When Do Properties Not Go Up in Value?

The question

When do properties not go up in value? We've had some customers who purchased a property in 2015, and they sold it towards the end of last year — for $10,000 less than they paid for it.

That's wild. Most people in New Zealand would assume that's impossible.

Our culture around property, our view of property, is just that it continues to go up and up and up. We've seen the truth of that — that it doesn't always go up.

People probably want to know what makes a property not appreciate. They probably heard your story at the start and they're asking — well, what the heck was going on with that house? Is property even as solid as we thought?

Welcome back

Welcome back to the Blueprint Finance Podcast, where everyday Kiwis come to learn how to get ahead financially. Rory, mate, it's been a while.

Too long, aye.

This podcast today is about a topic that's a bit more long-term thinking. We're not gonna get stuck in the humdrum of today's economy — we're actually gonna talk about building wealth. Bigger picture, aye?

Yeah. No macros, no micros. We're just talking long-term, letting economic cycles do their thing and what sorts of things to think about. So specifically in property this episode, the title's gonna be: when do properties not go up in value?

You tell me, mate. So this has sparked a very interesting story — we've had some customers who purchased a property in 2015, and they sold it towards the end of last year for $10,000 less than they paid for it. Over more than a decade, and you've taken a loss. They didn't realise the capital gain.

I think most people in New Zealand would assume that's impossible. Our culture around property is that it continues to go up and up. Obviously now in the last five years, with this correction we've had in our major cities — Auckland, Wellington — we've seen the truth that it doesn't always go up. There can be corrections, markets do take hits and then have to take time to bounce back.

But fundamentally, there's this aspect of our property market that doesn't always experience the same massive capital growth. And we'll go into that today so we can inform people about what the fundamentals are about real estate. So people can invest safely and know — I don't have to worry about what's gonna happen in the next five years. If I'm buying for 20 years, I'm buying a good investment, and I know it's gonna go up in value over a 20-year period.

I know it's gonna perform. So are we looking at 2015 to 2025 as a bit of a case study for today?

The cycle

100%. I showed you that graph in our meeting — the cycles. We'll send it to Producer Jackie and we'll get a picture up on the screen for the folks at home watching. What it's gonna show is the cycle of a property market. It's very comparable to a share market cycle. You'll see it's got a line moving diagonally upwards — which is the overall price, the value of a market increasing over time. And then you've got these wave lines that dictate the shorter-term movements.

Because as we all know, markets don't move flat, just consistently up. They move in massive waves. When you have price increases, it happens all at once, like a domino effect. All the money rushes into the market and demand hits its peak. Then when demand goes, it comes crashing down.

So the 2015–2025 market is a perfect example of that. You're starting off from the end of the GFC — just after the GFC fully wrapped up, the bottom of that market is around 2011. Then you've got this steady, steady increase as wage growth is happening. Because what happens is when interest rates are steady and wages continue to increase, people's debt servicing is gonna increase over time. So during that whole period from 2013 all the way up to 2019, we had that steady growth.

Then we have what's referred to as the boom period. So the boom period, I wanna say, is from early 2019, even though people don't wanna say it is — but that's sort of when it started. Up until 2021. The economy was shocked. We had a shock that affected the economy — which was COVID — and it created this perfect environment for money just to be printed in the economy.

Now, people think it was just COVID that did that. But I'll remind people: at the time, money was incredibly cheap before COVID. Towards the end of 2019, before COVID, the one-year fixed rate was around the low threes — 3.29%. Historically extremely cheap money. And a couple of months before that in 2019, the banks actually loosened up LVR restrictions to stimulate the economy.

We had a very gung-ho economist at the time — it was Adrian Orr. He was very keen on getting property prices moving, because historically when properties are going up, small business owners and business owners in New Zealand want to spend money. They feel good about their financial position and they want to invest.

As we've seen for the last five years when properties aren't doing well — people don't wanna spend, 'cause they think, "I'm already in the hole. I'm not gonna take another risk on investing in my business."

Absolutely.

So we had this period of growth that started then. And then after COVID happened — 2% interest rates — the rest is history. Everybody's eating, having an absolute feast on the 2% interest rate. Property prices are going through the roof. Mortgage brokers having the best time. Real estate agents having an even better time. And it's all looking good.

