By Joan Baker

Most commentators and others in the know think that residential property prices are likely to flatten off or even decline fairly soon.

Even though they have been saying this for a year or more, they are probably going to be proven right some time fairly soon – everything seems to point to the market finally coming off the boil.

And the pot certainly has been bubbling away – the last few years have seen most markets greatly increase in value, making some people very wealthy indeed.

However, there are some factors that now point very strongly to a flattening of the markets:

• Higher interest rates – and probably set to go higher still
• Lower affordability – the latest (June quarter 2005) AMP Housing Affordability Index shows yet another decline in affordability
• The economy is looking likely to slow
• The prospects for immigration look poor.

All this seems to spell the end of the golden weather. Sure, that has been predicted before, but this time all the indicators are pointing in the same direction. Property is cyclical, and we are likely to be heading for the down part of the cycle.

However, this does not mean that you should forget about buying and owning property. It may be that the market is due for a few flat years, however property purchase and ownership is for the long-term. Provided that you own a property for ten years or more, you are likely to do very well from it regardless of when in the cycle you purchased it. Moreover, good property is when and where you find it – do not go to sleep on the markets just because we are facing a down period. In fact, you may find a good buy more easily as things become difficult than you would at other times.

There are a number of things that you should watch for:

• Yield. Make sure that you get a good yield when buying investment property. The yield is the percentage of rent against the capital value of the property – an expression of the cash return that you are going to get when you own the property. The boom that we have had over the last few years has meant that values have gone up, however rents have not gone up accordingly. This means that yields are now on the whole very low – not a good thing for investors. To get a good yield you have to go digging in the markets: properties showing good yields are available but they can take a lot of work to find.
• Don’t buy apartments. The boom of the last few years was mostly about rising land values – the value of buildings has not really risen much at all. The trouble with apartments is that as the owner of an apartment, you do not own much of a share in the underlying land. Furthermore, apartments are often built for just one particular market (e.g. students) and it can be very easy to oversupply this market. Oversupply has happened in the Auckland apartment market (especially apartments of the shoebox kind). This has seen both rents and values fall – potentially disastrous for owners, particular because this situation is likely to continue for some time yet. Stay away from apartments (if you want one to live in, rent it instead) and buy into houses that have a good bit of land with them.
• Ignore the noise of the markets. The news media can make a market sound like it is a key to instant wealth or a key to the doss house. Exaggeration sells newspapers and TV advertising spots, so find out for yourself what’s going on. Similarly, spurn the noise of slick marketing. Developers who offer a rental guarantee if you will buy their unit are not doing this out of the goodness of their hearts. They offer rental guarantees (or holidays to Bali) because they know that no one will buy unless there is some kind of attractive offer.
• Arrange your borrowings well. If there was ever an area where you can make a king hit on your finances, it is the mortgage. Mortgages are usually so big that there is great potential for those with a bit of knowledge and who are prepared to do a bit of work to make savings. Even an apparently small reduction in the interest rate that you pay can make a huge difference to the total amount of interest that you will pay over the course of the loan. Look for lower cost providers, and remember that at most times over the past 15 years, fixed rates have been cheaper than floating rates. A couple of hours spent on trying to reduce the cost of the mortgage will probably give you a payoff that is better than anything else that you spent the time on.

The next couple of years will be very interesting in the property markets. Things are likely to flatten as interest rates go up and property becomes less affordable. However, in the past our property market has never really taken a major fall and has always recovered from a gloomy period within a few years. The latest boom is somewhat different because this time we have been part of a global boom – prices have risen sharply in Australia, UK, Ireland, South Africa and parts of the USA.

New Zealand has followed these markets, and what might happen in them could have a bearing on what happens here. If the past is anything to go by, we may have a gloomy two or three years when property is hard to sell but prices decline only a little if any. You can never be sure when predicting the future, but it looks like we are about to enter this phase of the cycle. The views or information given in this article are not necessarily the views of AMP or AMP Adviser Businesses. It provides general financial information and is not intended to provide financial advice. For personalised financial advice, we recommend you Contact us.