Opinion

[OPINION] Kiwi property vs Kiwi shares

When I was growing up in Malaysia, there really was only one way to get ahead.

Wednesday, July 12th 2023

By John Ling

Chief investment officer

Wealth Morning (https://www.wealthmorning.com/)

You started a business. You took a calculated risk. And if you succeeded in providing a product or a service that people wanted, you gained positive traction. And you reaped the long-term benefits of doing so.

Of course, succeeding in business was no easy feat. You needed determination, diligence, and vision. As well as a generous sprinkling of good luck.

Interestingly enough, I have never encountered anyone in Malaysia who made serious money by being a property investor. It just wasn’t feasible to do so.

The housing supply in the nation was plentiful. So capital growth was limited. You didn’t get much upside for putting in the work for being a landlord. For most people, it was far better to invest in a business instead.

However, when I first arrived in New Zealand, I was greatly surprised. Things were so different here. It wasn’t business that drove the agenda. Instead, it was property.

Housing was king. Plenty of Kiwis chose this as their main vehicle for growth, income, and security.

A culture shock for me? Absolutely.

A love affair with housing

Generally speaking, two forces seem to be driving Kiwi investors toward property.

Historically, the zoning and resource-consent laws in New Zealand have made it difficult to build housing at scale. This has created a chronic shortage of affordable homes. This, in turn, has placed upward pressure on property prices.

Meanwhile, compliance costs and regulatory burdens have escalated over the years. Putting a tight squeeze on Kiwi businesses. Entrepreneurs face fierce headwinds. Only 37% of small companies will survive after two years. Failure, not success, is the rule here.

So, naturally enough, for many people, the path of least resistance will be property. If you can borrow cheaply, if you can leverage it — well, in theory, the sky is the limit.

It’s no wonder that New Zealand’s household debt has ballooned over the years. It peaked in 2022 with an astounding debt-to-income ratio of 175%.

Why so much debt? Well, why not?

Kiwis have grown comfortable with large mortgages — because up until now, the reward they received in return for taking on that debt seemed pretty clear-cut.

New Zealand has one of the most expensive housing markets in the world. The surge in prices over the past decade has been dizzying.

So, you can’t blame property investors for experiencing emotional euphoria. It has reinforced certain deeply-held beliefs that include: Investing in housing is safe, investing in housing is secure and investing in housing is risk-free.

Unfortunately, the idea that property is risk-free is simply not true.

For example, look what happened in Ireland. A real-estate bubble started to appear in the early 2000s. That’s when excessive borrowing and speculation reached a fever pitch.

When a credit squeeze arrived, courtesy of the Global Financial Crisis, the bubble popped. This was devastating. In 2013, house prices in Dublin crashed an astonishing 54% from their peak.

Talk to any Irish person who lived through this period. You will understand what a deeply traumatising experience this was for the Celtic Tiger.

Of course, what happened in Ireland was an extreme example of a housing meltdown. Chances are, it won’t happen in New Zealand, given that our market has different fundamentals.

Perhaps, in the grand scheme of things, the Reserve Bank of New Zealand has done us all a favour. II has raised the official cash rate steeply from 0.25% in August 2021 to 5.5% today.

This has caused much anxiety and anguish. This is particularly acute among people who are deeply plugged into this ecosystem — housing developers, mortgage brokers, real-estate agents, and yes, mum and dad property investors.

Let’s face it: no one likes it when the easy money is taken away. The shock of this withdrawal is even more excruciating when you realise that what we’re seeing is the steepest rate-hike cycle since 1999.

Yes, the medicine is bitter — but, ultimately, the patient needs it. By pumping the brakes on the housing market, the Reserve Bank may have saved us all a lot more pain and grief further down the track.

So far, from peak to trough, the Auckland housing market has experienced a correction of 27%. This is stressful, yes, but at least it’s not the 54% crash that we saw in Dublin.

Nonetheless, this financial shake-up is raising some important questions: Are the days of extraordinary capital growth in housing over? If so, does it make sense to look at the stock market as an alternative How advantageous is it to invest in shares?

Comparing property with shares

History can serve as our guide here. Here’s the scenario for NZ-based real estate:

  • On 31 March, 2003, the median price of a New Zealand house was $200,000.
  • On 31 March, 2023, the median price of a New Zealand house was $775,000.

This represents growth of 252% in nominal terms.

This does not assume rental return — though studies show that this may only add around 0-3% on a net basis after costs, on average.

Meanwhile, for comparison, here’s the scenario for NZ-based shares:

  • On 31 March, 2003, the NZX 50 index was 1,931.61 points.
  • On 31 March, 2023, the NZX 50 index was 11,884.50 points.

This represents growth of 515.26% in nominal terms.

This assumes the reinvestment of all dividends.

