market correction and head back to property."
When Ben Lewis began investing in his mid-20s he jumped into the property market buying an apartment in Auckland's Panmure.
He then bought a second Panmure apartment and another in CBD-fringe Eden Terrace with a family member within a few years.
But 18 years later Lewis is eyeing a sale of one of his properties and says he wants to invest more in shares and privately-owned companies.
"I've got too much property at the moment and want to spread more into shares. Property is just not as favourable."
A process improvement analyst by day for the telecommunications sector, Lewis says that's because property prices have gone up so much now the yield he is getting from the rent can't keep up.
"What happens is you end up sitting on a lot of value in the property but it's not returning that much because the rent is not keeping up."
And he says over time there have also become more and more expenses for maintaining the properties.
"I can't remember the last time I had a clean month where there hasn't been anything that had to be fixed."
While he has made good capital gains on paper the investments have also not been without challenges.
Just a few years after buying the Panmure apartments they turned out to be a leaky building meaning Lewis had to spend $140,000 on each one to fix them up.
And last year a decision to turn his Eden Terrace apartment into a short-term Airbnb coincided with the outbreak of Covid-19.
While he earned $37,000 renting it out, after the set-up costs, power and internet costs and property management fees he says he only made $800 on the investment.
"It is not as easy as everyone thinks and it can be quite stressful."
Lewis already has some investments in shares, he set up an ASB Securities account in 2013 and was also one of the first to jump aboard online investment platform Hatch when it launched in late 2018.
"Other investment classes are looking way easier to get into and lucrative. It would have been only three or four years ago if you wanted to buy American shares you would have to go to a broker and talk to them and they would charge you a much higher fee.
"It is a lot easier to get into now and I'm more comfortable investing in shares overseas. Previous to this I was only really doing New Zealand and Australian shares."
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