We get to November 2021 and — boomf. We realise that this inflation's gotten out of control. All the inflation indicators are saying we're at 7%, 6% inflation. We've desperately gotta do something to make our economy more efficient, otherwise our dollar's gonna completely lose value. Handbrake comes up.

And how fast was that?

It happened pretty quickly, aye? I feel like we went from twos to like 7% interest rates almost instantly. The Reserve Bank sent the message: "That's enough now." 0.5% OCR increase and LVR restrictions cut back to 30% — actually dropped to 60% or 65%. They really pulled it back to say: for us to fix this problem we've made — we've now realised we've overinflated the market — we need to make people feel sick about property and feel sick about consumer spending.

It was a hell of a hangover, right? It was like the party that you didn't want to end. Like you said — the mortgage brokers and the real estate agents, they all had ties around their head. And someone just cut the music — and it was time to go home.

That's exactly what happened. The parents came home from the bach. They came home from the bach and caught everyone. And they said: "Call your parents — you're in deep crap."

55% growth — and the people who missed it

So an interesting little figure here, going back to your story at the start, around people holding investments or selling their own property and losing money. We had average prices over this period of property in New Zealand going up 55%, during 2015 to 2025.

Exactly.

But not everybody was a winner.

No, and that's what we wanna talk about today. Generally when people talk about asset growth, we can see that 55% during that property cycle — and that's including a massive downturn. We've included the downturn in there, and we still had 55% growth over a 10-year period. So it's really showing you that yes, fundamentally property does go up at that rate. But you're right, there are categories that haven't experienced this kind of growth, and it's a great opportunity for us to see how those properties are different.

What are the drivers? It's quite interesting.

When we're showing projections to our clients about the future of their portfolio, we always assume a 3% growth. We know some advisers in Australia are so bullish about capital growth, they use 6% — which I think is ridiculous. It's just so non-conservative, pie-in-the-sky stuff. So I always base it off 3%.

If we look at Auckland's growth, for example, we had a 38% growth over 10 years. So that is closer to 3% — that's more like a 4% annual growth, just under. Auckland was relatively small versus the rest of the country. The average growth in New Zealand was 55%, which is well above 3%.

So we're gonna talk about the reason why a city's growth rate is gonna lag compared to maybe a region, or a more developing part of the country.

Why cities lag

The number one thing — higher property values. Average property price just exceeded a million bucks in Auckland in 2022, and it's sitting just above that now. Obviously you're not gonna experience the same thing in a region like Gisborne or Taranaki. If you're getting a 20K increase in the sale price, that is a much larger percentage than a 20K increase in Auckland. So that's a huge reason — because the values are so much higher, the percentage is gonna be smaller. First indicator of why you're not getting the same percentage growth in a region.

Auckland's already starting with larger property prices because it's in a more advanced stage compared to other regions which are still developing. You're buying properties with less land in Auckland, less subdivision potential, all those sorts of things. When you're buying in the regions, these properties are underwritten by land.

That's where the true value is in real estate. Actual buildings hold their value or some actually depreciate — but the land is what's causing the value to increase. So if you have larger sections and larger areas of land, you're more likely to get a percentage increase as inflation increases. Land's what really holds the value. That's what you can use to subdivide, that's what you can use to make further forced appreciation. The land is where money's at.

So there's less land available because the lots are much smaller in a larger city like Auckland or Wellington. That's why you don't get as much growth.

Auckland's house prices already starting high — there's a limit to the growth. We can't see 30% growth in a year from here. It has to slow. Because who's buying the properties of average house prices to get to $1.5 mil? People's salaries aren't keeping up. The numbers don't work.

There's this absolute middle ground.

I've got a pretty good micro example of this. We spoke about it recently — clients who just bought a property in Rotorua. They were living in Papakura before that. The house they were renting was a cross-lease three-bedroom, two kids, and they're average income earners. They moved to Rotorua to earn the same income working in similar fields, and spent the same $650K — and got a 700-square-metre freehold four-bedroom.

Living the dream, mate. Why wouldn't you?

So there's that element as well, which is hedging the price — you can get more house somewhere else. The people at the lower end of the income scale will be attracted to that, or the middle end of the income scale will be attracted to that and will make those moves to get more lifestyle.

