Seekers of Property Gains Beware
A house sale in Wanaka was in the news recently. The owners bought it in 1968 for $7,500 and sold it for $820,000.
2 August 2003
That's a pretty nice capital gain. But:
© 2020 Mary Holm, NZCity
• It's not as amazing as it seems.
It works out an annual rate of 14.4 per cent, which is high but not astounding.
• It could give readers false hopes.
Such gains are unlikely to be repeated. In the first 20 years that the couple owned the house, inflation averaged 11.6 per cent a year.
In the last 15, it was only 2.5 per cent. And inflation seems highly unlikely to revert to the levels of the 70s and 80s.
Just as importantly, this has been singled out as a remarkable gain. Such stories grab the headlines. But let me tell you about two house sales that didn't make the news.
In the first case, the couple paid close to a million dollars for a beautiful old villa, close to downtown Auckland. Then the zone for Auckland Grammar School changed. The house was no longer within zone. Its value dropped by about $300,000.
Another couple felt rather smug when the share market crashed in October 1987. They had recently sold all their shares to buy a $385,000 house in a blue chip suburb. A year later, they decided to move across town.
House prices had fallen - probably largely because people were moving to smaller homes to repay share-related debts. But that was okay. The couple were buying and selling in the same market.
They bought a new place, and put their old house on the market. Months later, they reluctantly accepted $270,000 - 30 per cent less than they paid for it. House values in the blue chip suburb had dropped much more than elsewhere in the city.
Admittedly both these price falls were over short periods. No doubt the houses would have regained lost ground over time.
But it can take several years. And even then, the loss would drag down long-term gains.
At a time like this, when more and more people are speculating in property, it pays to remember that sayings like: "You can't go wrong with bricks and mortar" aren't always correct.
At the risk of over-exposing BNZ economist Tony Alexander, who I quoted in my last column, I'm going to quote him again.
He wrote recently of three groups:
• Those driven by fear of missing out on rental property gains. They buy "without giving adequate thought to how realistic the purchase price is, or how great the demand from tenants at the rent needed to cover costs."
They are inexperienced and "will be the least able to weather a downturn if one comes along."
• Those driven by greed, who have already done well in property "but will now be looking to gear up into extra properties." They are starting to think about early retirement, "and will be unbearable at parties."
• Those who have held rental property through several ups and downs. Most won't gear too much. "Their experience will help them avoid the greatest risks of this cycle."
They will focus on getting rid of properties that have proved difficult to rent. The properties may need maintenance, or their suburb has deteriorated, says Alexander.
And here's the crunch: This third group will be "getting rid of the rubbish to the above two groups."
Alexander is not saying house prices are about to drop. He still thinks "this cycle has further to run." But price rises aren't likely to continue at the pace of the recent past.
To those thinking of buying now: proceed with caution.