The tried and trusted model for property investment in NZ has been to take a cashflow hit for at least the first few years (topping up the rental income from other sources) but then pay down some debt and also get some rental growth so that over time the property becomes ‘positively geared’ – all the while, potentially seeing some capital gains too.
As it’s turned out, this has worked pretty well for many investors, with our Home Value Index having grown by an average of around 6% year on year since 2003. Indeed, that capital growth has helped many investors to retire with a solid amount of equity even if they’ve stuck with an interest-only loan for a decent chunk of their ownership period.
But would it now be sensible to tinker with the assumptions and actually factor in a lower rate of capital growth in the future than we’ve seen? That may well prove to be a good idea. Indeed, although property values are influenced by many different factors, such as credit rules (e.g. LVRs), local economic trends, or even happening to be on a particular street that suddenly becomes very desirable for some reason, research from NZ’s Housing Technical Working Group suggests that the big drivers are interest rates, the tax system, and land supply.
In other words, historically, property values have been driven up by the long downward trend in mortgage rates (as central banks have progressively got inflation under better control), the comparative lack of new land coming forward for housing, and a tax system that has tended to be relatively favourable for residential property, e.g. the previous ability to use a property loss to reduce the tax on non-property income.
But from here, those factors may...
