Beware New Zealand Real Estate Prices

[Dell]

Do you rent or own?" Perhaps it's just where I'm from but I would never even think to ask that question because why would I care? I don't get it.

I wonder if people are asking you this to determine if you're in NZ to stay - or just here for a year or two? Owning a home implies that you're here for the long term.

[b&k]

Thank you Adam P for starting this discussion. I find your arguments well stated and well thought through unlike some of the other respondents. There is a small minority of us here in NZ who do agree with you.

As you rightly pointed out, landlords are effectively subsidising rents as the cost of owning the same property is greater even when discounting the equity portion of the mortgage payment. Since moving to Auckland and selling the Christchurch house, we are happy renters too. There is too much potential downside in Auckland's overpriced market to warrant the risk. While I want to own a house in the long-term, I am happy to wait out the market safe in the knowledge that I am saving more in my current situation.

I recently posted this on another forum regarding house investment:

Anyone who relies on capital gains to make money is a speculator, not an investor. A real investor wants an income. The 1-3% being earned by private investors on housing would not be touched by professionals. Gearing up with a mortgage and betting on house prices is a gamble pure and simple. Many people will find this out when (not if) prices crash. Ironically, after the crash, housing will become a sensible investment as yields will increase to a reasonable level.

[CCC]

Adam:

Thanks for your input. Yanks should also consider the current relative high NZ dollar, now 82 cents compared to a historical average of 59 cents to the US dollar. A current Yank buyer could also be buying at a currency exchange peak, which historical trend is also to fall as the US economy eventually recovers. If the eventual sale dollars are to be later returned to the US, either with a return move or via an estate distribution, any property gain after the currency conversion could instead produce a substantial loss. For example, a $600K house purchase now would involve $492K US. If the house were later sold at even $800K, at the historical average $.59 rate, the US$ result is $472K, a seeming $200,000 gain instead producing a $20,000 loss, without also the added realtor commission costs!!! Given the added unresolved NZ Leaky House scandal and increasing victims, which media reports indicates surpasses the Christchurch quake damages and most sales are to unsuspecting non-advised foreigners, a Yank could lose their life savings! I completey agree with your conclusion that a Yank best not currently buy NZ property based on current market overvaluations, and instead focus and compromise on rental options.

[Adam P]

Thank you Adam P for starting this discussion. I find your arguments well stated and well thought through unlike some of the other respondents. There is a small minority of us here in NZ who do agree with you.

As you rightly pointed out, landlords are effectively subsidising rents as the cost of owning the same property is greater even when discounting the equity portion of the mortgage payment. Since moving to Auckland and selling the Christchurch house, we are happy renters too. There is too much potential downside in Auckland's overpriced market to warrant the risk. While I want to own a house in the long-term, I am happy to wait out the market safe in the knowledge that I am saving more in my current situation.

I recently posted this on another forum regarding house investment:

Anyone who relies on capital gains to make money is a speculator, not an investor. A real investor wants an income. The 1-3% being earned by private investors on housing would not be touched by professionals. Gearing up with a mortgage and betting on house prices is a gamble pure and simple. Many people will find this out when (not if) prices crash. Ironically, after the crash, housing will become a sensible investment as yields will increase to a reasonable level.

Whew! You're a breath of fresh air, mate. I was starting to believe there were drugs in the drinking water, leading to mass national delusion. But some folks are asking the tougher questions, like yourself. I like your distinction between investors versus speculators. I think it's a useful way of looking at it. When the "income" from the investment is no longer there, according to the math, then we've veered away from sensible investing and towards something else--such as speculating, as you suggest. Or a "lottery"--another Kiwi obsession...and clearly not a very good bet for 99.99999999999999999% of the tickets sold.

To the other response above, yes I'm in NZ for the long haul. That's our plan, me and my family. I was born here, and then raised in the U.S. and have come back home, so to speak. We love it here, and don't want to be anywhere else at this time in our lives, or the foreseeable future. Intelligent managing of our money actually will ensure that we can stay in NZ as long as we want, rather than mis-managing our money, which might entail some forced emergency move to some place I don't wanna be once we've gone broke sinking our money into a depreciating asset. Renting doesn't mean we have any intention of leaving. It does mean we're mobile and flexible though, whether that's within New Zealand or not. I don't think that a house is supposed to be a boat anchor that makes it impossible for you to leave, nor a badge of honour to prove my Kiwi-ness. I'm a Kiwi who rents.

Adam:

Thanks for your input. Yanks should also consider the current relative high NZ dollar, now 82 cents compared to a historical average of 59 cents to the US dollar. A current Yank buyer could also be buying at a currency exchange peak, which historical trend is also to fall as the US economy eventually recovers. If the eventual sale dollars are to be later returned to the US, either with a return move or via an estate distribution, any property gain after the currency conversion could instead produce a substantial loss. For example, a $600K house purchase now would involve $492K US. If the house were later sold at even $800K, at the historical average $.59 rate, the US$ result is $472K, a seeming $200,000 gain instead producing a $20,000 loss, without also the added realtor commission costs!!! Given the added unresolved NZ Leaky House scandal and increasing victims, which media reports indicates surpasses the Christchurch quake damages and most sales are to unsuspecting non-advised foreigners, a Yank could lose their life savings! I completey agree with your conclusion that a Yank best not currently buy NZ property based on current market overvaluations, and instead focus and compromise on rental options.

