No housing bubble – Property Investors Federation

SIMON Sustained low interest rates, sustained high capital returns, this is an investors’ paradise, isn’t it?

ANDREW Look, it is pretty good, yeah. It is quite good. But house prices going up is a double-edged sword. One, if you’ve already got the property, then the value of that property is going up, and that’s good. But if you are in a position or want to buy more rental property, that makes it hard. And at the moment, in Auckland, it costs around about – apart from the 10% deposit, which is about $45,000, $50,000 – it costs an investor around about $200—

SIMON More than that.

ANDREW Oh, look, it could be, but that’s not the kind of property an investor will buy. It’s probably not going to be a good investment property.

SIMON So investors are able to get into the market easier than first-home buyers, then?

ANDREW No. No, not at all. They’re probably potentially going for the same type of property, or you would they are. You would hope that first-home buyers are not in fact going for these $800,000 properties, because they’re just going to get themselves horrifically in debt.

SIMON And what happens— is there— do you agree that there’s a bubble?

ANDREW No. No, there’s not a bubble at all. Massey University do an affordability study. At the moment the index is at 25 for that. In the previous cycle, it got up to 34. So we’re about 37% away from that.

SIMON Gareth Morgan wrote this week that leading economist Peter Philips says we are in a bubble and it started in 2013. Of course, we’ve had warnings that there’s going to be a sharp correction to the market. Do you agree?

ANDREW No. No, not at all.

SIMON Why not? How do you sustain capital gain to this magnitude without prices going up? Rents aren’t going up as much either.

ANDREW For a start, the rent— it’s really an Auckland thing. It used to be Auckland and Christchurch. Christchurch is levelling off a bit. But it’s an Auckland thing at the moment. The rest of the country hasn’t really seen the same price increases as Auckland.

SIMON So we have two economies?

ANDREW We pretty much – game of two halves, if you like. But houses prices in Auckland are going up by around about 15%. We’ve got 53,000 people coming to New Zealand now. This was going to happen. In fact, in the last cycle – the last property cycle – we had about 30,000, an increase in population of about 30,000. But house prices went up at a far greater rate than they are now. If anything, you’d say that we haven’t actually grown as much as we could’ve expected with this amount of people coming into the country.

SIMON So the Government’s been targeting the supply side. What about the demand side? Why shouldn’t there be some— I mean, the latest mortgage figures show that 40% of new residential mortgages are going to investors, now less than 10% going to first-home buyers. Surely that imbalance needs to be addressed. How?

ANDREW Well, I think they are addressing the imbalance. Remember, the amount of rental properties there are is around about 35%. So you’re going to get, at any given time, 35% of the purchases are probably going to be by investors. So 40% isn’t that much, really. And a lot of it is happening in Auckland, and in Auckland, around about 40% of the rental properties—sorry, 40% of all properties are rentals. So you would expect, normally, that about 40% are going to be going towards investors. There’s nothing new going on here.

SIMON In terms of capital gain, you don’t think that you can sustain double-digit capital-gain growth, do you?

ANDREW No. No, definitely not.

SIMON So what happens when that comes off? Then suddenly the pressure is on, because the rental returns are only around 3% for many landlords.

ANDREW True.

SIMON What happens then? Either rents have to rise or property values have to drop, don’t they?

ANDREW The rental market and the housing market are two totally different things. So at the moment—

SIMON But they’re interrelated.

ANDREW Kind of interrelated, but they really are separate. Like, at the moment, some people are saying that because rental prices in Auckland are going up by 6% or 7% a year, prices are going up by 15%, 17% a year, that somehow that’s wrong, and it shows that there actually isn’t a supply problem. But a lot of—If you talk to people like the Salvation Army and a lot of our members, who are looking at renting our properties, they’re finding that a lot of tenants are moving in with each other now to cope with those 6% to 7% rental price increases. So what we’re seeing are two different markets – buyers and tenants are completely different.

SIMON Warrants of Fitness, suggested by the Children’s Commissioner, for houses. Why is that being opposed by so many investors?

ANDREW I think because—

SIMON Decent houses for their tenants to live in.

ANDREW Oh, look, absolutely. Property Investors Federation, we educate our members that if you provide a good home, well maintained, then your tenants are going to stay longer.

SIMON Stable tenants.

ANDREW Right. Good stable tenants, good rent, good rental return, an easier life. So we actually advise that. We’re not opposed to having better conditions for the properties.

SIMON All right. Take your word for that. Just one more thing. Capital gains tax, land tax, asset tax – we’re hearing all these possibilities. If those come in, what does that mean to your investors?

ANDREW It basically makes it harder for them to provide rental properties. I think what a lot of people need to realise is that a property investor is not a property trader. A property investor provides rental properties to tenants.

SIMON Long term.

ANDREW Long term. If it’s made harder for them to provide those rental properties, it’s the tenants at the end of the day who are going to suffer. These 6% to 7% rental increases that we’re seeing at the moment, you start putting tax in there, you start making it more expensive then to borrow money, those rents are going to go up even higher.

SIMON Andrew King, thank you very much for your time this morning.