Baby Boomers face property reality check as values drop and tax risks rise – Darcy Ungaro

The old premise that property would double every seven to 10 years no longer holds. So, is “buy, borrow, die” finally dead?

The past five years have been tough for anyone banking on higher house prices. Immigration slowed, interest rates stayed higher for longer, we faced a tougher economy, and some regions moved from a housing shortage to oversupply.

For property owners who bought expecting consistent performance, it’s been a painful period. Some have already sold, facing negative cashflow and unwilling or unable to keep topping up their rental’s mortgage. Others are keeping a long-term view and can afford to hold. Still more are quietly looking for the exit.

So, is this evidence that property no longer works, or are we just in a different stage of a normal property cycle? Property markets, like share markets, go through seasons of booms and busts – it’s a cycle.

The biggest bust cycle happened after the GFC (Global Financial Crisis), and many can still remember it. From 2009 to about 2011, it felt as though subdued demand for housing would be the new normal.

Yet from 2012 onwards, first-home buyers returned, then investors showed up, and finally, the upgraders kicked in. It might feel as though “this time it’s different”, but it could just be the darkest days before the dawn.

Let’s look at Australia. Strong immigration and a resilient economy there have seen its property market move from strength to strength, but three things are now changing fast. Interest rates have gone up, immigration is facing growing social pushback, and tax rules are being tightened.

The property market there is almost certainly entering a more difficult phase, one that New Zealand has already experienced. On a relative basis, our lower dollar, lower taxes and lower barriers to entry make Kiwi property look quite attractive.

Demographics play a massive role, too. The average Baby Boomer is 71. About that age, time starts to feel more finite, and that can be a catalyst for releasing wealth now to the next generation through the sale of the family home.

Some feel an extra sense of urgency as they look at the possibility of New Zealand voting in a Government more like Australia’s, keen to tax the wealthy harder.

The “buy, borrow, die” strategy depends on buyers being able to use debt against property to spend tax-free. It wouldn’t take much to label this a “loophole”. And what happens if the next generation doesn’t have the borrowing capacity to snap up all the property that hits the market? Okay, Boomer, we may have a problem …

The New Zealand economy has been built on us all trading properties with one another, creating a net rise of new lending.

When banks create new money for people to buy more expensive houses, it masks New Zealand’s productivity problems. So, if the lending engine slows permanently, the effects would be felt far beyond property owners.

This is why politicians and the Reserve Bank will always work to support conditions that allow credit creation and property activity to recover over the long term. They have to.

Yes, owning rental properties as a strategy is under real pressure from higher interest rates, weaker immigration and a struggling economy. The political risk of “have-nots” forcing a rebalancing of wealth taxes is higher than it was a decade ago, but it’s not that simple.

Property is also showing signs of moving out of the painful phase of the cycle and towards recovery. Australian Property Investor magazine reported in March that property investors there were flooding back into the market, looking for bargains in the sub-A$700,000 range.

Where Australia is in the cycle and the simple fact that the financial system still needs property lending to function both point to the same conclusion: the old playbook may be damaged, but it’s not finished.

The real test will be whether the next wave of buyers can still make the numbers work.

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