Like most financial decisions, psychology has as much to do with it as the numbers.<\/p>\n
Your brain focuses on what you paid for it, sunk costs and loss aversion. I\u2019ve spent so much already! I don\u2019t want to lose money! I just need to sit tight and wait until prices recover!<\/p>\n
But will property prices recover?<\/p>\n
Eventually, probably. But when? How enthusiastically? And what will holding in the meantime cost you?<\/p>\n
If you\u2019re continuing to tip money into simply servicing the debt, then the goalposts \u2013 the capital gain you require it to deliver \u2013 keep shifting.<\/p>\n
Let\u2019s see if I can bring that to life with some numbers.<\/p>\n
Say you bought a property pre-Covid in 2019 for $900,000. I\u2019ve assumed an interest-only mortgage because I want to isolate the cost of holding the investment, rather than repaying the debt.<\/p>\n
The rent covers most of the costs, depending on the interest rate \u2013 but not all. Averaged over the six years, let\u2019s say you\u2019ve needed to contribute about $200 a week to pay the property\u2019s costs. That\u2019s not an unusual amount for a fully leveraged property in Auckland, but over that time it\u2019s a not-insignificant $62,400 you\u2019ve chipped in.<\/p>\n
Today the property might sell for $1 million, so a headline capital gain of $100,000.<\/p>\n
But you still need to pay the real estate agent, marketing costs and legal fees \u2013 let\u2019s say 3.3% or $33,000. Plus we need to subtract the $62,400 you chipped in to keep it afloat.<\/p>\n
Suddenly, that original $100,000 gain has been eaten up by the cost of getting there \u2013 and that\u2019s before you factor in inflation, and the opportunity cost \u2013 ie what else could you have done with your $200 a week?<\/p>\n
You might well say \u201cjust don\u2019t sell it, then \u2013 duh!” Property is a long-term investment and holding for 10 years is the golden rule, right?<\/p>\n
If you hold for another five years, topping up again at around $200 a week (you could argue this could fall as rents rise \u2013 but the rental market is weak, interest rates are on the way up, and rates and insurance are only heading in one direction \u2013 so I\u2019d argue it\u2019s conservative). That\u2019s another $52,000 you\u2019ve put in simply to own the property, and selling costs will arguably be higher as its sale price rises.<\/p>\n
So, the hurdle the investment needs to clear keeps getting higher. The longer you wait, the stronger the capital growth required to justify continuing to hold it.<\/p>\n
Will strong capital growth return? Maybe.<\/p>\n
Independent economist Cameron Bagrie is firmly of the view that gains made in past property cycles are over. <\/p>\n
\u201cHouses used to average 6-7% a year while income growth was about 3-4% \u2013 that model was always going to blow up. You\u2019re probably talking something around 3% in future,\u201d he says.<\/p>\n
Opes Partners resident economist Ed McKnight says prices are already rising in some regions like Christchurch and Invercargill, while Auckland and Wellington remain weak. <\/p>\n
\u201cMy standard long-term assumption is that property prices would rise by 5% per year (on average) outside of Auckland, and 6% in Auckland.\u201d<\/p>\n
However, McKnight also points out that long-term forecasts from Treasury and Westpac \u201cboth have the property market going up by around 4.1% per year once we get 4-5 years in the future\u201d. That suggests there could be several years of bumping along the bottom to come yet.<\/p>\n
That, incidentally, is a problem for Labour, because it\u2019s difficult to fund policies from a capital gains tax if there are no capital gains to tax.<\/p>\n
But that aside, how do those forecasts bode for our example?<\/p>\n
If property prices are flat for another two years, then grow 4% a year, as per Treasury\u2019s forecasts, it would be worth about $1.125m in five years\u2019 time. If it instead grows at the 6% McKnight factors in for Auckland, after two flat years, it might be worth closer to $1.191m. Do the same using Bagrie\u2019s 3%, and we\u2019re at about $1.093m.<\/p>\n
So a headline gain of anywhere from $193,000-$290,000. But after subtracting circa $150,000 of holding and selling costs, has it rewarded you particularly well for the risk you\u2019ve taken, the time \u2013 11 years \u2013 and the pressure you\u2019ve put on your household\u2019s cashflow? That\u2019s the question you need to answer for yourself, with your own numbers (and perhaps a bit of professional advice).<\/p>\n
Of course, not all property investors invest this way \u2013 the Property Investors\u2019 Federation\u2019s Matt Ball points out that investors are not a monolithic group. But he says the rules have definitely changed, and he believes simply waiting for the market to deliver no longer works. <\/p>\n
\u201cAssume windfall capital gains are a thing of the past. Buy and hope is no longer a strategy. Buy based on cashflow and potential, run a good business, add value, and you\u2019ll do well.\u201d<\/p>\n
I don\u2019t think the question is whether the property market is dead or alive, or whether property prices will eventually recover. They probably will \u2013 eventually.<\/p>\n
The question is, will they recover enough, fast enough to justify the extra dollars you have to contribute while you\u2019re waiting?<\/p>\n