Last year, I ended an 18-year gig as a residential landlord. There were many highlights:

  • Being summoned to clean up pools of blood after a botched burglary. (My anaesthetist tenant could perform epidurals but apparently not operate a home alarm).
  • Negotiating the early termination of a lease. (That’s after the police advised they would not attend the street unless armed).
  • A tenant emailing to advise the girl next door had many different boyfriends visiting at odd hours. (Would I investigate if she could be running an illegal home business in the area?)

Leaking roofs, outbreak of rats, cracked spouting, weatherboards falling off the house, exploding showers, and tenants expecting to be put up on a cruise to Hawaii every time a tradie was called in to fix things. (If you could even find an overworked tradie).

All gone. I miss it…like one might miss having piles.

Perhaps I exaggerate. Yet there is a stress that no longer exists. I invest in shares now, in productive businesses that are managed and run well. And thanks to diversification and careful research — processes I enjoy — I sleep better and longer.

I also assist some wholesale and eligible investors in building their portfolios. The main referral I receive is from people looking to sell their rental properties after years of stress. And a sense that the government is starting to make their lives as landlords a lot more difficult.

Obviously, I’m not saying shares are a completely stress-free option either, but the physical management burden is less.

Where will property go?

Like me, you’re probably tired of hearing that we’re overdue for a house price correction. It never seems to cut that deep. People always need a roof over their heads. And in New Zealand, there’s a shortage of roofs (and people to repair them).

But this time, things are different.

The crucial number is the ‘PIR’ — The Price-Income Ratio — where average house price is divided by average household income.

From the 1950s to the 1980s, NZ PIRs sat somewhere between 2 and 3. So it was 2–3 times the average annual household income to buy an average home.

Then, after about 1980, house-price inflation took off, with New Zealand leading the pack:

Source: The Economist

Incomes didn’t keep up. The PIR across NZ is 6.21 (as of Feb 2019) and 9.01 for Auckland.

A high PIR indicates demand exceeds housing supply.

A low PIR doesn’t necessarily show a healthy housing market.

The PIR in Detroit in 2018 was 3. It’s widely known that Detroit has seen better days. I read about a local guy who moved back there a few years back. From gunshots through the night to running from roaming packs of pit bulls by day, his accounts did much for the city’s marketing profile.

Ideally, you want reasonable PIRs with a growing economy and low unemployment.

Alain Bertaud’s 15th Annual Demographia International Housing Affordability Survey mentions Houston and Atlanta. They have decent economies whilst maintaining PIRs of 3.7 and 3.5 respectively.

The only Kiwi cities to come close to these are Wanganui (3.10) and Invercargill (3.60).

Bubble trouble

While high PIR housing may signal a fast-growing economy and global hotspots, it’s equally likely to signal a housing bubble. When PIRs got out of whack in Japan in the late 1980s, residential land values in the six major cities dropped 15.5% from their peak by 1992.

Japan has not yet completely recovered from this asset bubble.

The biggest problem with excessive PIRs is that it leads to a misallocation of resources. Low-income households spend a disproportionate amount of their income on mortgages and rents, with little left over to spend in the rest of the economy. High-income households invest disproportionately in property ownership, instead of investing in more productive areas of the economy — such as in businesses or through the stock market.

And the book has been flung at New Zealand central and local governments. Report after report questions how a usually well-managed country has allowed its housing to become such a downfall, with only a minority of under-40-year-olds able to afford a home.

The government is now faced with a difficult challenge. Bringing about affordable housing while avoiding an out-and-out property crash.

A big hammer

When the government wants to nail something, they can’t help but use the biggest hammer in the shed. When something happens, whether it involves firearms crime, health and safety, or financial markets, by virtue of being the government, the weight of response seeks to cover not the original problem in isolation, but its universal threat.

That’s going to happen with housing.

Previously, open-market foreign buyers, excessive immigration, landlord tax breaks, easy-come-easy-go tenancy rules, density controls, urban boundaries, free-for-all capital gains and many other loose factors were all just part of the property market.

As I write, the government is moving to take control of this Wild West. And the big opportunity in property — and the big gains we’ve had — could disappear into the dust.

Tomorrow, we’ll look at what’s happening out there.

Check back then for your next update on our property crisis.


Simon Angelo

Editor, Money Morning New Zealand