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Has investment in housing hit the wall?

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  • Has investment in housing hit the wall?

    Has investment in housing hit the wall?

    By AMANDA MORRELL - The Press Last updated 10:21 25/05/2009

    A GOOD BUY?: Home ownership is an ingrained part of Kiwi culture but is it necessarily a good investment?
    More than 200 years ago, famed free- market economist Adam Smith poo-pood the assertion that home ownership is a good investment.
    "A dwelling house, as such, contributes nothing to the revenue of its inhabitants," he proclaimed.
    In the face of the sub-prime crisis in the United States and the ensuing avalanche that hit financial sectors worldwide, even Smith's staunchest foes would likely agree. But here in New Zealand, where home ownership is the Holy Grail of the working world, this kind of sentiment is blasphemy.
    In 2007, housing stock in New Zealand was valued at $614 billion dollars, an amount four-times our GDP, making it the nation's single biggest asset class and a formidable asset class of its own. And while housing prices are fast outstripping New Zealanders ability to buy them, many are undeterred even in the face of a global downturn, a national recession and rising unemployment.
    One Canterbury lending institute that offers no and low-deposit loans for those of modest or medium means, has seen a doubling of loan applications in the past six months. With record low-interest rates and tumbling home prices it is no wonder.
    But is a house actually a decent investment?
    The Economist reports on a finding by the International Monetary Fund which notes that a quarter of the 100 or so recessions since the 1960s have been connected to house-price busts. Further, the IMF found that among those housing-related contractions some were deeper and longer than others.
    While the social benefits of home ownership have tended to blow economic arguments out of the water, those long-held assumptions are also being challenged. Can lower crime rates, higher votership, greater community involvement, better academic scores and lower teenage pregnancy rates really be attributed to home ownership or is it simply that those in a position to buy procure such outcomes.
    There are no clear-cut answers.
    But what about New Zealand, where home ownership is sacrosanct?
    Former Reserve Bank chairman Arthur Grimes has been tasked with finding out whether the purported social advantages of home ownership are true in New Zealand. He believes the accepted wisdom that home ownership is good on an individual and collective basis is open to debate.
    "There are very successful social democracies in Europe with low home ownership rates. It's important not just to take overseas studies as being applicable here. Apart from superficial things, we actually don't know much about it."
    Grimes, through his work with the Motu Economic and Public Research Trust, is overseeing a three-year study to examine classic social outcomes linked to home ownership.
    Although he declines to offer his thoughts on the economic argument for home ownership, Grimes upholds the suggestion that the preponderance of people who buy do so largely because of the ingrained Kiwi belief that it's for their own good.
    BNZ economist Stephen Toplis is more forthcoming on the economic question. He says home ownership, measured against stock market returns - 2007 and 2008 aside - easily falls short. "Almost invariably you'll find that equities outperform the user gross index, which they should do because they are higher risk," says Toplis, BNZ's head of research.
    But are indexes the best tool with which to measure the comparative soundness of an investment like housing? Not if you are talking about the NZX, he says. "We don't have a very deep equity market and it is not particularly reflective of the New Zealand economy which makes it even more problematic."
    If not the NZX50, then perhaps the S&P500?
    Toplis says the remoteness of foreign market investments as a measuring stick is also problematic to the extent that people quite often don't understand them. "It's all very well to say, 'Well, why don't you just chuck your money into offshore equities markets', but that makes people feel uncomfortable because it is distant."
    When it comes to buying a home, Toplis believes people are driven by motives other than making money.
    "I think it's important to differentiate about why people own a home. Part of it is an investment prerogative, part of it is a consumption prerogative, like everything else you own. We don't buy stereos and cars and TVs with the intention of getting a return off them, we buy them so we can use them."
    Still, when you factor in the real cost of buying a home all those fortnightly payments over 25 years with interest, would a person not be better off just putting money down on rent and investing on the side for retirement?
    Toplis believes the renter's market in New Zealand has precluded that from occurring. "One of the problems New Zealand has is that it is quite hard to find long-term rental accommodation. It's not often you can find a property for five years, so that distorts our rental market."
    Even so, the rental market here is rising at a much faster rate than home ownership which has the pro-home ownership contingent panicking.
    According to the Centre for Housing Research, Aotearoa New Zealand (CHRANZ), the number of working households that can't afford to buy a house has grown by a whopping 160 per cent in a decade.
    At the same time, home ownership rates have been slipping. During the past 20 years, it has dropped from three-quarters of the population to two-thirds.
    CHRANZ is forecasting a further decline in rates of home ownership and an expansion in the number of renters. In a 2007 study on the subject, it predicted home ownership will become increasingly unattainable as housing prices go up and incomes remain flat.
    Many believe that to be a cause for alarm in that it will lead to disproportionate wealth in society, severely disadvantaging younger people and creating a shortage of affordable rental stock.
    Policy makers may have a more complex problem on their hands but for the average person or family, income and personal circumstances are the main concern, Toplis points out. "If you've got six kids in rental accommodation, given the stability you require for your lifestyle, you would almost unequivocally be better off owning a house over anything else. Conversely, if you are a single person, wandering about the tracks, it's unlikely you would be sufficiently better off purchasing a house than investing wisely elsewhere over a sustained period of time."
    Then again, point of entry into the property or sharemarket can make all the difference. "If you went into the equity market 18 months ago, it's going to take you an awful long time before it delivers you a return better than if you had just left your money in the bank," Toplis says.
    So where does that leave an aspiring homeowner with doubts?
    Toplis suggests people need to weigh up their personal circumstances and measure it against their appetite for taking risks.
    "I think that general education about risk and return is more important than actually defining which asset classes are going to win over any period of time."
    He believes that, ultimately, people should only spend money on what they understand.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    In what way is this, 'Hitting a Wall'?
    Man, I get tired of useless cliches.


    • #3
      ..at the end of the day...one mans meat is another mans...poison.


      • #4
        What a brainless article.

        What exactly are they suggesting? People should stop living in houses? New Zealand needs a certain amount of housing to errrr live in! Shelter isnt a luxury.. it is a need.