Investing in property has long been a favoured strategy of many New Zealanders, attracted by decades of strong price growth, low volatility and the ability to fund part of the investment with debt. Now, with market dynamics having shifted and prices steadying, a more advisable approach could be to look for alternative investments to grow wealth. 

“Property prices in New Zealand have risen by a factor of eight over the last 30 years and are already among the highest in the world relative to income,” says Aaron Ibbotson, senior analyst at investment management firm Forsyth Barr.

“For housing to provide similar returns going forward as it has in the past, it would mean the house prices to income ratio would have to rise to 20x over the next 30 years. The reality is that this is a very unrealistic expectation.

“Mortgage rates went from 12% in the early ‘90s to 2.5% in 2021. As a result, an average family could take on more debt in relation to income. But mortgage rates are now back to around 5%, which is probably about normal.”

While attitudes are starting to shift, convincing people to look at alternative investment strategies is sometimes harder than you’d think, even when the numbers are black and white.

“Investing in shares has typically returned around 7–9% per year over the long term, for example, property today is more likely to achieve less than half,” says Ibbotson. 

“Yet, many people prefer to invest in property – they feel safe because they own it, have a title and can touch it.”

Another perceived advantage is the ability to borrow a significant amount of money to fund your housing investment. But while borrowing allows for larger investments, it also increases the risk. 

“If property prices fall, as they have in Auckland over the last four or five years, all your equity could be wiped out. People may not immediately appreciate the extent of their losses because the value isn’t updated daily or seen in a bank account,” says Ibbotson. 

Many property investors who entered the market at the wrong time and experienced significant losses didn’t fully appreciate the risk they were taking through so much leverage, he adds.

Over the long term, investing in the equity market has proven a successful way to accumulate wealth.

Ibbotson says New Zealanders are becoming more comfortable investing in the share market for their retirement, in part because of a growing understanding of the market.

“Initiatives like KiwiSaver have played a crucial role in familiarising people with the equity market, encouraging them to invest in shares as a method for building their retirement funds,” says Ibbotson. 

“I think attitudes are slowly shifting, helped by the first meaningful property price correction in decades – it has been quite healthy in adjusting people’s views on property investing.”