The Auckland Monopoly Game: A Dangerous Path

As a kid, I loved playing Monopoly. It’s a simple game to win. You buy up as many properties as the dice allows, mortgaging to the hilt if necessary, and then you put the other players out of the game by building houses and hotels and charging astronomical rents.

Soon, the losing kids sense the hopelessness of it all, start crying, and Mum must step in.

Feel a bit like the Auckland property market?

Oh no. That was much worse.

Some years back, John Key won an election with dire warnings of rugby stadiums of New Zealanders leaving for Australia.

To curb that, we had to start growing faster than Australia and catching them up.

That’s a tall order. Australia is an inherently wealthier country. While we sell milk and meat, Australia has vast mineral deposits of iron ore, upon which the world’s factories depend. When Japan slowed as a market for them, China took up the balance.

Not that we’ve done bad selling milk and meat. It’s just meant that prior to about the year 2000, we were toward the bottom of the developed countries league in terms of GDP per capita.

 

Wealth is as simple in your own household as it is at a country level

If you’re productive in high-margin areas and can bring in a lot more income than you spend, you start generating surplus to invest. And you get richer.

The guy at the end of my street who paid multi millions for his home is productive. He’s a highly skilled surgeon. He’s like Switzerland. Selling diamonds, high-end watches, and pharmaceuticals is always going to net you more than a slab of well-marbled sirloin off the farm.

The trouble for NZ is that, in our short-run election cycle, governments didn’t have the time to strategise a Swiss export approach. They needed to increase income coming in now.

 

So how can you grow faster than Australia?

Well, increase the population faster, of course. And that’s exactly what we did. With loads of wealthy people wanting to escape the pollution and crowds of fast-growing developing countries, we found a faux market.

Migration to New Zealand per capita was nearly double that of Australia’s and three times that of the UK’s just a few years ago.

Then we had the Christchurch quakes bring in foreign insurance money.

And viola, you have a ‘rock-star economy’, guys.

 

Until things get hot at the Monopoly table

Suddenly the kids playing Monopoly are up against a whole bunch of new players. They’ve been in the sharp-ended markets of China, Hong Kong, and Britain, and they know how to play. And there’s only so many title deeds to go around.

The older local kids have a big advantage, though. They’re already in the game. The value of their property soars. It’s the younger ones who miss out.

And you have the makings of a generational property war. Meanwhile, the big Aussie banks make record profits as the number of homes with mortgages jump and the size of those mortgages boom.

Okay, we’ve climbed a whole lot higher on the GDP per capita stakes. We’re now ahead of countries like the UK rather than behind them. But at what cost? And what have we really got? 

 

We’ve created a dependency worse than P

Last year we turned off one tap — foreign buyers. The Auckland property market is stumbling. At some point, immigration is going to become a much more aggressive issue.

I’m the first to put up my hand and say I love living in a cosmopolitan city. That’s made NZ a whole lot more interesting.

But there is a growing and angry part of the electorate priced out of housing, as well as many worried parents.

Winston Peters has previously expressed a desire to target 7,000 to 15,000 migrants a year. Economist Michael Reddell told TVNZ’s Q+A programme in 2016 that if we were to reduce the 40,000 to 50,000 target that was in place, house prices in Auckland could fall 25%, taking a huge burden off young New Zealanders trying to get into their first home.

Migration numbers have been running more recently at a net gain of 60–70,000 per year.

Peters was kingmaker at the last election. It’s likely he’ll find himself in that position again. And next time, he’ll have more power to push his policies. Even if he does not, there is a vacuum of votes to be sucked up in this area. The same vacuum that swept in Trump, Brexit and swings to the right in France, Italy and Germany.

Nature abhors a vacuum.

 

Money, however, has a way of swaying the mind

I’m pro-migration. When I moved to Auckland in 1993 to study at the university, the city was booming. I put myself through school, paid lodgings, and came out with a house deposit, thanks to a small tutoring business with significant numbers of new migrant customers.

I’ve also been a migrant to Europe. To gain entry, I needed to submit a detailed business plan on how I’d add value. Any investment I may make in housing was not considered and in fact discouraged.

But migration has been good to me and for me. And good to many others. It’s brought in plenty of money, especially in Auckland.

There’s an old saying about money. ‘Money often costs too much.’ While we’ve had all the benefits of immigration, we’ve also had the pressures.

It’s put pressure on housing, roads, real wages, schooling, and healthcare.

But the biggest loss has been one of focus.

When the investment focus becomes housing speculation and population growth, too many bright people get away from what really makes a country wealthy: selling the best, most valuable, and most innovative products to the world.

New Zealand doesn’t need any more lawyers sorting out housing spats in Auckland. We do need more science and tech entrepreneurs creating valuable products on the world stage from this paradise.

And we don’t need more migrants who want to sink money into homes in Auckland and then retire on the rent roll.

We do need migrants who can help build the productive capacity of this economy.

 

But if you still want to invest in property…

My favoured vehicle is industrial property. These properties provide the space needed for manufacturing, export, and logistics businesses to grow.

This is where our future lies.

Of course, most investors don’t have the $12 million or so entry price to get into one of these properties.

Property for Industry [NZX:PFI] could be a good way to enter. They hold a portfolio of industrial properties with 147 tenants who pay rent totalling $82 million. At the time of writing the portfolio is 99.3% occupied with a weighted average lease term of 5.39 years.

There’s some risk of course. The current share price outpaces the NTA (net tangible asset) backing of the portfolio. There’s the risk you’ll pay too much for the assets.

Dividend yield is around 4% per annum.

The real upside could be the looming shortage of quality industrial property when the penny drops. When as a country we become more interested in productive businesses rather than houses.

Perhaps the government will use CGT to tip that. CGT on second homes. Not on businesses, farms or shares.

Then its time to put away the Monopoly board and go make some kites to fly.

Regards,

Simon Angelo
Analyst, Money Morning New Zealand

Important disclosures

Simon Angelo owns shares in Property for Industry [NZX:PFI] via wealth manager Vistafolio.


Simon is the editor of Wealth Morning and has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge fund industry in Europe. Before this he owned an award-winning professional services business and online learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book and manages global share portfolios.


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