Anybody that isn't super drawn to the hustle and bustle of a city, that can earn parity in a region, would be attracted to it. If you're earning $200,000 and that's what you earn, you can earn it in Auckland or you can earn it in the region. It's something to think about. The same dollar goes a lot further.

And then you've got the middle-to-high income earners that probably couldn't earn the same in the regions. So then they're not forced, but they choose to live in the city and have less property, pay more, and earn more income.

And have a more vibrant lifestyle. Or more options for their children. So that's another reason why the city growth is gonna lag.

Where it's been pumping

If we compare it to areas that have seen the opposite — where's been absolutely pumping? We said 38% growth in Auckland, less than that in Wellington. Manawatu. Southland. Gisborne — your favourite. You're an East Coast guy.

Gizzy. It's a beauty.

Over 130% growth on average. They've been pumping.

Based on the basics — already low property prices, the land value's there, the units are much larger. It's just poised for growth alongside these other factors like people from the larger cities moving to get a more affordable lifestyle.

Talk to me a little bit — although I don't wanna digress from your flow state — but the positive yields in the regions for rentals. Why is that so prominent? Is it because rents aren't much cheaper in the regions?

That's exactly why. The answer is there's way less houses in the regions. And there's way less houses being built in the regions. So the rental demand's actually up here versus the property stock.

Whereas Auckland — it's such a developed area. Yes, there is a cry-out for rentals, but there's still a bunch of areas with weak rentals. For example, my investment property at Papakura. Every time it comes up for renewal, I struggle to get a tenant, and the property manager is conditioning me, saying, "You're gonna take less rent." The developers are here, boots on the ground, just trying to pump out more.

You're competing against more people for the same tenant.

Whereas in the regions there's not as much activity, and there's less houses. So my investment property in Hawera came up for rent and four people competed for it. It got tenanted in two weeks. And the rent is actually very close to what I'm getting for the Papakura.

That's why the rental yield is so high.

And if you don't know this, you'd think — "Well, there's less houses, there's less people." And that's true as well. But the demand is greater than the supply. That's as simple as it is.

You forget that, because economics seems so complex. But because everyday life's running with it, it always comes back to supply and demand.

Yeah. And we're not talking about, like, Stewart Island. Gisborne's a pretty big area.

Region's got like 50,000 people.

It's a massive area, and there's heaps of houses. Most of the East Coast could come under Gisborne or Bay of Plenty region.

And then these areas with lower property prices — when the property price increases, the percentage is amplified. Some of these properties would've started 2015 valued at 150K; now they're worth 300K or 400K. They're very standard. The investors are buying them and the first home buyers are buying them — anyone living in the regions can just say, "Oh, my mortgage payment will be cheaper than my rent. Why would I not buy the house?" So that market is still developing that way.

Land availability is a massive one. These sites being sold have a bit of land, so you can always subdivide them and build more property — they're gonna go for a higher price.

Do you see this trend carrying on, say, for the next 10 years from where we're at now? Like, these same areas? Or will it move? Are there other parts of New Zealand that will speed up?

I seriously do — I do think that these areas will continue to experience similar growth. With the net migration coming into the country, they are actually spreading across the country and moving into these areas. Most of the areas where I'm investing, where you're getting the high yields and cash flow, is actually driven by people moving to the area — new to the area, immigrants — creating more rental demand.

I do hope it slows for the tenants' sake — that it can stabilise a bit, and that people build more houses in these areas.

It's probably comparable to the development of a city, where it's just slowly, slowly ticking away.

Queenstown — the exception

In saying that — if we talk about cities or areas you consider a city, Queenstown has a big circle around it as sort of a developed area that did experience tremendous capital growth even during our property downturn. We had this downturn in '21 where prices fell off a cliff in Auckland and Wellington. In Christchurch it stayed steady. But in Queenstown it just absolutely took off — because remote working, mate. Everybody started working from home and they thought, "I might as well move to Queenstown."

Queenstown, Wanaka.

How many people do you know — Aucklanders — that moved down there for lifestyle? I think that's a big one. Retirees going down there to finish up. And there's not as much developable land out there. So naturally that demand has just gotten out of control. That's been a real interesting one to watch, and I think we can circle that one as the fundamental reason why it sort of increased. That'll probably remain as well — there's always gonna be demand. Even as prices get hectically expensive there, it's an area where there'll always be a buyer.

Now I'll move on to the area where everyone's dying to know. Invercargill.

