Blog: The Landlord says...

Whenever there is a downturn in any market, whether it is shares or property, there are always one or two people who try to make a name for themselves by predicting all sorts of outlandish doom and gloom.

The latest is one crowd who is saying the housing bubble has been so big that it will take years and years to recover. Indeed, the suggestion is that prices will not rise back above their November 2007 peaks until 2018 at the earliest. The size of the bubble, they say, is so large it may take until 2028 before prices recover and people who invested in 2006 and early 2007 start seeing capital gains again.

While I am not an economist, claims like these seem ludicrous and designed more to create publicity than provide any meaningful insight into the market.

There are a hoard of well-qualified and experienced economists out there making their own predictions, and none I have seen bare any resemblance to the latest, unqualified, soothsayer.

What I have seen and heard is that there are lots of variables that drive the property market, and predicting some of them is very difficult.

For instance, immigration is a key driver of the market. While numbers are down at present, the government can quite easily turn on the tap that will provide a fillip to the market.

There are lots of other factors like the government making houses more affordable, buyers who have been priced out of the market sitting on the sideline and strong employment levels, which arguably provide a good backstop to the market.

There is no doubt the market is falling from its high growth rates of recent years, but that doesn’t mean total darkness is descending on the housing sector.

I hear an increasing number of stories about landlords wanting to sell up and do something else with their money. That is normal behaviour. However, I am also hearing stories, and seeing people get quite excited, about the buying opportunities which are starting to emerge.

One thing which has intrigued me in recent months is how government MP Clayton Cosgrove is so anti real estate agents.

He seems to take whatever opportunity he can, even when he is overseas, to get stuck into real estate agents, labeling them all “land sharks” and implying they are just rip-off merchants.

Sure there are some dodgy ones, some questionable practices and some issues around the way agents are policed, but….are they all dodgy?

Clayton’s language makes great sound bites for telly and radio, but isn’t warranted.
Last week, after select committee hearings on the new real estate agent legislation, he was up to his same old tricks. However, United Future leader, Peter Dunne, (who calls himself Mr Common Sense) played a card not many expected.

In a release which has probably gone unreported, he says the United Future party “will withdraw its support for the Real Estate Agents Bill…unless there are major changes to the legislation and the sponsoring minister, Clayton Cosgrove, adopts a more consultative attitude.”

“It was clear from today’s Morning Report interview that Mr Cosgrove is maintaining a belligerent, bully boy attitude towards the Real Estate Institute, and his claims to be consulting with the Institute are undermined by his inability even to get the name of the Institute’s President right,” he said.

There is no doubt that the real estate industry needs better processes to clear out the sharks and the dodgy operators, but that won’t be achieved by bellowing at everyone and listening to no-one.

If ever there was a group of “advisers” who needed regulating then it’s the ones who sell all this Blue Chip stuff, or what we call packaged property investments.

NZ Property Investor Magazine has been examining the collapse of Blue Chip. What is amazing is that “investors” bought nearly half a billion dollars worth of property through Blue Chip in a year.

If you think about all the other crowds who are selling this stuff then the sector is a significant player in New Zealand’s investment markets.

Although people are being sold this stuff as an investment and “for their retirement” it falls outside of the securities laws.

This is absolutely ridiculous.

New disclosure laws that came in on February 29 don’t have any impact as the people selling this stuff aren’t investment advisers.

According to the Securities Commission an “investment adviser is a person who gives investment advice about securities.”

All this packaged property stuff isn’t a “security”.

My discussions with the Securities Commission indicate they don’t have any jurisdiction over this, rather it falls to the Commerce Commission under the ambit of Fair Trading Laws.

I can’t see this being particularly useful.

The next bit of adviser regulation is the bill currently before Parliament that “licenses” advisers and makes them all join an Approved Professional Body, who then regulates them. Again, it appears that these rules won’t capture people selling – I wouldn’t call it advising – on packaged property.

Commerce Minister Lianne Dalziel says she has an open mind to changes to the rules, but it is also understood any changes have to be careful and not capture ordinary real estate transactions.

That’s fair enough, but it can’t be to difficult to develop some rules which capture sellers of packaged property.

A couple of months ago I commented that getting finance for property deals was getting harder and harder to obtain and that lending criteria was tightening.

Recent conversations with a number of non-bank lenders suggest that this situation may change quite quickly.

I have come across a number of organisations who have money to lend are keen to find new business – this can only be good news, especially when you look at the latest real estate stats.

In the past week there have been releases from Barfoot and Thompon, QV and REINZ which all paint a gloomy picture of what is happening in the market.

The key messages being that vendor price expectations are too high, housing inflation has dropped from over 10% to being close to static, and the number of days to sell is increasing.

While it’s easy to be gloomy on what is happening, there are positives out there too. BNZ chief economist Tony Alexander said last week that the media are taking a too pessimistic view of the market and not reporting the positives. I tend to agree with him here.

Amongst the positives he lists are strong employment, buyers waiting on the sidelines for prices to become more affordable and rising rents.

Another new positive which, if it eventuates, will help the market is the prospect of interest rate cuts.

While it would be foolish to predict when they may happen there is an increasing likelihood that recent data releases may see this happening sooner than what we thought just a month or so ago.

This week much of the attention is on the Reserve Bank and what it does with interest rates. A cut is out of the question and it seems a rise, although suggested by some, is a long shot too.

A bigger question is when will the central bank start cutting? Until recently the view was very late this year or early next year. However, little signals are appearing which suggests there is a slim chance cuts could come earlier.

I suspect when cuts come they could be bigger and deeper than many predict. No doubt the government is hoping for earlier rather than later with a general election due around November.

On that note it was interesting to see the Prime Minister’s comments that the government is not expecting a property crash (nor does it want one!)
She is spot on here.

As for the market itself. Well you have ASB chief economist Nick Tuffley advising buyers to be patient – prices are likely to tumble in the next 12 months, he says.

Yet discussions I have had with real estate agents suggest that vendors have over-inflated expectations on price and there are already a bunch of bargain hunters out there.

Vendors wanting to sell will have to drop their prices making this a good buying period for investors.