Is Property Still a Good Investment in New Zealand?

Property investment has long occupied a special corner of New Zealander’s financial hearts.

Dinner tables up and down the country have hosted many spirited debates over capital gains, interest rates, and whether Uncle Bruce’s third rental will fund an early retirement or simply early hair loss. Yet the question persists: is property still a good investment in New Zealand?

It is a question that, frankly, has changed meaning significantly over the last few years. The days of simply buying any house, waiting six months, and watching your equity magically double have, for now, been shelved.

With the steepest ever climb in interest rates resetting the financial calculus and regulatory changes shifting the ground under landlords' feet, many investors, both seasoned and prospective, are asking if the game is still worth the effort.

Let’s explore the pros and cons of New Zealand residential real estate investing.

For the avoidance of doubt, this article is focussed on the most common form of New Zealand property investment: buying residential real estate as part of a long-term ‘buy and hold’ strategy. Note there are different property investment strategies.

The Case Against Property

Push Factors, Away from Property

Over recent years, a lot of things have changed, which make residential property investment less appealing:

• Especially in larger cities, yields are usually too low to make a cashflow profit
• Tax changes - it is becoming harder to offset any rental property cashflow losses against other income
• Investors face higher compliance costs such as additional costs for heating and insulation
• There is now limited or no price appreciation (capital gain) in some areas, and a reduced possibility of capital gains moving forward
• More favourable laws for tenants
• Social pressure to make housing more affordable is only likely to increase
• High housing prices relative to incomes have made property seemingly less affordable
• Every few years, potential talk of capital gains tax or wealth tax rears its head. Sometimes this scares away some traditional property investors. Though of course, no-one can know what may happen with future legislation.

The New Equation: How Leverage Became a Double-Edged Sword

For generations of successful New Zealand investors, the greatest advantage of property has always been leverage. When a bank lends you $800,000 to buy a million-dollar asset, you are effectively controlling $1,000,000 worth of appreciating asset with only $200,000 of your own capital. If the property value increases by 20 percent (i.e., $200,000), your original $200,000 investment is now worth $400,000. You have doubled your original investment, minus any costs. You have a gain of 100 percent on the sum you invested.

Try getting your bank manager to lend you 80 percent against a diversified global shares portfolio, you will likely be met with a laugh that shakes the entire financial institution. Property, in this sense, remains unique.

However, high interest rates have introduced a profound structural change to this calculation.

The Cash Flow Squeeze

In the era of two percent mortgage rates, the rent received (the yield) often covered the operating expenses, including interest costs. The property was cash flow neutral, or even slightly positive. The investor merely paid down the principal, and the market provided the capital gain.

Today, with standard mortgage rates sitting higher, the cash flow proposition has flipped for most residential rentals, especially in major centres. The property’s gross yield (rent divided by property value) in high-value areas often falls far short of the cost of debt.

This results in negative cash flow, meaning the investor must inject personal funds every month to cover the shortfall between rent and expenses. This cost is a crucial part of the investment. It requires a resilient financial buffer and a strong belief in long-term capital appreciation to justify the monthly drain.

If the market stalls or corrects, the property investor is essentially paying every month for the privilege of retaining a highly geared asset that is not performing. This is not necessarily a bad thing for a high-income earner seeking tax advantages and maximum leverage, but it changes the risk profile completely. It means the investment requires significant maintenance capital, not just seed capital.

Pull Factors, Towards Non-Property Assets

Complementing the list above are a range of reasons that Kiwi mums and dads are increasingly being pulled away from property:

• KiwiSaver has increased familiarity with investing in diversified managed funds.
• Increasing knowledge, coupled with widespread use of the internet has shown many New Zealanders that this country is just 0.2 percent of the global economy. Many people are now more familiar with the investment opportunities which present themselves overseas, including in rapidly expanding areas such as information technology and cutting-edge healthcare.
• Coupled with the points above, online share trading platforms have given New Zealanders a means to invest in promising other markets in a (generally) low cost and tax-efficient way.

The Case for Property: Timeless Financial Principles

While interest rates fluctuate and politicians tinker with tax laws, the core reasons property has been a successful asset class for centuries have not vanished. These are the principles that make property "timeless."

1. Real Asset, Real Demand

Residential property is a finite, tangible asset essential for life. Unlike a share in a company, which represents ownership in a dynamic, potentially fragile operation, a house represents shelter.

The fundamental demand drivers in New Zealand are long-term forces that generally underpin value:

• Population growth,
• Migration, and
• Structural housing shortages.

We will always need places to live. This enduring, inelastic demand provides a powerful floor for the asset class over extended boom and bust cycles.

2. The Hedge Against Inflation

Property has long been considered one of the most effective hedges against inflation. No superpowers involved, we're just adding or subtracting two different numbers:

1. Rental Income: Rents tend to rise in line with or slightly above general inflation over the long-term, protecting the purchasing power of your income stream.
2. Debt Reduction: When inflation is high, the real value of fixed debt erodes. You are repaying a debt with dollars that are less valuable than the dollars you borrowed. The principal amount of your mortgage remains fixed, but the real burden of that debt decreases over time.

This powerful combination of rising income and shrinking real debt is a primary reason why, despite short-term fluctuations, property has historically delivered reliable inflation-adjusted returns over long periods of time.

