Blog: The Landlord says...

Just after nine o’clock on Monday fixed-price real estate agency The Joneses announced it wasn’t proceeding with its sharemarket list. After lunch it was gone. In voluntary liquidation.

Talk about pulling the plug and going down the gurgler.

The Joneses listing was curious in that earlier director Chris Taylor had said the listing wasn’t about raising capital, rather it was about profile and transparency.

He said last month: “We are not the same as your typical IPO [Initial Public Offering]. This is not an IPO. We are not aiming at raising capital from the public.”

Guess in the end though that wasn’t quite the case. Seems as though the company needed the capital and it wasn’t forthcoming.

It’s easy to blame the volatility in the capital markets, but maybe the truth is more that investors didn’t buy the concept or the numbers.

The company made big noises about revolutionising the real estate industry and getting a piece of the $1.3 billion market.

However, at the end of the day their listing was probably ill-timed. Real estate is all about volume and pushing through deals.

In the current market the number of deals is declining quickly, and the big players are out to capture as much of the business as they can and protect their patches.

With that background it is difficult for a new, low cost, under-capitalised model to compete.

The Joneses demise is a loss for vendors and purchasers. They brought some competition to the real estate market, and helped reduce costs. We can all argue that is a good thing.

A question I have been pondering is whether schemes like what Blue Chip offered investors have a place in the market.

No doubt many of you will say no way. They are just big rip off schemes where the promoters clip the ticket the whole way through.

However, I suspect there is a place for them, as long as they are well-run. But there’s the rub. How do you tell if it is well run? And what are the rules around these things?

On the latter it would seem there are very few rules; certainly less than around other sorts of investments offered to the public. That in itself is a concern and something the government should be looking at in terms of its current reform of the financial adviser market.

With regards to the former question the answer isn’t particularly clear right now, other than to say the Blue Chip clearly wasn’t well run. I would be interested in your thoughts on this. (Email me here).

Stepping back a little it appears that there are some similarities between Blue Chip and finance companies which have failed.

One of the issues with finance companies is that in many cases businesses relied on new money coming in to help fund investments when they matured. When the inflow dries up a cashflow issue develops.

It seems with Blue Chip there may have been a similar situation.

Secondly we have seen “contagion” in the finance company sector where bad news with one company impacts on investor confidence in the sector and other companies. Blue Chip maybe to this sector what Bridgecorp was to finance companies?

The government made two big housing announcements today – one about housing affordability and the other about a shared-equity scheme for wannabe home-owners.

Clearly the ideas are aimed at winning votes as they are aimed at helping Kiwi’s achieve that great New Zealand dream of becoming homeowners.

However, the ideas are full of interesting ideas and irony.

Firstly, it’s very curious that the central bank is trying to slow the housing market down, yet the government is doing things which most people seem to see as being stimulatory to the market.

One point I struggle with is what is this affordability issue about? As mentioned before it is about how much people earn, what mortgage rates are and house prices.

Whichever way you look at this issue it is absolutely clear that incomes aren’t sufficient to pay the mortgage on a house with prices where they are.

Yet we keep hearing the answer is things like making more land available, or changing things like the Resource Management and Building Acts.

While they may have some impact, they are not the crux of the matter.

So the PM’s announcement that more land will be made available seems like a sop to the very vocal lobbyists.

At least property investors can see some benefit in the idea.

The other initiative from the government is a shared equity scheme, where the state helps people into houses by sharing the equity.

This idea has lots of merit, as well as a touch of irony because the government will now be far more involved as a property investor.

As an investor, no doubt it wants to see house prices rising, just like other landlords!

Two items of data in the past few days show the housing market is slowing quite rapidly.
Today we have the QV data which shows slowing in house price growth continues. What’s attention grabbing is that QV are now saying we could see flat or negative house price inflation in some parts of the country this year.

On Friday Auckland’s biggest real estate firm reported its January figures and they show house sales had crashed 41.5% in the 12 month period.

Meanwhile average prices were down 7.5% on a month-on-month basis, but were still up 8.9% over the year.

Added into this equation is that there is a rising stock of unsold houses. This suggests low migration and high mortgage rates are biting.

We expect the Real Estate Institute will put out its figures this week. We will be watching what spin they include to try and tell everyone the market is still chugging along just fine.

The evidence is firmly mounting showing there is a slowdown well underway.

Anyone looking for finance for a property purchase at the moment may well be having trouble finding money from lenders.

We are hearing a bunch of interesting stories at the moment. The first is that following the global “credit crunch” banks are becoming far more conservative about what sort of deals they will lend money on.

Macquarie put out a research paper on this subject. While the paper was Australian-based the same is happening in New Zealand (after all most of our big banks are owned by the Okkers).

Secondly we have heard stories where brokers have taken good deals to banks, expecting to get them accepted, but the opposite has happened. They said no. This was particularly bad around Christmas, and, according to this broker, lenders have mellowed slightly.

This suggests property investments that are negatively geared or a little speculative in nature may not get a loan.

Added to this situation is increased volatility in world markets that is making it hard for lenders to manage their books. Interest rate comparison site, www.goodreturns.co.nz, has reported that Westpac has withdrawn its two and three year capped rate products from the market and that Wizard has withdrawn five year terms. Also a number of non-bank lenders have pulled longer maturity lo-doc loans.

This is happening at a time when some people like the longer term rates as they are the lowest in the market (albeit at historically high levels).

If you have had trouble getting finance please drop us a line or leave a comment below.

I wondered if Tony Alexander had been reading the NZ Property Investor Magazine after I read this latest economic note.

In there Tony, who is BNZ’s chief economist, wrote a piece about how coastal property prices may be directly related to the fortunes of the dairy industry.

February’s issue of NZ Property Investor has a piece saying just the same thing. What’s happening at the moment is that diary farmers have so much money they are looking for places to park it. One option is to buy a coastal property as an investment and uses the losses for tax purposes.

The drawback now though, is that the drought is negating the impact of higher milk solid payouts and therefore farmers won’t be that much richer after this season.