Over the past few years some people have built up what they optimistically call ‘investment portfolios’ made up entirely of rental properties. This has always been a rather neat thing to drop into conversations at dinner parties and other social gathering.
In the true traditional of NZders love of “bricks and mortar” as an investment vehicle, the latest group of propety investors has enthusiastically jumped into the property market dazzled by the high ‘returns’. Unfortunately, unlike their parents generation, most of these people have financed this off the capital gain in their primary residence.
People always seem to conveniently forget that just because you live in your house and pay the mortgage, you don’t actually own it, the bank does. Until you have paid off every last cent, your property isn’t completely yours. The bank may also be quite willing to lend you more money on the notional capital gain of your primary property to buy another property, even on a interest only basis, but you no more own the rental than you own you primary property, you’re just deeper into debt.
None of this is wrong, as long as you can finance the repayments. It’s not very logical because you would have been better to pay off the first loan ASAP, especially as in many cases people are actually going to end up paying twice the purchase price for their property, with little guarantee that it will be worth this when the loans paid. A 30 -50% capital gain over the last few years in a drop in the ocean compared to the interest payments to the bank over a 20 year mortgage, halve the time you pay the loan and the scenario is totally different.
I think it’s a bit like trying to beat a casino, the odds are always stacked against you, and trying to make money with debt is on balance a bit like trying to beat the casino, sometimes you might win, but the odds are against you – how do you think banks make so much money?
A friend who’s a mortgage broker has come across a lot of people who simply cannot continue to finance their portfolio as the rental won’t cover the mortgage and the tax loss (LAQC scenario) is outweighed by the increase in interest rates. They are now in a position with negative equity and house prices haven’t really started to fall.
At some point something has to give and it will surely be house prices. Sales have halved, and investors are putting more properties on the rental market presumably in the hope that things will improve quickly and they can flick them on. The problem is that rents will fall further as the rental stock increases, and those having to sell with get desperate as the banks put the pressure on. Lending has become more cautious, six months ago 100% mortgages were possible – they aren’t now, so purchasers will be thin on the ground with some holding out for lower prices. I guess it’s like a huge game of chicken, and increasingly likely that highly indebted property ‘investors’ will be the losers.
It would be nice to think that this will see NZders take a more balanced approach to investment, paying off debt before embarking on building a investment portfolio based on a range of ‘products’ from shares to property. It would also be better for everyone if people weren’t so blinded by short term gain and an obsession with an investment they can touch, as the property obsession is neither logical, nor for a lot of investors, very profitable.
Next time you come across a friend who was previously gloating about how much capital gain they on their property portfolio, ask them how it’s doing – sure to be a conversation stopper!