I’m a regular reader and subscriber to Tony Alexander’s ‘Weekly Overview’. I find it’s an interesting read mostly, and I like his writing style because it’s very much like his speaking style – I feel like he’s shooting from the hip but you’re still getting considered opinion.

A recent ‘Overview’ noted the following stats released from Treasury as to their expectations regarding house price growth across the country, and they got me thinking:

  • To June 2019 – 2.8%
  • To June 2020 – 2.0%
  • To June 2012 – 3.4%
  • To June 2022 – 3.7%

That’s average growth of about 3%. Obviously, it’s been higher than that in the past. And a lot higher in the very recent past.

I decided to get out my compound growth calculator and see what a $500,000 house would be worth in 10 years at a growth rate of 3% per annum. The answer is $671,000.

What if growth was higher than that. Say 5%. The answer is $814,000. Holy moly.

That growth isn’t guaranteed. Yeah yeah. Blah blah.

And there are costs associated with owning a house. Most notably, the mortgage, but don’t forget council rates, insurance and a bit of annual maintenance.

  • The interest cost on the mortgage (assume a conservative interest rate of 5%) is $25,000 a year.
  • Allow say $3,500 a year for rates and insurance.
  • That’s $285,000 of costs over a 10-year period, against an increase in capital value of $171,000 ‘at worst’ or $314,000 ‘at best’.

If you accept those basic numbers, then owning the house you live in is a poor investment because you’re not really gaining much in capital value compared to cost of ownership – and there’s a high chance you’ll actually go backwards.

But who said the house you live in should be considered an investment? It’s actually more than that. The security you get from having a stable roof over your head cannot be measured in dollars. There’s a ‘social return’ and a positive impact on communities that comes from a high level of home ownership.

But what if you don’t occupy the house. Instead, you have a tenant.

Ignore for a moment all the bad press you hear about having to deal with shitty tenants. They exist, but I think that if you have good selection procedures, you inspect regularly, and you deal with issues promptly when they (inevitably) arise, then you’ll have happy tenants who pay rent and just tick away nicely. That’s been my experience anyway.

Let’s say your $500,000 house produces $450 of rent per week. It means your cost of ownership has fallen from $285,000 over ten years, to just $51,000. Based on the forecast value increases from the boffins at Treasury, the actual return is $120,000 ‘at worst’ (ie. the $171,000 value increase, less the $51,000 expense borne by you).

Clearly, a capital gains tax (CGT) is going to make property investment less attractive. But even if a CGT stripped 30% off you, you’re still going to come out better off with about $90,000 in hand. Yes the return is smaller but it’s tonnes better than doing nothing…

The cost of ownership could change too, of course. Interest rates change. Insurance and council rates only seem to go one way. Maintenance is an infrequent expense but when it comes it’s chunky, so factor that in.

Still, the fact remains that you have an asset that will continue to produce income (rent), and will still go up in value (god willing!).

My back of the envelope calculations may not be very sophisticated, but they do prove a point. And the point is that owning rental property will remain a viable investment option for plenty of Kiwis – those willing to analyse the numbers in a similar way to the above and those who take a long-term view. Even if the government makes property investment less attractive, I think the value in it will still remain true. After all, less attractive doesn’t mean unattractive, does it.

One last point…

This might be bleedingly obvious, but in a market where demand for housing exceeds supply – like Auckland – there’s an expectation that property values will grow faster than those Treasury forecasts mentioned above.

What if growth was more like 6% or 8%? I’ll leave you to figure that out, but you might find that it makes for a super-compelling argument to own a rental property long-term in an area where growth prospects are good.

Yes, house prices are high at the moment. But if you subscribe to the above argument then maybe it doesn’t matter.

Want to know if owning a rental property’s a viable option for you? Get in touch and I can guide you through the nitty-gritty of your numbers.

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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