So, generally speaking, the stock market has enjoyed better growth than property. Here’s why:

  • Shares provide immediate access to dynamic companies. They solve problems, provide services, create products, secure new customers.
  • Shares provide instant diversification across a range of industries and geographic regions. This reduces overall risk exposure.
  • Shares provide both liquidity and accessibility. This allows people at any level of income or expertise to participate.

Now, of course, if you’re skilled enough to stock-pick, you can find even more value in the global market. You should consider which is better:

Option One — a three-bedroom house in Auckland, situated in a single vulnerable location. This property may be 30% overvalued, paying a gross rental yield of about 3%; and

Option Two — a real-estate investment trust in Australia, operating more than 300 childcare centres spread around the nation. This company appears 30% undervalued, paying a gross dividend yield of almost 6%.

Now, rationally speaking, investing in Option Two offers a clear benefit over Option One. When you can buy into a well-diversified asset ‘below’ its fair value, you immediately gain a long-run advantage. This is a powerful force that compounds over time.

As a shareholder, you become the joint owner of a billion-dollar company. When the company prospers, you prosper. In my opinion, this is the best golden handshake ever.

So, what are smart investors looking for?

  • Better prospects for capital growth.
  • A stronger stream of passive income.
  • Diversified wealth protection.

As the economic cycle switches gears, new openings have emerged for real-estate stocks.

In the words of Warren Buffett: ‘A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices

What to think about 

So, right now, here’s what you need to think about:

  • is it time for you to scale up?;
  • is it time for you to go global?; and
  • is it time for you to look at property assets on the stock market?

These are big questions. Critical questions. And if they are important to you, you need to act.

 

Comments

On Thursday, July 13th 2023 12:21 am Peter Lewis said:

The Celtic Tiger rolled over and died in the mid-2000s and many of the locals have had to live through hard economic times ever since. The Irish banks were rescued with taxpayer money after they had lent millions to developers of commercial and residential property - the Anglo Irish Bank alone posting a loss of €12.7billion in one 15 month period around 2009. After that rescue they have taken every opportunity to gouge as much profit as possible from their captive residential mortgagee clients. Although the crisis did not originate from within the residential investment sector, property investors were very badly affected. And yet, when Irish landlords were heavily punished in the aftermath, the following comments appeared in 2022: "Ireland’s rental market is in crisis, with available properties estimated to be as low as 716, landlords leaving the market in droves, and experts saying it could be a cautionary tale for New Zealand. It is widely understood New Zealand has a shortage of rental homes, but it pales in comparison to Ireland, which has a population similar in size – and a complex system of rent controls. There were just 716 homes advertised for rent nationwide in Ireland on August 1, according to the latest rental report from Daft, a property website equivalent to Trade Me. In Dublin there were 292. A check of Daft this week showed there were now 776 rentals available on the site. On the same day Trade Me was advertising 9772 homes for rent in New Zealand. A recent study by the Institute of Professional Auctioneers & Valuers and the Irish Property Owners’ Association found the challenging regulatory and tax environment was responsible for the exodus of landlords. Increasing pressure means the government is considering tax breaks for landlords. Even the chief executive of a national housing charity, John McCafferty, from Threshold, says government strategy must focus on how small landlords can be incentivised to remain in the market."

SBS FirstHome Combo 6.14
Unity First Home Buyer special 6.55
Co-operative Bank - First Home Special 6.79
Heartland Bank - Online 6.89
Wairarapa Building Society 6.95
Co-operative Bank - Owner Occ 6.99
Kiwibank Special 6.99
Unity 6.99
TSB Special 6.99
ICBC 7.05
China Construction Bank 7.09
Unity First Home Buyer special 6.45
Heartland Bank - Online 6.55
SBS Bank Special 6.69
ICBC 6.69
TSB Special 6.75
Westpac Special 6.75
ASB Bank 6.75
AIA - Go Home Loans 6.75
China Construction Bank 6.75
Kiwibank Special 6.79
Co-operative Bank - Owner Occ 6.79
SBS Bank Special 6.19
ASB Bank 6.39
Westpac Special 6.39
ICBC 6.39
AIA - Go Home Loans 6.39
China Construction Bank 6.40
Kiwibank Special 6.55
BNZ - Classic 6.55
Co-operative Bank - Owner Occ 6.55
TSB Special 6.59
SBS Bank 6.79
SBS FirstHome Combo 6.19
AIA - Back My Build 6.19
ANZ Blueprint to Build 7.39
Credit Union Auckland 7.70
ICBC 7.85
Heartland Bank - Online 7.99
Pepper Money Essential 8.29
Co-operative Bank - Owner Occ 8.40
Co-operative Bank - Standard 8.40
First Credit Union Standard 8.50
Kiwibank 8.50

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