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Andrew Bruce: How do you start investing in this market – a cautionary note for first-time buyers

Andrew Bruce is the President of the Auckland Property Investors’ Association and is passionate about sharing his experience with fellow investors.

Property markets work in cycles, and currently, we are in the upper stages of this market cycle. When will it finish, nobody knows.

Related article: What is a ‘housing crisis’?

It seems you can’t open the paper or online media these days without an article talking about property prices. With this level of interest in the market
and the legitimate concerns about the unaffordability of housing, particularly in Auckland, there is little wonder enterprising entrepreneurs are creating
ways to assist people looking to gain a foothold in the market. The options I’ve seen recently have ranged from buying shares in a property through
to potential crowdfunding opportunities.

While the marketing of some of these companies may appear compelling, what we need to be aware of is the property market works in cycles. Currently, with
the associated media hype around property we could be forgiven for thinking that property is a one-way bet and that prices will never stagnate or go
down. It was only six years ago in the final quarter of 2010 that property prices decreased.  Before that, the Auckland market also took a hit
for the most of 2008.

From my experience, having now been through two property cycles, there tend to be repeated discernible patterns. At the start of a cycle, prices can stagnate
or decline (as in 2008 and late 2010). In 2012 property prices in Auckland started increasing. Immigration was slightly negative, but interest rates
were starting to drop.  Auckland at the time had an undersupply of houses.  Since then we have had the perfect storm for property owners/investors
of a persistent undersupply of houses, net migration above 69,000 (which is significantly above the 10-year average) and the lowest interest rates
on record. I have no doubt that these three factors in cohort extended the current property cycle.  Will the boom persist?  Of course not.
 At some point, the party will stop or at least slow down.  

Recently the Reserve Bank have brought in new rules restricting the amount of money that banks can lend to property investors and first home buyers. Along
with this, banks appear to be more selective about how much money they will lend altogether. There is also talk of more restrictive lending policies.

Please don’t assume from this blog post that I’m bearish on property and selling up, this is not the case at all. What I want to do is show property markets
goes through cycles and in the end the people that I know who have been very successful in the industry have been long term players.

Related article: 10 questions to ask before you buy a rental property

I can remember back in 1996 when I purchased our first property having only just arrived in Auckland. At the time, I couldn’t afford to buy the property
myself, so I went in half shares with a friend. A few years later this friend sold his share to my partner.  The best move we have ever made financially
was not to sell that property.  We still own it today.

It’s all very well for those of us who have investing for a long time but what about first home buyers or first-time investors? Referring to my earlier
point about looking at opportunities to gain access to the property market, some successful strategies I’ve seen implemented by first time buyers who
are Auckland Property Investors Association members include:

  1. Purchase a property in shares with somebody else (if you do this make sure you have a formal written agreement in place).
  2. Rent where you wish to live and then buy a rental property in another more affordable location.
  3. As John Key has been quoted in the media recently saying, look at an apartment for your first home.

Whatever choice you make, be mindful that property is a long-term game that is not without risks. Whenever you borrow money, you are entering into
a financial agreement that you have to honour as the repercussions can be very serious.

Related article: How to choose the right investment strategy for you?

We need to be aware that property markets move through cycles. Purchasing a property is likely to be one of the largest, if not the largest, investment
you will ever make.  It is imperative that you educate yourself before spending your hard earned money.

 

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