We could put Invercargill in the 130% growth.

It's done well, hasn't it?

Done really well. Invercargill. These areas — obviously cheaper properties — but the percentage increases have been fantastic. Still showing really strong rents and great places to invest. We recommend our clients to invest, 100%.

Properties that don't appreciate

But people probably wanna know what makes a property not appreciate. They probably heard my story at the start and said, "Well, what the heck was going on with that house?"

Yeah, what the heck's going on with it?

So the first big one about this property was that it was an apartment. Apartments in general experience less capital growth than your standard freehold property, or your cross-lease, or even your unit.

The restrictions around it are the property type, and the body corporate. If you're a straight-up apartment building with floors, you are at the hands of your body corporate if there are any major changes. For example, if there are big repairs needed in the body corporate, regardless of whether it's on your floor, you may be held accountable for those changes — and you have to actually cough up some cash to remediate things. We've met some clients over the years who have bought properties and ended up having to share a $500,000 remediation bill.

These are very common things.

Property issues like drainage and these things involve neighbours anyway, but body corporate's the most common, because you're literally in this group and people at the head of the group can make decisions for you. That is the risk. That's the financial risk.

People understand now the implications, and that perceived risk — even though it's not even experienced — plays into the property price. Because people are being advised, and people know that's a higher risk. And apartment types, or these smaller dwellings in general, do not experience as much capital growth.

With this particular client I mentioned at the start of the podcast, it was also a leasehold apartment.

So you own your building, you own your room — but you don't own the land. The land is being leased to another entity. Sometimes it's the council, sometimes it's a business, and you pay ground rent to that particular owner. Is that common in New Zealand?

With apartments, very common. In CBD, and in Wellington as well. These types of properties. So this has been something that meant they got a decent rental return on it — but after ground rent and body corporate, return actually wasn't that good. You're buying because you know it's got good rentability. You're gonna have consistent tenants because it's in the CBD. But you're giving up these other rights that you have as a property owner, or these other assurances behind capital growth.

These property types — there's many of these in the central areas of these cities. It's probably the main reason why you can see we're getting 38% average capital growth in Auckland and Wellington, and we're getting 130% in regions.

So you've got two things there: higher average house prices, and property types that aren't really moving. We know townhouse-apartment in the city is the rage.

New builds vs cashflow

Exactly. If you're new to investing and you start doing a bit of research, they'll tell you these new-build townhouses are a no-brainer. You see a lot of them in Christchurch as well. But they come with caveats — like you say.

I'm so glad you brought this up. We've outed ourselves on this podcast again and again as swearing by cashflow property. Property investment's on a spectrum — you've got capital growth on one end and cashflow on the other. We wanna steer our clients towards cashflow. You don't need to be redlining cashflow, but towards cashflow.

When it comes to investing in property, you've got a couple of voices. You've got people like myself who are giving advice strictly based on the numbers, saying: "If you buy this house, it's in the regions, you can get good cashflow." Or, "The property is in a city, but it's a cashflow property — maybe it's got multi-dwelling. You gotta do a bit of work to it, but you can get it to a point where it's cashflowing really well." As your adviser, I'm not incentivised to sell you the property — I'm just giving you the advice. If you take a loan with us, that's great, but there's not really a massive incentive there.

But there's very loud voices in these areas who sell new-build developments. They're financially incentivised to sell that property for the highest possible amount.

They're new and shiny, aye? The developers absolutely maximise the value. Every inch of the dwelling has been maximised.

They say, "You can't buy this asset and then force any appreciation."

These can make great family homes — because at the end of the day, your family home is not an investment. You can't sell a bedroom and retire.

Oh yeah, mate, we're not going anywhere. We're going down with the ship. It doesn't matter if it's a good investment — of course it's nice to see your house go up in value, like we said. It inspires confidence in people to do more in the economy. But as an investment, these new builds have proven to not really do much.

The selling point is: "It's new, it's shiny, it's in a city. Don't even worry about maintenance — 10-year builder's warranty. You'll get a good tenant. There'll always be demand." But there's caveats.

And then the other side of it, what you're talking about — regions. That's a bit scary. "I'm living in Auckland, I've got this new build investment in Auckland — that's safe. Why do I wanna buy a house in Gisborne? How do I even manage it? I haven't been to Gisborne for 20 years." It seems a little bit scarier, and riskier. But the people that are doing it are getting the rewards.

