Questionable Decisions 

Is now the best time to buy?

This burning question makes many people wish for a magical eight ball that could predict the future. Unfortunately, just as life is sometimes a gamble, so too is property investment. However, there are certain factors that can help guide your decision and give you a sense of assurance.

Our last article looked at a recent study on global home prices. One of the factors helping to determine value was called the price-to-rent ratio. This ratio allows property investors to Decision-Making.jpgjudge whether market conditions favour the buyer. "Real estate values are proportional to rent. The rule of thumb is that homes should typically cost about 15 times their annual rent," noted one North American market researcher. Thus, for it to be a good time to buy, the benefit of purchasing should outweigh the cost.

How do you figure that out? Well, start by calculating the annual cost of renting. For example, according to property management company Crockers, current rent for a three-bedroom home in outer Auckland is $2,000. Yearly rent would therefore be $24,000. In a normal market, this would give a home price of $24,000 x 15 = $360,000. However, in New Zealand's present bubble, buyers are more likely to pay somewhere around the $550,000 mark. Translated, this shows that anyone choosing to purchase Kiwi property at the moment is going to pay a price-to-rent ratio of at least $550,000 / ($2,000 x 12) = 22.9.

This also makes it clear to prospective property investors that the market itself is sitting in a bubble, and the difficulty with a bubble is not knowing if or when it will burst. However, as evidenced in many global markets over the recent years, the bigger it gets and the higher it goes, the more likely it is to come crashing down, greatly impacting your chance at a strong return on investment.

This is not to say buying property with a number above 20 is wrong per se, but, according to web real estate community, only do it when there is expected to be long-term occupancy (i.e. 15+ years). Otherwise, the lower the price-to-rent ratio the better.

It is unlikely there are many, if any, places in New Zealand that have a ratio under 15 at present. America on the other hand, has metropolitans as low as 3.7. In Trulia's most recent rent-versus-buy study, two of Estero Property’s markets even placed in the top ten locations to purchase; Cleveland and Memphis.

If you're trying to decide whether now is the time for overseas property investment, the answer is yes. For more information, contact us today.



Consider making your investment now. Talk to us at Estero today and find out how we can help