Property investment has long been a successful and proven path to financial independence in New Zealand. It has certain advantages over other asset classes. It can be hands on — unlike shares, with property you can get your hands dirty and increase the value of your investment through improvements like renovations. Prices are slower to move in either direction than other asset classes and demand is typically fairly stable. This relative certainty means you can often leverage your resources by borrowing to compound your returns. If you look at the long term trend of property prices, it’s not hard to see why it has traditionally been a favoured vehicle for those seeking to achieve financial independence. But with property prices having gone sideways or decreased for some time now and capital gains feeling like a distant memory, is property investment in New Zealand still a way to attain financial freedom?
The short answer is likely yes. The longer answer is that it’s a yes — but it’s complicated.
The Investment Timeline
Firstly, it’s important to consider the investment timeline. Right now, property prices are not increasing and they don’t look like they’ll start anytime soon. Short term, the prognosis is not great. However, property has typically never been a short term investment. There are definitely strategies to make money in the shorter term — covered below — but most people enter the New Zealand property market with the view to building wealth over the long term.
When you consider the trajectory of property prices over the last 100 years, there have been respectable gains. The main drivers of this have been population growth and lack of supply. While there’s limited population growth at the moment and reasonable supply available, it’s unrealistic to think this will continue long term. Property always moves in cycles, on average every 7-10 years. We went through a boom a few years ago — now we’re at the opposite end of the cycle. There’s no major driver for this cyclic pattern to change over the long term. So while capital gains are unlikely in the short or perhaps even medium term, long term, property investment in New Zealand is likely to still be a suitable vehicle for wealth creation.
There’s no denying that it’s a buyers market right now — perhaps that’s the best time to be greedy when others are fearful and position correctly for the next cycle.
Alternative Strategies for Wealth Creation
Long term capital gains is not the only path to creating wealth through property. The longer answer as to whether property can still be used to attain financial independence is that it can — but perhaps you need to consider alternative strategies to the traditional buy and hold. For those who are convinced the days of capital growth are over, or for those wanting more immediate returns, there are other options worth exploring.
Cashflow Investing
Investing for cashflow typically looks like this — you purchase a property in a high rental demand area, then set about increasing the income from the property. This is typically achieved by adding bedrooms, dividing existing spaces, or adding sleepouts, as well as making general improvements that enable you to charge more rent. The goal is to increase returns to the point where the property pays you a positive income every week.
This is a more hands-on strategy — organising or even completing renovations yourself — but the rewards can be significant, with gross yields of 12% or more in good examples. This provides an immediate positive income stream and, as the property is valued on that income stream, a likely increase in equity as well. This is a great option for those prepared to get more involved — just don’t underestimate the time required to carry out such projects.
Development
Development — such as subdividing or building new purpose built properties — can provide serious gains, but it also comes with serious risks. History is littered with bankrupt property investors and will continue to be so. This is not an area for the faint hearted, but if done well, it can provide significant rewards over relatively shorter periods than the buy and hold strategy.
Flipping
Flipping is a short term strategy to build cashflow and your equity position. You purchase a property, ideally under value, typically carry out cosmetic upgrades like new kitchens, paint and carpets, then sell at a higher price, realising a profit after all costs.
There are plenty of risks associated with this strategy — underestimating total renovation costs is a classic, as is paying too much for a property that needs significant maintenance. There are also important tax implications to be aware of. It’s not the sort of thing one should go into unprepared. However, when done well, flipping can be a relatively fast way to build equity quickly.
Commercial Property Investment
Commercial property investment is sometimes overlooked as it is typically less understood by the average investor. Commercial property differs from residential in that the tenant usually pays rates and insurance, so yields are typically greater. However tenancies are typically harder to fill and you must be prepared to carry an empty property for some time in certain cases.
Unlike residential property, which is largely driven by demand and emotion, commercial property prices are very sensitive to interest rate changes, with rental yields largely determining the value of the property. Commercial property investment remains a solid option for wealth creation in New Zealand, but requires a comprehensive understanding of the market before making any moves.
The Tax Question
The potential wildcard is the unknown around the long term tax treatment of property by future governments, with a non inflation adjusted capital gains tax already having been proposed. Profit from rentals is already taxed, but getting into politics is outside the scope of this site! The buy and hold strategy is the approach most likely to be affected by any changes, as flippers and developers already pay tax on their gains. Property investment as a path to financial independence would remain a viable option under most scenarios, but a change of strategy focus may be required in response to government changes.
The Bottom Line
There’s a lot of doom and gloom in the property investment commentary right now. We’re at the lull of a fairly typical property cycle. Is property investment in New Zealand over as a path to wealth creation and financial independence? This author thinks not — provided you view it with the appropriate timeline and adapt your strategy to meet your goals accordingly.
With the right strategy and timeline, property can still be a powerful tool for those seeking financial independence without sacrificing the life they’re building along the way.
Thanks for reading.
Note – if you are interested in beginning or advancing your current property investment path, get in touch and we can recommend some of the top performing property advisors.
Nothing in this post constitutes financial advice. Please consult a qualified financial adviser licensed in your jurisdiction for advice specific to your situation.
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