Property vs Shares in NZ: How Leverage Changes the Maths

Residential property has been one of the most common ways New Zealanders build wealth. Changes to lending and tax rules over the last few years have taken away some of the advantages investors used to enjoy, and many people now ask whether shares or managed funds are the simpler choice.

This guide compares property with other investments from the point of view of an Auckland investor. It focuses on the one feature that sets property apart, leverage, and is honest about the risks that come with it. It is general information, not financial advice.

Why property appeals

A few characteristics keep residential property popular:

• It is tangible. You can see it, insure it and understand what it is worth to the people who live in it.
• It produces income. Rent arrives weekly and tends to rise over time.
• It has a long record of capital growth. Not every year, but over decades.
• It can be bought with mostly borrowed money. That is leverage, and it is the real difference.

Rental demand

Demand for rental homes underpins the income side. Across its New Zealand network, Ray White receives between 6,500 and 9,000 tenancy applications every month, which turn into only 900 to 1,200 new tenancies, largely because there are not enough rental homes available.

Population growth adds to that over time. Without a big increase in the number of rental properties, that demand keeps pressure on rents. For an Auckland owner, demand varies a great deal by suburb and property type, so it pays to know your local market. Our Auckland rental market update shows median rents by suburb and number of bedrooms.

How leverage works

Leverage is the ability to borrow most of the cost of an asset and repay it over time. Banks will lend a large share of a residential property's value because they see it as stable security. They will not generally lend that way against shares, currencies or most other investments, which they see as too volatile.

Leverage means you benefit from any gain on the whole property, not just on the money you put in.

A worked example

Suppose you buy an investment property for $650,000 with a 20% deposit of $130,000, and borrow the remaining $520,000.

Five years later, you sell it for $910,000, a rise of 40% over the period.

• The property gained $260,000.
• Your deposit was $130,000.
• Before costs, the gain is twice your original deposit.

If you had invested $130,000 in an asset that rose 40% without borrowing, you would have gained $52,000.

That example leaves out a lot. Over five years you would also have paid interest, rates, insurance and maintenance, received rent, and paid selling costs. The real result could be better or worse depending on those numbers. It does, though, show why leverage is so powerful.

On the deposit itself: under the Reserve Bank's loan-to-value restrictions, most bank lending to investors needs a larger deposit than 20%. A 20% deposit may be possible through non-bank lenders, and some exemptions apply, for example for certain new builds. A mortgage adviser can tell you what is available for your situation.

Leverage works in both directions

The same arithmetic applies when prices fall. In the example above, a 10% fall in value would cost $65,000, which is half of the $130,000 deposit.

Prices do fall. REINZ figures show New Zealand house prices outside Auckland fell about 9% from their February 2022 peak to March 2024. A buyer at that peak with a small deposit saw much of their equity disappear on paper. Leverage rewards patience and punishes forced sales, so hold enough buffer to ride out a downturn without selling.

Long-term capital growth

Growth in property values is not guaranteed and cannot be predicted precisely. Over long periods, though, the trend has been upward.

REINZ figures quoted in Ray White's Investment Information Guide put average price growth over the 30 years to March 2024 at 6.85% a year for New Zealand excluding Auckland, and about 7% a year for Auckland. Those averages include the recent fall, which is the point: the long-term figure smooths over years that felt very different at the time.

You can follow current market figures through REINZ, which publishes monthly data on prices and rents.

Where shares have the advantage

A fair comparison has to include what property does not do well:

• Liquidity. Selling a property takes weeks or months and costs thousands. Shares can be sold in seconds.
• Diversification. One property is one asset in one location. A small share portfolio can spread across hundreds of companies.
• Entry cost. You can start with shares or a managed fund with a few hundred dollars.
• Effort. Shares need no tenants, maintenance, Healthy Homes compliance or insurance claims.
• Tax on sale. Selling a rental within two years can trigger the bright-line test.

Many investors hold both: property for leverage and income, and shares or funds for liquidity and diversification.

Making property work

If you choose property, the return depends on choices you control: the price you pay, the rent you achieve, how well the property is maintained and how quickly vacancies are filled.

• Our guide to choosing an investment property covers what makes a property easy to let.
• Our guide to measuring rental yield shows how to test the numbers.
• A free rental appraisal gives you a realistic rent for a property you own or are considering.

Before you borrow, talk to a mortgage adviser about structure and to an accountant about tax. Leverage is a powerful tool, and it works best when the lending is set up properly from the start.