3. Control: The Hands-On Advantage

As an investor, you have remarkable control over a rental property, a trait virtually impossible to replicate with an investment in most funds, including KiwiSaver Schemes. This allows you to influence the asset’s value and income:

• Manufacturing Capital Gain: You can renovate, reconfigure, or add value through subdivisions, instantly creating capital gain. A share investor must wait for the company CEO to perform; a property investor performs the role of the CEO themselves.
• Tenancy and Management: You control the property manager, the lease terms, and the tenant selection.

This is the key area where the self-reliant investor excels. With property, you have the ability to intimately know and control the asset in a way that is simply not possible with a publicly traded stock or investment such as via a KiwiSaver Scheme. This is where your individual effort translates directly into investment performance.

4. Leverage

As mentioned earlier, a distinct advantage of property is the willingness of banks to lend against it.

In contrast, obtaining 80 percent lending to fund the purchase of a business, a managed fund, KiwiSaver Scheme, or some other investment such as shares is tough to obtain – certainly for the average everyday New Zealander.

Focussing on the Controllables of Property Investment

Often, a significant part of the anxiety surrounding property investing comes from obsessing over factors outside the individual investor’s sphere of influence: the OCR, the global bond market, and continued political tinkering with tax laws.

Instead, a wise investor channels their energy into three core areas they can control, which dramatically impact the long-term success of the investment.

1. The Purchase Price (Margin of Safety)

The greatest mistake any investor can make is overpaying. An investment is defined by its purchase price. A property bought at a good price will be a sound investment even if the market declines.

Your focus must be on finding value. This involves painstaking research, patience, and a willingness to walk away from deals that do not meet your required rate of return. We are not talking about chasing desperate sellers; we are talking about calculating the intrinsic value of the asset based on rental yield, replacement cost, and the required capital expenditure. Buy well, and you mitigate most future risks.

2. Cost Management and Structuring

In a negative cash flow environment, every expense matters. The difference between a well-managed property and a poorly managed one can be thousands of dollars annually.

• Refining Lending: Ensure your financing is optimally structured for tax and cash flow efficiency. This often involves working with a financial adviser (including the team here at Become Wealth) to determine the best approach for interest-only versus principal and interest structures, depending on your overall financial position.
• Minimising Vacancy and Maintenance: Strategic capital expenditure on durable, low-maintenance materials can significantly reduce ongoing repair costs. Furthermore, selecting high-quality tenants and maintaining good landlord-tenant relations dramatically reduces vacancy periods.

3. Define the Property’s Purpose (The Exit Plan)

Before signing a single document, you must answer the most important question: Why are you buying this property? Is it for:

• Cash Flow: Aiming for high yield, perhaps with a townhouse or apartment?
• Capital Gain: Buying into a high-growth area with high negative gearing?
• Development: Planning to subdivide or add a dwelling?

Without a clear purpose, the property becomes an expensive, aimless asset. Knowing the exit plan (for instance: selling in 10 years, living in it in 20 years, or passing it to the next generation) determines every decision, from the lending structure to the level of renovation.

It is easy to get caught up in the current media cycle, where every headline suggests doom. Smart investing requires discipline, not drama. You cannot control the market's mood, but you can control the price you pay and the debt structure you employ.

Property as an Asset Class, Not a Financial Religion

The biggest conceptual hurdle for many investors is the idea of property as an exclusive destination, rather than a component of a larger journey.

For decades, property was seen as the only viable path to wealth creation in New Zealand. This was a tribal approach. There was once the idea that you were either a property investor or a share investor. Nowadays, that is financially illiterate and limiting.

Successful wealth accumulation is usually best achieved through diversification. Property can be a strong asset class, but it should be viewed alongside others.

Property Investment and Portfolio Integration

The property portion of your wealth can be large, highly leveraged, illiquid (hard to sell quickly), and concentrated (all your eggs are in one regional basket). This concentration risk is why typically your other investments should be intentionally liquid and globally diversified.

Your non-property investments would ideally give you exposure to global markets, technology, financials, healthcare, commodities, and other sectors with different risk and return profiles. This strategy acts as a financial shock absorber.

By taking a global, diversified approach, you are not betting against New Zealand property; you are simply ensuring your financial destiny is not solely dependent on the economic fortunes of one small nation which is susceptible to any number of risks, including natural disasters.

The Bottom Line: Property Investment Is Still a Good Investment, as One Part of An Overall Investment Portfolio

The days of easy property gains are over, but smart money is still being deployed. The current environment separates the emotional, speculative buyer from the disciplined, analytical investor.

It seems we have entered a new era. One where residential property investing needs to be assessed as just another part of an overall investment portfolio, rather than the sole component of wealth creation and wealth sustainment. Buying and retaining an investment property should be viewed in the same way as buying any other type of investment. That is, only performed as the result of careful analysis and only performed as part of a cohesive portfolio approach to achieving an overall aim or goals.

Property is not an easy, passive investment like a managed fund, but its sheer power of leverage, combined with its tangible nature, makes it a solid tool for the determined wealth accumulator.

Are you ready to stop gambling on sentiment and start building wealth with principle-led action?

If so, take ownership of your future financial freedom, schedule your complimentary wealth structuring assessment.