A friend visited from the UK last week.
‘After years of shoving money down the drain paying rent, I finally bought my own property,’ she announced.
It’s a new build near Brighton. Not large, for sure. But warm, attractive and funded around the average British mortgage rate of 1.73% (two-year fixed).
Most of all, she has her own little castle for her and her son. And she can plant a garden, hang Cath Kidston curtains and spark some joy.
Home building at scale. Source: Rightmove.co.uk
The UK has several publicly listed home building companies. They roll out mass numbers of proven and reliable homes at reasonable prices.
The government provides a ‘Help to Buy’ scheme. This comes in two forms: an equity loan, where the government lends up to 20% of the cost of a newly built home — so you only need a 5% deposit.
Or shared ownership, where if you can’t afford a mortgage, you buy a share of your home on the part you can afford and pay rent on the rest.
Speculation and landlording play second fiddle to the social goal of more people owning their own home. ‘Buy-to-let’ and second home purchases pay stamp duty of 3% to 8%. Capital-gains tax is levied when second properties are sold at between 10% and 20%.
Meanwhile, here in NZ, we lock people out of housing. We have the lowest rates of home ownership since just after the Second World War.
And it’s starting to show.
Leave the sanctuary of some of the nicer coastal neighbourhoods in Auckland — where ownership rates are high (often in family trusts) — and walk to rent city. It’s heartbreaking to see the number of loan sharks, gaming lounges, and cheap liquor outlets preying on vulnerability.
Head up Queen Street. There’s a lady there with a bowl and sign — ‘Please any spare change. I can’t make rent.’
How did we get to this?
The previous run of governments allowed Kiwi housing to be sold without restriction on global markets. They ran immigration at nearly twice the per capita rate of Australia — and more than three times that of the UK. The tax system encouraged investment into a limited housing stock. Lack of other investment opportunity and know-how encouraged property investment. The lack of an economic home-building industry meant supply always fell short. Greed, speculation and hording set in.
The problem with debt
Then there’s the problem with debt.
Start with the Reserve Bank cash rate — which, in effect, is the wholesale price of borrowing money.
In the UK, the Bank of England base rate is 0.75%. Average mortgage rates, at 1.73%, are 0.98% above this, reflecting the banking margin.
In New Zealand, the average mortgage rate is 4.90% (two-year fixed) and the Reserve Bank OCR is 1.75%. Our margin gap is 3.15% above the OCR — more than 3 times compared to Britain.
So, as with home building, where we lack economies of scale, it appears the same with lending.
If you want to buy a house and you don’t have the cash, they’ve got you over a barrel.
What can you do as an investor?
The new government seems more intent on fixing a broken housing market. Part of their strategy is to curtail speculation and investment into housing. One of the main groups of people I see getting into shares are those getting out of rental properties because it’s too hard now.
But property can still be a great investment.
Right now, UK homebuilders on the London Stock Exchange are cheap due to Brexit concerns. Yet there remains a shortage of homes in England, and that’s a problem they’re solving. Fundamental analysis of a couple of these companies reveals sound management, strong profitability, good dividend yield, and value underpinned by land holdings. ‘Help to buy’ provides a tailwind.
That’s why I’ve increased my holdings in Crest Nicholson [LSE:CRST], a home builder known for stylish, good quality houses and apartments. Of course, there are risks with the housing market as the UK goes into Brexit.
While home-building provides cyclical investment opportunity, there’s also strong yield available through REITs.
REITs are Real Estate Investment Trusts. They scale property investment into mainly commercial opportunities. Often, their structure requires them to pay 80%–90% of their profits out as dividends to shareholders. You enjoy the capital gain on the underlying properties (usually reflected in stock price growth) and share the rental yield through dividends.
The REITs I’ve bought in Australasia and Europe pay dividends in excess of 5% per annum. One Australasian holding has also delivered capital growth on the share price in excess of 15% over the past 12 months.
We’ll look to cover these opportunities in an upcoming newsletter.
What can you do with your mortgage?
It can be profitable to borrow when you’re getting a profitable return. For example, borrowing to buy a business.
For most people, their mortgage is just a huge cost. Even many rental property investors must ‘top up’ or depend on upper-bracket tax losses — which are about to be ring-fenced by the IRD.
Often, the best thing you can do is accelerate the clearing of your mortgage and stop working for the bank.
When I bought my first property at 25, I managed to clear the mortgage in a couple of years by going into battle. First, I rented out the rooms to flatmates so I didn’t, in fact, pay the mortgage myself. Second, I used a revolving facility, where I only paid interest on what was needed and could max out repayments immediately. Third, I worked all hours of the day until it was cleared. And lastly, I started with a fixer-upper on a main highway that many people would have ran from.
But that was back in 2000. Could I even do that in Auckland now? Could my kids do it on their own? I’m not so sure.
Fortunately, there’s another plan. Which is what we’re focused on at Money Morning New Zealand. Stay with us as we go beyond the mainstream financial media and find the opportunities for you and your family to gain lasting financial independence.
Analyst, Money Morning New Zealand
Simon Angelo owns shares in Crest Nicholson Holdings plc [LSE: CRST] (via wealth manager Vistafolio).