Investing made easy: State of play

The latest Real Estate Institute of New Zealand (REINZ) statistics show that the median house price (under the new stratified measure) rose in July and August and that 5,878 homes were sold in August this year, compared to 4,220 last year. Net migration is on the rise and the Reserve Bank is suggesting the official cash rate (OCR) is likely to remain low until the latter part of 2010.

It is all starting to sound as if the property slump could be behind us. But Craig Moffat, ANZ general manager of specialist distribution, says that while there are positive signs, it holds concerns about whether there are strong enough underlying factors to support these improvements.

He points to unemployment, describing it as "having a way to go" before it reaches its peak yet, while the high exchange rate is also a concern.

"We've still got some challenges to face and therefore I don't think the property market is set for a stable rise in values and in rents for a while to come."

Investors also need to remember that the growth we are seeing is coming off record lows. Moffat says when the property market does return to "normal" it's unlikely to be the type of normal seen in the heady days of 2006/2007 and more likely to involve a "return to slow growth".

A good time to buy?
Sue Tierney, president of the Auckland Property Investors' Association, believes there are always opportunities around and that now is a "fantastic" time to be looking for them.

But she is quick to point out that this is only if the numbers stack up.

"To race off and buy just for the hell of it is totally illogical," she says. 

Neil Inns, director of the Professional Financial Group, says investors need to look at their overall financial situation and stick to the property investing basics.

"First of all, understand why you are doing it - not enough people do that - they think it's all ‘jump on the capital gains and go'. It's actually a very long-term investment - it should be a minimum of seven years," he cautions.

Inns also tells his clients that if they have to rely on the tax breaks to make a property deal stack up, they should not be doing it.

Alistair Gillespie, president of the Capital Property Investors Association, has snapped up a few properties himself recently and says there are still bargains out there. But he too says investors need to be sure they can service the debt first.

"There is still a lot of uncertainty around employment with a lot of people," he says.

Expecting the unexpected
With little room for error in the current market, making sure investors are prepared for any potential risks is vital.

Tierney says: "Those risks might be: have I taken out income protection? Have I taken out landlord cover if anything happened to the property? Have I covered it in case the interest rate rises?"

She suggests investors should "sensitise" their calculations to ensure they could cope if interest rates went up another 3%. There is potential for interest rates to rise fast, particularly if the Reserve Bank does start to hike the Official Cash Rate.

Potential changes around things like property taxation and also Reserve Bank monetary policy is worth keeping an eye on, Moffat suggests.

Inns warns that investors need to consider their whole portfolio when it comes to their borrowing strategy to ensure they minimise "maturity risk" - when fixed term mortgages all mature at once. This can be bad news if interest rates have gone up.

Move with care
The recent ANZ Property Investment Survey, produced in conjunction with the New Zealand Property Investors Federation, revealed a jump in the number of landlords worried about untenanted properties, with defaulting tenants also a concern. Meanwhile, 27% of those landlords surveyed cited the economic conditions as a reason not to buy this year.

When dealing with untenanted properties, prevention is undoubtedly better than cure. Choosing the best tenant for your property is essential regardless of the economic climate, says Usha Ganda-Wilson, president of the Independent Property Managers Association.

She uses a set of standard procedures for tenant selection. This includes running credit checks; ringing the tenant's employers; and speaking to previous landlords, among other things. She also checks prospective tenants on the Ministry of Justice Tenancy Tribunal orders online. It is essential not to let your guard down, Ganda-Wilson says.

"Stick to your criteria no matter what their story is, because the day you don't check it, is the day they'll burn you," she warns.

Tierney believes it is better for a property to be untenanted than to rush in a bad tenant.

"To take on a bad tenant is absolute madness. It doesn't matter what the market is like, that's just a crazy thing to do," she says.

Dealing with a tenant's loss of income
This can be a delicate issue that requires some landlord sympathy, but both Ganda-Wilson and Gillespie suggest it needs to be dealt with on a case by case basis in terms of the amount of leniency a landlord might extend.

"If they'd been a good tenant for a long time, you might give more than someone that's just moved in," Gillespie says.

He checks that rents are paid on the day they are due and rings immediately if anyone has not paid to see if there is an issue. Tierney adds that it is worth directing tenants to Work and Income NZ, to see if any state help may be available to them.

While some landlords might allow tenants experiencing tough times to break out of a fixed term contract, Tierney says she would not necessarily encourage these discussions.

What the successful investors are doing
Moffat says successful investors are sticking to the property investment basics and taking a relatively conservative approach right now.

"Yes, some of them are looking for properties in the marketplace. But they're doing their investigations first and they're thinking long and hard about how this fits into their portfolio and is it a good long-term buy," he says.

"They're not getting too carried away about the future at this point."

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