Investors buying older properties might do them up which leads to economic activity in terms of providing work for builders and trades people, Jeremy Williamson says. Photo: RNZ / REECE BAKER
Calls for New Zealanders to break up with property investment and focus instead on investing in more productive assets such as growth companies are missing the point, says an economist at one property investment firm.
Jeremy Williamson, head of private wealth and markets at Craigs Investment Partners, said there was momentum building for a move away from the country's "love affair with property and property investing".
"New Zealand is always going to have an affinity with property investment but there are so many benefits for us as a country if we can turn the dial away from it, into more productive parts of the economy."
He pointed to the returns that were possible from investing in the sharemarket.
"If you put $100 into a New Zealand house 30 years ago it would be worth nearly $600. If you put it in New Zealand shares, it would be $1100."
But Ed McKnight, property economist at Opes Partners, said that was ignoring the power of leverage.
Because people only put a deposit in to the purchase of a property, and borrow the rest, it can mean bigger returns.
"If you compare a standard property index or prices to shares, shares increase in value faster than houses. But houses can help you grow your wealth faster than shares… it comes down to the debt, the mortgage.
"It's a double-edged sword. Whenever you use a mortgage to invest, whether in a house or business it makes your returns larger, which can either be good if the value increases, or it can be bad if the value decreases.
"That's the reason why, if you put a 20 percent deposit into a house and your house value goes down by 20 percent you've lost your entire deposit at least on paper until the asset recovers in price.
"But if you put 20 percent into a house and the value goes up 20 percent, you've doubled your money. I call it the mortgage magnifier effect. The bigger the mortgage you use, the larger your return compared to the market return.
"So property doesn't go up in value as fast but it can be a better wealth builder because you can borrow against it."
He said it was also not accurate to say that property was not a productive investment.
While it would not grow the economy if an investor bought a house and sat on it, he said, people who were buying new were encouraging economic activity.
"The builder or developer is taking an older house and building a new one, it drives the economy forward. You have people building houses and nice, new, warm dry homes for tenants.
"Even if you are buying old properties, many investors do them up. That's economic activity, taking something that might be a bit run down and you're improving the quality of the New Zealand housing stock, you're spending money at Bunnings or Mitre 10, it means plumbers and electricians get jobs. It's not true to say property investors don't add anything to the economy."
He said simply buying and selling existing shares did not add to the economy, either.
"Because buying a share in a company doesn't mean that the money goes to the company for investment. If you buy a share in NZME, the money goes to the person I bought the share off, not the company itself.
"Even in IPOs the money sometimes goes to the founders. Only a small fraction of My Food Bag's IPO was earmarked for investment. A large part went to paying out the founders. So share investments aren't always as 'productive' as the average reader might think.
"Though if more people invest in shares, then there is more money available when companies do raise money for further investment. Similarly, property is more productive than non-property people give it credit for. Many investors don't just buy and sell houses. They build new ones, or do them up. This improves the housing stock in New Zealand and does contribute to higher GDP and a higher standard of living."
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