New Zealanders who read the news are acutely aware our population is growing older. We’re living longer too and having fewer babies. These facts mean New Zealand superannuation costs have increased and are likely to continue to do so. This raises the question of whether superannuation payments will be available to those who retire in the future. If the scheme does continue, perhaps the eligible age of a recipient will be raised, or perhaps a form of means testing will be introduced to determine eligibility. Even if no changes are made to our current system, surviving on superannuation payments alone won’t guarantee a comfortable level of living for most people. It’s for this reason, many New Zealanders have augmented their retirement fund with an investment property or two.
Recently, interest rates have declined, and real estate stocks have grown. These factors frequently encourage purchasers to acquire investment property. If you are considering this, selecting a property shouldn’t be based solely on personal preference. Rather, specific criteria should be evaluated. To help those who are contemplating acquiring investment property, we’ve recounted some factors below we think you should take into account when making your selection.
Common amongst the majority of property investors are twin goals: to purchase a property that appreciates and one that is easily rented. Whilst these goals are laudable, it’s important to understand not all property appreciates equally. Some properties experience greater price increases than others and some enjoy those increases at a greater rate of knots than their counterparts. Similarly, some properties command a higher rental than others and are easier to rent than their counterparts. These differences are partly due to geographical area and other relevant influences as discussed below.
• Population Size and Growth Rate
The different parts of our country enjoy varying levels of population growth. Population is derived from 3 sources – those born in the area, those that relocate to the area from within NZ and those that migrate into the area from another country.
When leaving aside migration and immigration and concentrating on natural population growth through births net of deaths, it’s easy to see that when a population in an area is strong, so strong in fact it creates a demand of itself, a favourable demand state exists. This is because natural strong population growth rates reduce the reliance on migration and immigration stats to create demand for housing. Hence, if a population in a specific area grows through natural means, and if that area suffers a shortage of housing, property is likely to appreciate in prices over the long term at a greater rate than an area where population is dwindling. An added bonus to non-reliance on immigration to boost population growth and consequently demand, is property price increases won’t be entirely subject to immigration policies of the government of the day.
• Employment Opportunities and Incomes
The majority of people have to work to earn an income to live. Accordingly, often the choice of where a person lives is based upon the employment opportunities available to them. In the main, large geographical areas provide greater work prospects at higher wages than smaller locations. These factors are important because banks take them into account when a prospective purchaser-borrower applies for a loan. Higher incomes lead to greater borrowing capacities. This can have an effect on property prices within an area. For example, if you are wanting to sell your property, you will want the greatest number of people with the highest possible incomes to form your pool of potential purchasers. As these prospective buyers bid against each other, the potential sale price of the property is increased and then reset when the property is finally sold. Consequently, if you want to ensure your property has the best chance of increasing in price above other properties, you will purchase in an area that has plentiful employment opportunities and high wage incomes because that leads to the existence of potential buyers with greater borrowing capacities.
The same can be said for tenants and rental returns. The amount of rent you can charge a tenant is affected by the level of income your prospective tenant enjoys. Thus, if you don’t want your rent to be capped as a consequence of the level of income the prospective pool of tenants earns, ensure you purchase in an area that has solid employment opportunities that pay high incomes to employees. These factors will affect the sale price of the property if you later sell it to another investor too.
• Location Forecasting and Spending
Governments and local authorities (eg: Councils) regularly spend large amounts of money forecasting and formulating reports on population and corresponding infrastructure needs. This data enables decisions to be made such as what legislation and regulation is needed in respect of land development, what housing creation should be encouraged and what and where infrastructure implementation should occur. Much of this information is publicly available. Reading such info can help in making sensible purchasing decisions. For example, if a report notes particular infrastructure is planned (eg: main roads and motorways, shopping centres and parks) to cope with the large population growth expected in an area, it may be sensible to consider acquiring an investment property in that area before the people come along with their demand for housing. If you acquire before the increase in demand transpires, you are likely to pay a lower purchase price than what you would pay when many people are clamouring for housing in the area. Furthermore, your property will have a propensity to increase in price as demand for housing increases in that area.
Much more than what is that covered in this article should be considered if you are contemplating purchasing an investment property. The above are merely pointers to demonstrate growing wealth and providing for your retirement isn’t simply a matter of purchasing a property or two.
Other considerations such as following the correct purchasing strategy, implementing the right asset-protection-tax structure, and having the optimal loan facilities in place, are vital. Understanding the numbers before purchasing is imperative too, which is what Greenlion is exceptional at. So, if you are considering investing in property, ensure you call us to discuss your prospective purchase. Our assistance could be the difference between making a smart buy that aids your level of comfort in retirement to buying a clunker that takes you to the bottom of the dark blue sea.
Full commentary on investing in property found in the Women & Money : Mastering The Struggle book, chapter 14 available through Greenlion Limited.
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