Egads! Another breath of fresh air. We're all coming out of the woodwork now. Your point about the NZ dollar exchange is very, very sensible for a foreign buyer to be considering. Historically speaking, the NZ dollar is incredibly high right now. The NZ dollar has a history of volatility too, so don't be surprised if it reverses precipitously. That could be a double-whammy for a US dollar buyer of real estate in Auckland. You'd be buying an asset with a huge potential downside, along with having converted your US dollars at a historical extreme ripe for reversion.

[Hagabel]

Adam:

Thanks for your input. Yanks should also consider the current relative high NZ dollar, now 82 cents compared to a historical average of 59 cents to the US dollar. A current Yank buyer could also be buying at a currency exchange peak, which historical trend is also to fall as the US economy eventually recovers. If the eventual sale dollars are to be later returned to the US, either with a return move or via an estate distribution, any property gain after the currency conversion could instead produce a substantial loss. For example, a $600K house purchase now would involve $492K US. If the house were later sold at even $800K, at the historical average $.59 rate, the US$ result is $472K, a seeming $200,000 gain instead producing a $20,000 loss, without also the added realtor commission costs!!! Given the added unresolved NZ Leaky House scandal and increasing victims, which media reports indicates surpasses the Christchurch quake damages and most sales are to unsuspecting non-advised foreigners, a Yank could lose their life savings! I completey agree with your conclusion that a Yank best not currently buy NZ property based on current market overvaluations, and instead focus and compromise on rental options.

I, although British originally, have US citizenship and we all moved with my American 'yank' kids 18 months ago. We went ahead and bought a house after a year of renting. We brought some money over for a deposit and do not regret buying a house. yes, we have a much smaller house then in the US but we also have a much more affordable and smaller mortgage. So don't give generalised advise to the 'yanks' on this forum, all of our situations are different.

[Adam P]

I, although British originally, have US citizenship and we all moved with my American 'yank' kids 18 months ago. We went ahead and bought a house after a year of renting. We brought some money over for a deposit and do not regret buying a house. yes, we have a much smaller house then in the US but we also have a much more affordable and smaller mortgage. So don't give generalised advise to the 'yanks' on this forum, all of our situations are different.

I've made a number of comments in previous posts in this thread to emphasise your point, exactly--everyone is different and has to do their own research. Everyon'es situation is different too. I'm trying to offer a counterpoint to all the other real estate talk in this country that very deftly ignores any conversation about possible downside risk. If there was a more regular conversation about downside risk, as there should be with ANY investment, especially one that is wildly overbought, then I wouldn't feel the need to warn other immigrants here.

I'm glad you love your house and have a smaller mortgage. If you weighed the risks, and went for it anyhow, I have absolutely no argument to make against that decision. If you didn't weigh that risk in your decision, then, well...good luck?

I don't know if it's just my area but people ask me all of the time if I'm renting or I own. For example, I go to a 4 year old girl's birthday party. I introduce myself, casual talk, whereabouts in town do you live and then, "Do you rent or own?". I'm getting my haircut, talking to the hairdresser, "Do you think you'll ever buy a home?" Invite a child over for a playdate, mum comes in for a cuppa when she picks up her child, "Do you rent or own?" Perhaps it's just where I'm from but I would never even think to ask that question because why would I care? I don't get it. Does anybody else get this question? I have a friend (originally from Auckland) who gets asked the question all of the time as well and it blows her mind too.
I, like you AdamP, have decided to wait and watch the market before buying a home. We fully intend to buy but we want to see how the market is going. I think that is sound advice to anyone new to any country. However, don't you think you are overstating your position a bit? Real estate was supposed to make us movie stars? I don't even know what that means. That makes no sense.

Yes, I get asked this ALL the time--do I rent or own. It's part of the national obsession, and part of why I feel the need to speak up. Kiwis have become convinced that there is only ONE way to get through life, and that is through home ownership, no matter the cost. That is dangerous when everyone in a country is on the same side of a trade. It also entails a certain judgment about the person--that you're somehow not playing the game, not a member of the in-club, or you're some layabout who simply can't buy. I am not a member of the club, that much is clear. But we could buy if we wanted.

What I meant by saying that real estate was supposed to make us "movie stars", is that I believe part of the obsession with real estate in New Zealand is the need to climb out of the bucket, so to speak. To rise up and do better. It's a very laudable goal, and I respect anyone who tries to better their lives. But I believe there is a certain mentality that has infected real estate speculation in this country, that every clerk in every grocery store, every hairdresser, every restaurant waiter, could soon retire with riches by simply buying more houses. And that's how movie stars live isn't it? You know, sipping gin by the pool while other people do the hard work. I just don't think life works that way for most of us. And this is where it starts to sound like a lottery to me. At least at these price to income ratios.

[b&k]

Maybe we should get some T-shirts printed up saying "Renting and Proud"

If you still have access to overseas investing accounts (I have one in the UK), you can arbitrage the exchange rate. Currently, I send money to the UK and invest it there. When the exchange rate moves back to more normal levels (NZD goes down), I will transfer the money back over. The weakening dollar might be the catalyst for house prices to fall so, if this happens, I will have lots of money for a house deposit and lower house prices.

The median price to median income multiple for the North Shore is 7.5 which is higher than London, New York, San Francisco, Sydney, Toronto and many other more desirable cities.

[Super_BQ]

But I believe there is a certain mentality that has infected real estate speculation in this country, that every clerk in every grocery store, every hairdresser, every restaurant waiter, could soon retire with riches by simply buying more houses. And that's how movie stars live isn't it?

No that's how the game of Monopoly works.

[Beachcombers]

Oh come on! Can't anyone stand up to this drivel! Thanks a lot mods, been contributing to this forum for five years now.

[JandM]

This thread seems to be going over the same ground between irreconcilable viewpoints. Thanks to all contributors.