Tony Alexander is the Chief Economist at the Bank of New Zealand. The excerpt below is from his Weekly Overview of 10 May.
I write a fortnightly column in the Property Press magazine which sits outside real estate agent offices and various other places all around New Zealand. Apparently some 800,000 of us take a peek at this publication every week. Impressive. That probably reflects the attraction which property has to most of us – either in terms of undertaking an actual search for somewhere to live or invest in, gauging what one’s house might be worth in today’s market, peeking inside nice places to get redecoration ideas, or simply for pawing over.
A few weeks back I wrote an article comparing potential returns from keeping a property I have in Auckland or selling it and depositing the money and I thought Overview readers might find some interest in it. So here goes the same subject.
One of my properties is a little studio in Auckland. At a stretch it might sell for just under $300,000. Let’s assume it did. I could bank a capital gain and feel clever. But what would I then do with the money as a conservative investor?
If I put the $300k in the bank I could get 3.5% which after tax would deliver $7,000 in the hand each year. After ten years I would have saved up $70,000 plus some compounded interest.
If I keep the apartment I also will get about $7k in the hand after expenses and tax adding up to $70,000 plus some compounded interest.
Am I indifferent between the two options? No. After ten years my $300,000 term deposit will still be $300,000 plus the accumulated interest. My little apartment however is really, really unlikely to still be priced at $300,000 a decade from now. I would expect it to rise at a pace of at least 2% per annum.
Therefore, attractive as the thought of getting $300k in the hand is at the moment, if the alternative is placing the capital on term deposit and watching inflation eat my capital away I opt to keep the property and rent it out.
I have no hesitation when young people ask me about investments telling them to place what they can in Kiwisaver, build up a fund to get a house deposit together, pay down their mortgage as quickly as possible, and concentrate on their education, their work skills, their actual job, and training themselves to remain awake to the many opportunities continually presented to us all these days for skill and career advancement.
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