Rental property, politics and risk

19:06, Mar 06 2013
Illustration: John Shakespeare.

"We won't make ourselves rich by selling houses to each other," Bill English said to me in 1998.

He has repeated it since (as have others) and English has been a leader of this Government's drive to try to reduce the Kiwi obsession with buying houses. He has not been successful - yet.

That successive governments have not been able to subdue the attraction of housing to investors is evidenced by the latest ASB survey which found that 19 per cent of Kiwis believed that rental property was the best place to make money. This has rental property back on the top investment spot and the appetite for rental property is now nearly as high as it was before the GFC.

However, those considering rental property as an investment should consider carefully. If they are assuming that rental property returns for the next 20 years will be the same as the last 20 years, they may find they send their money down a blind alley. Property investors - like all investors - have to think about the risks as well as the potential returns.

At the moment, there is a special risk to property investment: politics. Whatever other risks rental property investors face, English and his opposition colleagues present a bigger one. English has not achieved house price stability - but that may well change.

Housing has always been a public policy issue and so it should be. The vast majority of people want to see the population well housed and, if possible, in their own homes. The home ownership rate, which has long been declining, is a high profile issue right now within the halls of power.


It is also an issue with the general public. This is driven by younger people feeling shut out of the housing market and their parents (and grandparents) sympathising with their offspring's inability to get on the property ownership ladder.

Every political party is developing policy aimed at affordable housing. There is consensus in this country regarding the desired outcome (stable property values and affordable housing) even though there are plenty of arguments regarding the means to achieve it. Politicians (with local authorities and the public on their side) will bring change.

House price stability will not be a quick fix - there is no magic button to push. However, there are a number of things that can be done which in time will depress house prices: Changes to tax, zoning, the Resource Management Act, banking ratios and state house building (along with raising interest rates) would all eventually have an effect. There seems to be enough political will and if that turns into serious determination on the part of the politicians (as I think it will), rental property will not give the growth of the past. That means much lower returns for investors.

Politicians will not want to see a fall in property prices: That would cause widespread disruption as many families would have negative equity, small business owners could not borrow for their overdrafts and the banking system would become less stable. Governments of whatever hue will, however, try to flatten the market as far as they can and stabilise property values. If they are successful this will affect investors as they sit on properties for years with very low returns.

Control of house prices will take time. However, those thinking about a long-term investment strategy would be well advised to be wary of the housing market and the eventual influence that politics will have.

Rental property investment does carry other risks, of course. House prices are relatively high, rental yields are low, some markets are in a frenzy of buying and interest rates will eventually rise. These risks will all be factored in as they are the kinds of things that all investors should consider - the smart investor always weighs the risk against the expected returns. However, these normal investment risks are one thing; the likelihood of politicians kicking the housing football all over the paddock is quite another altogether.

All investment carries risk, but it seems to me that rental property carries more risk than most other investments at the moment. A blind acceptance of the future being the same as the past is never good thinking for an investment strategy. There are some investment risks that I am prepared to take, but betting against a political consensus to stabilise house prices is not one of them.

Martin Hawes is an Authorised Financial Adviser and his disclosure statement is available free of charge at This article is of a general nature and no substitute for personalised financial advice.

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