Brash 'barking up the wrong tree'

A residential property investor and mortgage broker decries calls for us to stop putting so much money into housing. ANNE GIBSON reports.

Reserve Bank governor Dr Don Brash wants us to stop putting all our money into our own houses, saying our home-ownership mentality is harming our economy and we should all be saving more and borrowing less.

But this has upset Kieran Trass, an Auckland investor and consultant who runs Mortgagenet, a mortgage broker for residential property investors.

Mr Trass advises property investors to take no notice of Dr Brash and instead lauds the value of property investment to the nation and the economy.

He wanted to respond to Dr Brash's speech last month, to the Canterbury Employers' Chamber of Commerce, criticising our poor savings record and warning against our habit of putting all the money into the family home.

Dr Brash's comments on residential property are aimed at folk who put most, if not all, their savings into the house in which they live. He is not directly criticising investors who buy property to rent out for an income stream and hopefully capital appreciation - although he wonders why they would in these days of such low inflation.

Mr Trass reckons Dr Brash is barking up the wrong tree.

"First, let me point out that I don't encourage people to invest in rental property," Mr Trass said. "But if they have already decided they want to, then I help them to.

"Dr Brash's comments struck a raw nerve with me the other day when I read his speech.

"He was singing the same song last decade. During the housing boom of the mid-1990s, he was very vocal about the issue of burgeoning overseas debt caused by funding what he calls 'non-productive assets' like rental housing, and even ordinary Kiwis getting better, more expensive houses. But for the last three years or so, he became almost silent on the issue.

"Now, as soon as we see the slightest hint of house price inflation and press statements indicating a housing boom, residential property debt again becomes the whipping boy of Dr Brash."

But it is time for Dr Brash to face the reality that property cycles are, and will always be, a real part of our economy, whether he likes it or not, says Mr Trass, who predicts that the Reserve Bank governor will become increasingly vocal about property debt being responsible for our economic woes as house-price inflation continues.

People should realise that providing housing for rental is not non-productive, says Mr Trass.

"Or would the Government prefer people sleep on the streets? We could stop investing in rental property and watch market rents get way out of control as rental demand outstrips supply."

In Mr Trass' opinion, providing residential housing - for those who cannot afford to own, in particular - is a social service being provided largely by the private sector. The Government cannot or will not meet the huge demand, he says, citing Housing New Zealand's waiting list for its subsidised housing stock.

"Also, ironically, the Government is partly to blame for the increasing debt levels, as it has been indirectly encouraging the private sector to invest in housing to lease back to Housing New Zealand, usually for a five-year term.

"This is fuelling the number of first-time property investors, due to the guaranteed 100 per cent occupancy being offered by Housing New Zealand, and encouraging additional new dwellings to be built.

"More debt is created to fund these dwellings.

"Property investors clearly understand the risks of borrowing to invest - if interest rates significantly increase, then the ability to hold property is diminished - and they choose to take that risk and the potential rewards or losses that may eventuate.

"Mortgage debt is not always non-productive. Just look at how many Kiwis borrow against their family home to fund a small business, for example. It's heaps cheaper than getting an unsecured or business loan. Dr Brash seems to overlook such detail.

"Anyway, how can Dr Brash compare our relatively young economy with most mature and highly-developed economies in Europe and North America? Do we have a mature and highly developed economy?" he asks.

"Dr Brash is barking up the wrong tree. The real issue to be addressed is the lack of savings in this country, not the fact that people choose to borrow against property to invest in rental property or even to upgrade their house for a better lifestyle.

"The large majority of property investors I have met have actually generated significant savings and wealth - compared to those who do not invest - as well as making a social contribution by providing one of the basic human needs, which is adequate housing.

"Let's face it, our Government has failed to encourage adequate savings by the average kiwi. That is surely the heart of the problem. Why doesn't Dr Brash try the carrot for a change? We are tired of seeing the same old whip," Mr Trass says.

"Notwithstanding my opinions, Dr Brash's comments, ironically, are healthy for residential property investors, as we don't want everyone investing in rental property. That could eventually cause an unhealthy market collapse, with oversupply then mass exodus from property ownership."

Dr Brash emphasises that the value of property as an investment is not as strong these days as it was in the high-inflation 1970s and 1980s.

Back then, he points out, property investors who borrowed heavily benefited from inflation.

Today, with low inflation, real - as opposed to nominal - interest rates are higher and so being in debt is not necessarily a money-making proposition any more. Instead, it could be costly.

Unlike most developed countries, in New Zealand houses make up the overwhelming bulk of our relatively modest net wealth.

Dr Brash acknowledges that we all have to live somewhere, but, especially in a low-inflation environment, he says, houses do not offer a high investment return - either to most of us as owner-occupiers or to those holding investment properties.

Dr Brash points out that people who borrow to invest need to invest in activities with a rate of return higher than the cost of borrowing. Anyone borrowing to invest in property should think about that carefully and then make a judgment, he says.

His latest speech also notes that in an economy that is highly geared, the risk of sudden changes to interest rates and other factors is higher than in an economy where there is less borrowing.

As with many other investment propositions, it is the most highly geared people who are exposed to the most risk.

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