Blog: The Landlord says...

Here’s a question, I’m not sure of the answer to: Why have house prices increased so much in recent years?

Is it because credit had been easy to get? Has it been because of investor behaviour?

Then there is this question: Has the market been fuelled by the tax system?

There has been a lot of hot air over these types of questions recently. What is clear is that the Reserve Bank has increased interest rates over recent years with the main purpose of slowing the housing market down. RBNZ governor Alan Bollard has made it clear that was one of the objectives of these increases.

He has also acknowledged monetary policy is not the most efficient tool for managing the markets, and the bank and officials have looked at other ideas, such as ring-fencing losses from property (so people can’t offset them against other income), and a mortgage levy (which is supported by economists such as the BNZ’s Tony Alexander).

The good news, from the perspective of investors, is that the government doesn’t look like doing any of these things. Reports were done and they went as far as the Office of the Prime Minister, however, as the NZ Property Investor magazine reports this month, they aren’t going anywhere.

Why? Not surprisingly there is little political support for changes. The only real support out there is from the Green Party, and that is for some sort of capital gains tax.

Not exactly a policy one would talk about, especially this close to an election.

While people still debate whether property investment has a tax advantage or not, I come down on the view that, yes, there are some advantages. The main one though is that it is one investment where people are prepared to leverage their capital. This is fine when the investment increases in value and many people have made lots of money this way.

What’s probably more pertinent now, is that previously other investments such as managed funds were at a significant disadvantage to assets like residential property. With changes to tax laws and the introduction of the portfolio investment entity (PIE) tax regime and things like KiwiSaver, the differences are less than they were before.

It’s hard to see the rules around property investment changing too much and while there may be some advantages, there are other aspects to the game which make it a hard business (eg: managing tenants).

The other thing to remember is that property investors aren’t just buying an asset, they are setting up a business and running a service providing accommodation to others. This, I think, makes it quite a different type of investment.

In previous Blogs I have commented on the Mexican stand-off between vendors and purchasers when it comes to house sales.

It’s clear both groups have had quite different ideas of what a property is worth and for a while never the twain shall meet. I’m wondering now whether there is a similar sort of stand-off between the so-called experts and the people on the ground.

The experts tend to be people like university boffins and economists who are really good at doing what I call the quantitative analysis; look at data and then make predictions and conclusions. No doubt there is a wide variance amongst these people on how much hands-on contact they have with people in the marketplace.

As a general comment these experts are the ones who get quoted in the press making, what looks like bearish predictions, that the housing market will fall by massive amounts. Naturally they get the headlines and their thoughts become common wisdom.

On the other side are the people who get down and dirty in the property market each day. These are the investors, the real estate agents, property finders and the like. It seems to me, anecdotally, that this group has a contrary view to the experts.

Sure some of the comments, particularly from real estate interests, are overly optimistic.
I’m starting to come to the view somewhere in the middle of this and sense that maybe the housing market has taken the most of its beating and will now stay “flattish” for a while.

What’s making me a little more positive than the experts? A couple of pieces of information released, such as the ASB Housing Confidence survey and the REINZ numbers help. But also some work which we have done with Landlords.co.nz asking property investors what they think has been useful in forming this opinion. Details of this work will be released next week, but it is showing that there is starting to be more interest, if not activity, from people wanting to buy rental properties.

While one commentator has been brave and suggested that the market has turned, I wouldn’t go quite that far. Rather the house price fall has moderated.

Time will tell whether the experts or those on the ground have got it right.

This week has been a week of conflicting statistics on what is happening in the residential property market. QV reported that house prices had fallen for the first time in seven years, while REINZ, as it is wont to do, painted a much more positive picture later in the week.

While people have been quick to jump on this hint of rebound, BNZ said this week that the latest numbers show we’re merely pulling back from an ugly brink, not facing the end of the downward slope.

Bank analyst Tony Alexander says it would be wrong to believe there’s anything remotely smelling like an upturn around the corner.

However, I did see a report this week from ANZ which put the market into a useful perspective. It said the property market is going through a familiar cycle: six years of growth, followed by a year of stabilising prices and two to four years of “flattening” where rising wages push close the affordability gap.

In what seems like typical economist-speak these days (it seems they all want to show the world they have personalities and humour – or they all have good copy writers): “The big picture is that we’ve eaten like an elephant for the past five years. Now we’re going through the rebalancing phase where those sectors which have done well since 2003 will find it tough.”

This bank’s prediction is that property prices will drop 10 – 20%, followed by an upward correction and slow improvement with a return of real strength in the five to 10 year timeframe.

“There’s still a lot of cash around – investors and speculators who pulled out of the market in 2006 and are sitting back smoking a cigar just waiting for the right time to re-enter the market.”

My discussions with investors show that many are actually buying at the moment already.
But to help you make up your mind on what is happening you can visit the statistics sections of Landlords.co.nz where we have, this week, uploaded the latest house prices data and rent data.

One stat, though, which experts agree on is mortgage rates. Good Returns’ survey of economists  this week shows they are unanimous (for once). All agree that the Reserve Bank will cut the official cash rate next month. While home loan rates have been static this week, expect them to fall some more.

The housing market tends to go into a boom and bust cycle. While it’s looking a bit sad at the moment, expect it to come back again. If you believe the Reserve Bank governor then it’s all the fault of politicians.

Reserve Bank governor Alan Bollard did a lengthy (18 mins) interview on radio this week where he discussed a number of things including the state of the housing market and his ability to influence it.

He maintains there are still fundamental distortions in the economy which favour investment in housing and there is little he can do about it.

Commentators often point to monetary policy as being the tool the bank can use to influence the market. Bollard made the point that he has been pushing up interest rates to get the market to come off. It has done that with a “thump” he says.

However he also points out that monetary policy is not, and I love this, “perfect technology”.

It appears he is a tad frustrated that politicians haven’t done anything to stop the Kiwi love affair with property.

His frustration is that the bank has proposed ideas such as mortgage levies and ringfencing, but he says nothing proposed has “been taken up in a serious policy way”.

Reading between the lines it seems that Bollard is saying there will be another housing boom because politicians are too scared to change the rules.

I’d be interested in hearing readers’ thoughts on whether the politicians should do anything, or whether they think property investment will be much of an election issue. Leave a comment below.

The August issue of the NZ Property Investor magazine takes an in-depth look at what Kiwi investors can do to ride this current storm out. I say co-incidentally, but in reality the aim of the magazine is to help investors manage their properties successfully.

What surprised me a little with this article is how many different things investors can do to ride out the storm.

Sure, one is to sell up and maybe take a loss, therefore limiting future losses. However, I reckon there is a good argument for trying to hold on. Over the years of publishing the NZ Property Investor I have heard plenty of stories where people have toughed it out through difficult markets and been thankful they have done so.

We know markets go in cycles and once we get through this part of the cycle, things will be on the up again.

When that will happen I don’t know – and it would be foolish to predict. As readers of my Blogs will know I am cautiously optimistic for the medium term, which is very different to the heavily bearish comments often published in the media.

Another reason to be weary of selling up is simply the supply and demand equation. Figures I have seen show that there is an increasing number of rental properties being put on the market for sale. Thinking back to the basic rules about supply and demand, I would suggest that selling into this market could end up with a pretty poor result. (If you are on the other side of the deal and buying, it’s a totally different story.)

If you want to find out some ideas on how to survive this downturn then make sure you pick up the latest copy of the NZ Property Investor magazine.