Are doing well.

With the new build investment — you will have to top it up. But long term, the numbers have proven that if it's on a freehold section — as long as it's not an apartment — your money should follow inflation, and you should get that capital growth. So I'm not too worried about those people, as long as they can afford the repayments and they're happy to top it up. They're still able to use leverage as a tool to build wealth.

And it becomes a great cashflow engine down the line. Especially if you manage to pay some of it off. I'd recommend interest-only until you've paid off your family home.

I like the way you keep bias out of it. Because there isn't an incentive for you. Actually, you spoke to me about how oftentimes it's better for you if they buy this new build — it's a bigger loan. Bank's happier. Less paperwork. No builder's report. You just talk to facts, don't you? The numbers speak for themselves.

I talk to facts, and I talk as an investor myself — having seen both play out. Just my honest two cents. It's not like those townhouses are never gonna go up in value — that's definitely not true.

One of your first properties was in a lovely region. We don't talk about that.

Biggest mistake of my life selling that house. In Tokoroa.

I love Tokoroa, right? I could talk about it — we could do another podcast on Tokoroa.

The fundamentals

These fundamentals — we can put a really big circle around some of these key ones.

Capital growth is really driven by land. That doesn't mean a cross-lease unit doesn't appreciate — but the underpinning land, if it's larger, is gonna appreciate more.

With your investment, the more control you have over your property, the more it should appreciate. If it's a freehold title, it's fully yours — that's the highest grade you can have. You'll experience more appreciation because you fully own the title of the land, and that will just continue to grow in value. The smaller your unit, or the smaller your claim to complete control — that's when we've seen you're actually not getting that growth. You can't guarantee that capital growth.

It's a very easy formula when people are asking when properties don't go up in value. It's:

1. The property type. Make sure you're buying the property type that appreciates, if you're looking for capital appreciation.

2. Rental demand. Are you buying in an area where people wanna live and people are fighting for the good rentals? Very easy to find that information — there's property managers who would love to talk to you anywhere in New Zealand.

3. Infrastructure. What does this area offer? Some of these regions that haven't experienced as much growth — you can just look at indicators like the unemployment rate. If it's over 23%, you've probably got not much going on and not much scope for growth. Opportunities are minimal. But there's areas that still get good rental yields and lower prices that are better.

And of course, if you look historically — as always, my final point — it's always good to look back and say, "Has this area seen growth?" If it's seen property growth before, and it wasn't from something like a gold rush, we can pretty much guarantee that we're gonna have some long-term appreciation.

That's great advice, mate. People are always wondering, especially now with these massive corrections: "Is property even as solid as we thought?" — which is an extremely fair question. It's been almost five years now from the peak of the Auckland market, and we just haven't even seemed to start heading back in that direction. So it's a very fair point for people to lose faith in how the system works.

But politicians are all talking about it now — this election. Property prices have to go up for people to feel inspired to invest in the economy. It's always been the way. Unless there's actual changes in our system, which is not gonna happen — it's gonna head that way.

The hot tip

Hey, are there any — I know you're not biased — but are there any areas that tickle your fancy a little bit, like, as an investor? Or do you just not really care? You're just like, "Mate, if the numbers stack up, I'll buy anywhere"?

If the numbers stack up, 100% — I'm that guy. I've looked at deals pretty much in most regions.

There must be some area where you're like, "Gee, they're always hot there. They're always good."

I think — okay, I'll give a name. Ooh, if you've waited to the end here…

An area I've found, by talking to property managers and other landlords, that's a really good combination of strong capital growth, good-quality tenants, and rental return — is Putāruru in South Waikato. Which happens to be 20 minutes from the greatest town in New Zealand, Tokoroa.

I'm not saying Toks is the best, but Putāruru is sort of the Remuera of South Waikato.

That's a hot tip, mate. Nobody not in the know is thinking that.

Prices are higher, but you can get home-and-incomes, you can get blocks of units, and the quality tenants I've found to be quite good. The big three boxes ticked. Happy to give that to the listeners. Fill your boots.

Someone had to listen to the whole thing to get that.

If you are that person — you've been rewarded. Massively rewarded.

Cheers, guys. Enjoyed it. Thanks for sharing your knowledge.