Property prices, is it a good time to buy a property? And what type of property should you buy? So generally, property prices increase over time. That's the general background rate is approximately 7% per annum growth plus 4% rental yield. The rent is about 4% of the value of the property and 7% growth, okay. That's the long-term trend. That's about a 70-year trend.

Now, who knows what the market's going to be doing in any given year, okay? Sometimes, as we saw in COVID, the prices went up a lot. So, they can go up 20% in one year and sometimes they might not grow at all. And other times you even see declines.

So, this graph that you're seeing, and it goes up to 2016, 2017, but more recently prices in the last two and a half years have actually dropped 14% from their peaks. So, 14% drop, it's the largest drop in 30 years. It's a huge drop. It's been the same through most countries actually, maybe barring the US. But they've dropped 14% in the 2 ½ years, but they've actually recovered 4% in the last five months to sit about 10% below their peak. So, prices at the moment is about 10% below their peak.

So, I've got a question for you. Let's just say you're standing in front of a store, okay. Let's say it's an electronics store, they maybe sell TVs in there. And you know that generally prices increase 7% on average for the last 70 years. That's generally what's been the return, okay? Now say that prices are 10% down. Everything in the store is 10% off. There's hardly anybody in the store, or very few. Now ask yourself, is it a good time to buy or not?

Obviously, it's a good time to buy. Prices are down in a period of time when generally prices go up. And I can tell you, I think there's been 14 recessions since World War II. It's still 7%. We've had the Vietnam War. We've had the 1987 stock market crash in New Zealand, which was pretty bad. We've had oil price shocks in the 70s. We've had the 2000.com bubble, 2008 GFC. We've had COVID, all the rest of it. It's 7%. So obviously sometimes prices might pull back a little bit, but the general price increases around that sort of figure.

Now there are many structural reasons why prices tend to go up, okay. There are many reasons, but one of them has something to do with the money supply, okay. I'm not going to get into too much detail but suffice to say that the money supply generally increases over time, okay. That's what inflation is.

When you see a pack of groceries in 1960 costing $50 for an entire trolley, that's inflation. That's just, the groceries haven't gone up. The value of money has actually gone down. People earn a lot more than they used to as well.

So generally, prices increase on everything over time. In general, not always of course, but property definitely does. It's how the system is actually built. It's how the Western banking system is actually built. It has to do with the money supply.

So long story short, it's an awesome time to buy, but it won't last, okay? Don't go to the ocean of opportunity with a teaspoon. And don't stand outside the store waiting for it to end and waiting for other people to go in, okay? Because by the time everyone else goes in, the prices are really going be going up.

Patience is a virtue, but the biggest mistake I see people making is not taking action because they think it's a bad time to buy, okay? Because they're reading, newspaper junk. Buy when you're ready, okay? At the end of the day, you're making a long-term decision for you and potentially for your family, and that's what you're doing.

It might not be financial, but it might be partially that as well. As long as you're thinking long-term, it'll be fine. Trying to pick the market short-term is a fool's game, okay? Really, really difficult. So, it's a great time to buy.

Prices don't go down that often, but we've already been two and a half years into this one. Like, we're getting to the very, very late stages of this. So, if interest rates get cut, it'll probably just give back the 10% that we're down, and that's my opinion. So, if rates get cut half a percent, it'll just go up 10%, which is to sit at the same level it was 2 ½ years ago. That, you know, it'll give back the 10%. That's my opinion. It's a bit of a holding pattern just at the moment.

So, this is obviously a graph of house price increases since 1954, all right? So, it's a long time ago. And I'm sure if you found a graph in England or something like that about landlords and prices of property, land and, Europe and things like that, it would progressively go back thousands of years as well.

So, different types of real estate. What type of property should you be buying? Firstly, different types of real estate. There are a few points I wanted to make here. Generally, it's the land that goes up in value. So yes, construction costs generally go up over time, but generally, the building gets older over time. It needs to be maintained, obviously. But generally, the value of the actual building, the chattels, what's actually on the land, generally depreciates over time.

It's the land that actually goes up in value. And in fact, there have been studies done on this where it shows close to 70% of the return on residential real estate is from land, okay? Nothing to do with what's on top of it.

Now, obviously, you've got different types of real estate. You've got apartments, which generally have got a lower land component because it's a percentage share of the land. They're generally lower maintenance, although not always. They're generally in better locations.

Houses or properties have the most land, especially established houses generally have a bigger land component than a new-build house or a new-build townhouse because they're trying to maximise the value. The developers are trying to maximise how many properties they can get on there. But generally, those older established kinds of standalone homes have a bigger land component or bigger section size in general, and they're more expensive.

I'm not going to get into every type of real estate, but the main thing I want to get across here is that there's no right or wrong type of property. There's only positives and negatives.

Obviously, apartments are becoming more popular over time. Apartments have body corporate costs, generally lower maintenance than a wood house or a weatherboard house. But generally, apartments don't go up in value as much. They also tend to be a little bit more difficult to finance for first-home buyers as well.

So, if you become a client, basically we'll step you through when you're looking at a particular property, okay? We'll tell you the traps to look out for and the considerations of things to be aware of on a particular property.

If it was me, I'd just be trying to find the best house or property for me that would suit your situation in terms of location and number of bedrooms with the biggest land component you can get. That would be my take on it.

Now, obviously not all land is created equal. A couple of acres on the west coast in the South Island is probably not worth as much as a 400-square-metre section in Herne Bay. You know, but that's what I'd be trying to do. Within my budget, trying to find an established-type property with the biggest land component or the biggest section I can find, okay? But with the house that suits me and your needs. That way, you're going to get some growth.

Also, Auckland tends to be more and more successful over time in terms of more skilled immigrants, higher-paying jobs, the economy's obviously diversifying. So, Auckland obviously is a good place there.

All right, any questions regarding any of that? Sing out, don't be shy.

Matthew Dawe

Mortgage Broker | Financial Adviser

Phone: 027 321 4287

Email: mortgages@matthewdawe.com

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