Property investment is not for everyone and those who understand it should look out for their less savvy friends and family, says BNZ chief economist Tony Alexander.
He says while it is a good way to build wealth, we will soon see people who should not be investing gearing themselves up as prices rise and messages increase about the need to build wealth.
“Not because they are greedy but because they will be told they are missing out on something and this it is easy to participate – which it is. But what always happens in asset cycles is that assessment of risk goes out the window.”
He says people do not consider things such as whether they will understand why things might turn bad, whether will know what to do to fix, whether they will know when to cut their losses if need be, and whether they understand that it can be hard to sell in a falling market.
“Will you ultimately become willing to accept a certain large loss in order to sleep at night not worrying about losing more?”
He says people should understand that if they are offered guaranteed rent for a period, that amount will have been added to the purchase price. “Do you understand that unless you buy a wide spread of properties from all around the country, long-term graphs showing projected returns based on historical experience are worthless?”
He says there are fundamentals supporting rising prices, such as increasing building costs, the unwillingness of New Zealanders to open up large tracts of land to be developed, councils’ fees for developers and a shortage of housing stock in parts of the country.
“But property investment is not suitable for your 65-year-old widowed aunt who lives in a mortgage-free house, survives on superannuation and who has $50,000 in her bank for emergencies. It is not optimal for her to gear her house back up again to try to boost her income or to be sucked into thinking she needs to build more wealth to pass on to her nieces and nephews. The younger generation are quite able to look after themselves.”
He says people should invest widely, diversify and put their money only into things they understand. “And for those of us with above average knowledge of these things, we have a duty to keep an eye on our less sophisticated friends and relatives… I am firmly of the view that it is the fear of missing out rather than greed which drives us to investments which are not optimal for us.”