Blog: The Landlord says...

Latest stats confirm that the housing market hasn’t gone anywhere in the lead-up to this year’s Budget.

Now that event is behind us there is plenty of discussion about where to now for house prices.

Certainly the bears have come out of the woods again (even though it is winter) making all sorts of negative predictions ranging from a 5%  fall in house prices right through to 15%.

I’m not going to make any prediction like that – partly because it will mean I’m likely to have to walk the length of the country or apologise for getting it wrong.

Rather it’s worth looking at the factors which drive the market.

The traditional ones that seem to have the most impact are: immigration, interest rates and construction.

House prices are closely correlated to immigration. At the moment it seems immigration is positive and it will remain so for the foreseeable future. Mark this one up as a plus for house prices rising.

Interest rates are on the move. We have hit the bottom of the cycle and the Reserve Bank started its tightening last week. Although banks are yet to move home loan rates it will happen. This is a negative for the housing market.

If you want a positive it is this – home loan rates are not expected to rise as high in this cycle as in previous ones.

Factor three is new construction. Numbers have been down for some time, but there are signs new building is increasing. However not at the rates previously seen.

I hear there aren’t as many builders around now and many who ran their own businesses during the boom time are now working for other builders on wages. This factor is possibly a mild positive for house prices.

Besides the traditional drivers there is one “unique” one at the moment and that is the changes Finance Minister Bill English announced in this year’s Budget.

The changes around deprecation and LAQCs will make property investors evaluate their holdings and in some cases sell.

The majority, who are buy and hold investors, probably won’t be too badly affected and will hold on. However those that are negatively geared and using LAQCs will have to make some decisions.

Many of these properties which have little chance of turning into cash-generating investments in the near future will hit the market.

How many fall into that category are unknown. Some suggest as much as half of the investment property stock could be in this group.

These properties will hit the market but not all at once. They are not likely to be bought by other investors, rather they will become owner occupied. This may be a window of opportunity for first home buyers to get into the market.

The other thing to consider is that many of these properties are in the lower price bands (ie. less than $300,000). It is this part of the market which will suffer. Changes from the Budget are less likely to impact the upper parts of the market.

When people talk about where house prices are heading they should look more closely at different parts of the market rather than talk about it as one big market heading in one direction.

One of the questions at the moment is whether property investors are selling up post the Budget or continuing on?

Reading the headlines there are conflicting views. Our survey at Landlords.co.nz shows that very few investors are planning to quit the market due to the removal of the ability to claim depreciation and changes to LAQC rules.

However, others suggest that there is a sell off happening.

Of course I will be a little subjective on this and say that our survey sums up the mood of the market pretty accurately.

We are finding little evidence of a mass sell off and looking at real estate listings it doesn’t appear landlords running for the hills. Indeed if you look at REINZ’s numbers today it is becoming more of a buyers’ market and investors will be in on the action.

It was suggested that maybe the survey is a little skewed as readers of the NZ Property Investor Magazine and Landlords.co.nz are, let’s say, a little more professional and do some more research on their investments than others. (I couldn’t possibly comment).

Then there was this story yesterday that residential property investors in Canterbury are quitting “en masse”.

A sale of 20 properties in a metropolitan city doesn’t seem like en masse. On closer inspection the story is actually good news.

Investors are selling for a variety of reasons. Some of them are getting rid of underperforming assets. Others are highly leveraged and have investments don’t stack up. Others have had bad experiences and poor advice.

What is good about this? The fact that investors are getting rid of non-performing assets is good. Why continue to hold onto a dud? Maybe these people will buy more property? Yes, the Budget will force out some people who probably shouldn’t have invested in property in the first place.

As for whether there will be a wholesale exodus from investment property I say no. Many people like property as it is an investment they can touch and feel and have control over. In fact it is one asset class where the investor can actually add value.

Many investors have no desire to put money into shares, bonds and finance companies – partly because they do not trust the people who run them and they can’t “see” what happens to their money.

There’s a saying that taxi drivers are a good barometer of what is happening in the world and that they have a good idea of what people are talking about. Why do I mention this?

Well on Wednesday I took a taxi out to Auckland airport to catch a plane home and the driver asked, as they do: “What do you do?”

Since this chain of cabs had magazines for their customers I mentioned the NZ Property Investor Magazine.

“I’ve read that,” he said. It turned out this chap, who I guess was getting on towards retirement age, owned four properties. Two in Auckland and two in Australia.

From here to the airport we had a good yarn about investing.

In many ways my driver was probably typical of a lot of investors. Started out not knowing too much; learnt along the way and was doing it to prepare for retirement.

Just an ordinary bloke who had the wherewithal to get off his butt and look after himself.

Of course our discussion turned to the Budget and what it means for him and his wife, as property investors. The answer was that he wasn’t too worried. Clearly not impressed with Finance Minister Bill English, but the changes won’t derail his property investing activities.

The story is interesting as this driver, as I said, is probably pretty typical of many investors. They are not speculators or people trying to rort the system as many suggest.

Are these people, the ones Rob Muldoon would have called Kiwi Battlers really the people the government should be picking on?

Hell no.

These politicians spend plenty of time in taxis (at our expense). Maybe they should engage with their people and see some reality.