What are economists saying about the future of New Zealand's economy and how does this affect the decision to invest in property?
The question many potential investors have is whether or not the housing market has reached bottom yet. Recently it was stated that the industry has declined 12% over 2007 figures. Some pundits have said that it could go even further with another 5% decline expected before the bottom is hit.
Putting Economic Forecasts into Perspective
If the economist quoted above is truly correct, then someone purchasing real estate right now would presumably pay 12% less for a devalued property. At the time that it decreases an additional 5%, the buyer will also experience a total loss of 17%, right?
Not necessarily.
The buyer only experiences a comparable loss if they sell at the bottom of the market. The old adage of "buy low, sell high" proves true for any type of financial transaction. The key is to hold on to your investment until its value rises. If you buy real estate at a low price, up to 20 - 30% less than its prior value, with comfortable financing terms, it just makes sense to keep the property until the economy recovers and the value increases substantially. In this scenario there is no loss but a very real gain.
Perhaps the most consideration is cash flow. If property investment negatively affects your ability to pay the bills, it is not a wise choice. But remember, too, that a reduced tax liability is a benefit of the investment. In fact with a tax refund due to real estate depreciation, you could be buying the property for nothing (net outlay) whilst enjoying high capital growth when the economy recovers and values increase far above previous levels.
Caveats
Before you go out and purchase a property, be aware that you should investigate the opportunities with some caution. Many homes are being auctioned off due to inability of the homeowner to pay the mortgage. The lending institution wishes to recoup their money so it takes some careful research to find a property that is offered at a low price but is expected to increase in value.
As a general rule of thumb, look for real estate being offered at 30% less than its 2007 valuation. It may take some time and effort to find this type of deal, but it will be well worth it in the long run.
Auctioned properties are best avoided but do consider homes that may need some minor renovations. Remember that location is in direct relation to the expected increase in valuation. Coastal real estate and properties from distressed developments are usually the best risks. Work a deal directly with the owner and avoid going through an agent to find the most favourable financing options.
In the current economy, property investment is one of the best ways to increase your financial portfolio as long as it does not negatively affect cash flow.
Author Resource:
Paul Easton is working with Gilligan Rowe & Associates are New Zealand Accountants and are a specialist Accountant firm and experts in property and family trusts.
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