What return does a house offer?
Is buying a family home really a good investment?
Last week, we slaughtered some sacred cows, and provoked plenty of anguished moos from commenters.
Having established that a house offers no diversification, little liquidity and high transaction and ongoing costs, we concluded it would need to offer one hell of an impressive return.
This week, we'll work out just how much money is up for grabs, and throw some of the non-financial factors into the equation.
But for our final piece of blasphemy, let's take a look at the worst-case scenario first.
If you buy in the wrong place at the wrong time, you'll make a big loss.
If there's no pressure to sell you might not feel the pain, but it's there all the same.
And of course, you might feel it very acutely indeed.
NZ Wealth head of advisor services Ben Brinkerhoff had his fingers singed in the US housing collapse, so he knows this better than most.
Back in 2003 he bought a cheap condo in San Diego, not too far from the sea.
With fees, rates, utilities and insurance to pay, he was forking out a significant premium to own over renting.
"I was essentially losing money every month, but the property values continued to appreciate," he says.
Until 2007, that is, when everything tanked. Brinkerhoff got out relatively early, selling up for a US$30,000 ($35,000) loss.
"If it'd continued to go up, it looked like it was the smartest thing ever," he says.
"If it went down, you can see how stupid it became pretty quick."
But Brinkerhoff got off lightly. For one thing, he could actually afford the modest home he was living in.
One of his friends took the fall harder. All the warning signs were there: The house was cheaper to rent than to own, his dad paid the deposit, and he could only afford interest-only payments.
"I said, 'I wouldn't touch it'," says Brinkerhoff.
But try telling that to someone who had watched property appreciate for something like 14 straight years.
"In these people's entire investing lifetimes, they'd only seen this thing go one direction," says Brinkerhoff.
"And he didn't listen to me, and he got creamed - he got totally, totally creamed."
Does this mean we can write Brinkerhoff off as a hardened house-hater?
Not all. In fact, he bought a home in Christchurch not long after the earthquakes.
"[Housing] has been a fantastic investment for a number of years," he says.
"But at this point, housing is expensive enough in New Zealand that simply to expect it to go up because it always did is naive."
There was a fundamental difference in his decision to buy this time, which we'll come back to soon.
But first, let's take a look at just what sort of returns houses actually offer.
If you own stocks, you get paid a dividend by the company as it shares out the profits.
The family home doesn't make a profit, but it does pay a "dividend" in that you don't have to fork out for rent.
According to Interest.co.nz, the median house price is roughly 22 times as much as the median annual rent.
That means on a typical $400,000 house, you're saving about $18,000 from going into the landlord's pocket.
In the first years, where you're probably highly leveraged, this provides a huge 23 per cent return on an initial $80,000 deposit (20 per cent).
Once you own the house outright, it's a much more modest yield of about 4.5 per cent.
... Minus Expenses
Few other investments require the whopping ongoing expenses we covered last week, so we have to subtract these before we get too excited.
Mortgage repayments on the $400,000 house are something like $32,000 per year. The usual rule of thumb is to add another 20-30 per cent for other expenses, which bring us to roughly $40,000.
That means you're actually paying a huge premium to own; something like $22,000.
But this is only half the story.
Twenty years down the track, you own a house. Not only that, there's every chance it's worth a whole lot more than $400,000.
And while your mortgage payments won't change much, someone looking to rent out the same place will need to adjust their budget.
Infometrics economists say the only long-term measure of rents comes from the Consumer Price Index, stretching back to 1975.
From then to September 2013, house prices have gone up an average of 7.9 per cent each year. Rents have kept pace most of the way, averaging 6.6 per cent a year.
If we extend those figures forward, at the end of 20 years, the same house is (theoretically) worth $1.8 million
It also means the annual rent payment will leap to something like $65,000.
Of course, at the same time, all the cash you've poured into the mortgage payments and the initial deposit has an opportunity cost.
It's tied up in non-productive bricks and mortar. What if you put it in the sharemarket instead?
Superlife found New Zealand shares returned an average of 8.7 per cent, after tax, over the 30 years to April 2012.
That's also bang on the long-term performance of the US share market.
If you'd put the same deposit and payments into stocks each year - minus the escalating costs of rent payments - you'd come out with something like $900,000.
Not bad, but it's still a rubbish return worth only half of the house. Or is it?
Remember how we said that $400,000 house would rocket to a cool $1.8m?
Yeah, nah. Not without a whole lot of work, anyway.
House price figures are misleading in that they reflect major improvements, new builds, and ever-larger homes being built over the years.
There are no major renovation costs factored into the above calculations.
"The people that tend to make the real money in this, are the ones that treat it as a business," says Brinkerhoff.
That means developers, renovators and investors, looking to add value.
"If you're just going to passively hold it, you maybe ought to pursue the other avenue of investment," Brinkerhoff says.
Then there's the question of being in the right place at the right time.
If you're buying shares or bonds consistently over two decades, timing is pretty much a non-issue. A house, however, ties up all your money in one fell swoop.
You could pick the best possible time - and you could buy at the absolute peak of the market.
Andrew King, president of the New Zealand Property Investors' Federation (NZPIF), says buying works out better in the long-term for most people.
"But in the short-term, you're much better off renting," he says.
In January, the NZPIF released research showing it was $138 a week more expensive to own than to rent.
King says that gap has widened from roughly $100 in the previous study, and he expects it to do so again.
In the last cycle, at the peak of the market in 2007, the difference between owning and renting was a whopping $300 a week.
A sensible strategy would be to ride out such highs, pocket the difference, and wait for the cycle to turn.
Location, Location, Location
Once again, counting your gains based on national house prices tracking merrily upwards is dangerous.
The media tends to focus on the big cities, especially Auckland, which has been a good bet in recent years.
But across the country, there's all sorts of different trends going on.
Some cities are more or less stagnant. Many regions are actually going backwards.
Small towns in particular have already experienced what amounts to their own US-style collapse.
Kawerau, for example, has slumped about 35 per cent from 2007, with an average house price of just $104,000.
Putting it into Practice
Confused? All this means is that housing is not a sure bet, and requires a bit of critical thinking.
Brinkerhoff says the first thing to check for is whether it's cheaper to rent or buy. Having to pay a big premium to own is a warning sign.
The second thing is whether you can safely afford the payments:
"When you stare yourself in the mirror, you've got to ask the question, can I afford this?"
Finally, you have to look at whether house prices in your area are close to rational or at the top of the cycle.
"Any kind of decision you make independent of the price is dangerous," says Brinkerhoff.
The logical alternatives are to look elsewhere if your job is portable, wait it out and save the difference, or reassess your price range.
We've deliberately kept this discussion focused on money, given it's the biggest purchase most people will make in their lives.
But when it comes to buying a house, it's impossible to ignore the non-financial factors.
To start with, not everyone who keeps renting will diligently squirrel away the difference every week.
King says many people see a mortgage as a sort of forced savings regime.
"For most people, it does actually really help them in saving money," he says.
"If they didn't have that, they may spend it somewhere else in a more frivolous sort of way."
Then there's the stability factor, which is particularly important with a family. You don't run the risk of getting kicked out and having to uproot your whole life.
"It also means you have the flexibility to do whatever you like to the place, because it's yours," says King. "If you want to paint a wall red, you can do that."
Assign a value to these things and factor them into the equations above. Chances are, the non-financials are what will end up swinging the balance in favour of a family home.
It might be a borderline investment, but that doesn't mean it's a bad purchase.
Just don't let emotion and the great Kiwi dream completely override rational decision-making. Go into it with your eyes open, and always weigh up the alternatives.
- Fairfax Media