Reserve Bank figures released last week showed that New Zealand households have 73% of their gross wealth tied up in residential property compared with 56% in Australia.
One of the reasons for this is that residential property in New Zealand has delivered good returns over the last ten years and remains the cornerstone asset of the NZ public. While the NZ stock market was hard hit by the Global Financial Crisis, the volatility in the housing market was less visible as transaction volumes simply dried up. Australian households have also had the benefit from over two decades of compulsory superannuation.
A simple analysis of the relative performance of the housing market and NZX50 Capital Index over the last 10 years indicates housing has performed substantially better. While NZ house price returns are less than the NZX50 Gross index, which includes dividends, a 100% owned house with an assumed rental yield (less maintenance costs) would have provided a superior return over the period.
House prices and the NZX have performed as follows over the past decade;
|Asset price performances – 10 years ended 31 March 2013|
|New Zealand house prices||100.00%|
|Auckland house prices||93.30%|
|NZX50 Gross Index (including dividends)||129.00%|
|NZX50 Capital Index||29.80%|
Why do we have a massive love affair with property investment?
The big advantage of residential property is the ability to leverage. If a purchaser borrowed 80% of the NZ median sale price of $200,000 in March 2003 and sold at the March 2013 median price of $400,000 then he or she would have achieved a return on equity of 500% over the ten year period.
However, leverage can also work in reverse as demonstrated by the recent housing collapse in the US. A 25% decline in the value of a US$400,000 house from March 2008 to March 2010, which was financed with 75% in borrowings, would have resulted in a 100% loss of equity.
Residential property has a clear advantage over the NZX because the asset class has lower perceived volatility, can be easily leveraged and most investors believe that house prices will never fall. These are the main reasons why New Zealand residential property continues to be the country’s preferred asset class.
However – as NZX investors discovered in the 1980s and American households in recent years – there is huge downside potential when a bubble bursts, especially for individuals who are highly geared.