There are plenty of reasons to discourage people from investing in residential rental property: as Sorted says, it’s a lot of work, and it’s illiquid. But, as Stats NZ says, 29% of us rent, and New Zealanders are mighty keen on putting their money into rentals: in 2006, three quarters of New Zealand’s rental households rented privately. If you want to get in on the act, Whitcoulls and PaperPlus have bookshelves stuffed with how-to guides. But you shouldn't: investing in residential rental property isn't just unproductive, it's positively unpatriotic.

1. Investing in rentals drives up the cost of accommodation - for everyone

Though directed at tenants, the Accommodation Supplement, introduced by Jim Bolger’s National government in 1991, has been an enticing subsidy for landlords. The more would-be landlords want to enter the residential rental market, the more the demand for houses increases. And what increases when demand goes up and supply stays roughly stable? Price. Price increases in the residential market hit everyone: those of us who buy (because there’s greater competition overall to buy) and those of us who rent (because those costs have to be recouped somehow).  

2. It’s a pyramid game, with a bubble prone to bursting

If you’re thinking of investing in rental property, capital gains are an integral part of the value proposition. But your capital gains rest on two assumptions, both of which are vulnerable: that demand for housing will continue to increase, and that supply will remain constrained. Your assumption that demand will increase rests on a single proposition: that national and international migration will continue, with more and more people fuelling demand, especially in and around Auckland. Supply, on the other hand, is vulnerable to two threats. First, the zoning laws might change to enable more houses to be built on existing land (as infill, or by extending urban limits). That’s just one of a parcel of measures the New Zealand Institute has been advocating. The moment additional housing is possible the value of an urban section falls, and, with it, your capital gain. Equally, supply would be increased if we hit an economic rough patch and New Zealanders began to default on their mortgages (s-u-b-p-r-i-m-e-?), flooding the market with unproductive properties and lowering the cost of houses and land. 

3. It’s money under the mattress when you could be helping out

This is the worst of it: if you own a private rental, you’re not contributing to the economy - except incidentally, through tax on your rental income and the odd tradesperson’s fee. In effect, you’re taking a chunk of productive change out of the economy and parking it in the hope of a capital gain. Worse, though, your investment in rental property has an opportunity cost: you could be investing it in business, which would grow the economy.

So what?

Are there better places to put your money? Definitely. Stay liquid. By shares, or index funds, or anything that contributes to the economy. But don’t put your money on Free Parking. You may not go directly to jail, but, in the end, none of us will collect any more than $200.

Posted
AuthorNicola Rowe