Blog: The Landlord says...

The little theme of this week’s newsletter is about looking ahead at the property market and what is happening. Pondering the market is something we often do and it is worth addressing again as there is so much uncertainty and change.

While the news has been pretty gloomy and the housing market appears to be dead, I wonder if it is as bad as some make out?

As readers know we try to be a bit more balanced in our view on the market and look for positives as well as negatives.

One thing that strikes me is winter is always a moribound season for house sales; this year is no different.

Some interesting figures from Alistair Helm yesterday show that the trend quite well. Often when we enter the spring period the market lifts quite swiftly.

On a month by month basis the last set of numbers looked sad. However its worth looking at them with a longer term view.

Helm’s reports says sales fell by 2.9% from June to July, and a total of 4,411 property sales were recorded by licensed real estate agents in July.

Back in July 2009 the total sales was 6,014. On a moving annual basis sales are up 2.8% with 63,701 sales in the past 12 months as compares to 61,952 in the prior 12 months.

The stratified price fell from $363,925 in June to $359,525 in July. The June price is up just 1.8% as compared to July 2009.

Sale prices across the country has remained fairly stable over the past nine month with some small ups and downs. The current price is still 3.1% below the peak price in the market back in November 2007.

Looking ahead there are a couple of warming signs. One is my discussions with real estate agents. No-one shies away from the fact June and July were awful periods. However, word getting back to us is that August has been far better with more buying activity and more stock coming onto the market.

While we put together the September issue of the NZ Property investor Magazine we also came across comments that were far more supportive of the market than one would believe if they listened to only some commentors and media.

Everyone agrees it is a buyers’ market and those in the position are doing just that. Again comment which came through was that it’s better now as “there has been a clean-out of timewasters, dreamers and fly-by-nighters.”

The other slightly positive factor was last week’s immigration numbers. (Read about them here).

And if I had to add another it would interest rates. The emerging view is that the next official cash rate will come later rather than sooner, and overall the increases will be less than what we have seen in other cycles.

So the next set of numbers will give us a good feel for whether these positive signs turn into activity.

I started by talking about looking ahead and finding out what is happening in the market. You can help do that too. The annual ANZ/NZPIF survey is on. You can take part here (and go in the draw to win a prize).

It’s often said that New Zealanders have a real love for property, but I wonder how far it will stretch?

We know the government has been trying to break up this long term love affair, but with little success. Judging by two surveys, one run by Landlords.co.nz and the other by QV, investors are going to remain property investors.

However this week we have had more evidence that the local housing market is pretty flat and there are low sales volumes. In a word it’s lethargic.

Investors have been used to active markets in recent years and could well be interested in something more exciting than the local market.

It seems quite a few New Zealanders have bought property in Australia but I wonder how attractive the “lucky country” is currently.

I did read a piece which said the Australia has one of the most expensive house markets in the world.

One of the “new” things that I’m hearing about in the market is a number of companies wanting to promote the idea that Kiwis buy residential property in the United States.

Yes this sounds a little outlandish at face value, but the numbers being bandied around will look attractive.

I assume a lot of these properties are ones where the lenders have foreclosed on them and wanting out.

I have come across this idea before. One of the first times was when I profiled a quite remarkable Rotorua-based property investor Tracey Hintz. She owned lots of property in New Zealand and employed many different strategies.

However she also bought some property in the United States and made some good money.

There is a warning with this story. It’s not all plain sailing and the US housing market is remarkably different to ours and how it operates. No doubt this is more we will hear about soon.

I’m interested to see how many investors would consider investing in the US? Once I have some examples of the numbers being talked about I’ll post them here.

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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.

The talk about changes to the tax system has died down a little and now reality is starting to sink in.

Most commentary has been around the fact that the proposed changes are designed to whack residential property investors. The anti-property brigade has been in strong voice once again pushing the spurious line all property investors are fat cats rorting the system; thankfully investors have been putting up a pretty good defence.

While things are still murky around what the government will do and how far it is prepared to go to alienate a good chunk of its support base, there is acceptance change will happen.

As I have digested the changes and talked to other investors it has become clear this is big.

Indeed I would argue the changes are once-in-a-generation stuff. The rules around residential property investing will totally change. The business will be totally different and investors will have to change their approach.

I have heard that many investors have got the heebie geebies and are already looking to exit and have put properties on the market.

I’m not sure that is necessary. The changes don’t necessarily mean that investing in residential property will no longer be profitable. It means you will need to think about how you approach it.

One change I suggest will happen is that some of these companies who find properties for investors and sell them to them on the basis of depreciation gains and tax benefits will struggle to survive.

Also the changes are likely to drive up rents over the medium term. While that is a plus for investors, tenants won’t be happy with the government.

The March issue of NZ Property Investor will be giving you lots more information about what these changes mean and what you can do adjust.

I’d love to hear your thoughts on the changes and how you plan to adjust to them. You can comment below or send an email to thelandlord@landlords.co.nz

PS: I was in Auckland this week and attended one of Kieran Trass’s breakfast presentations. He has plenty of views on the changes and also some ideas on what to do. If you are in Auckland and want to attend one of these Wednesday sessions click here.

Mortgagee sales are likely to hit the headlines again when the latest stats come out showing a big increase in the number of properties sold this way.

We’ve been looking at this issue for an article in the next edition of the NZ Property Investor magazine. Mortgagee sales are interesting, as most people think that banks are unhelpful and will move to a sale quickly.

It reinforces that notion banks are bastards.

Indeed the opposite appears to be true. Around 30-40% of mortgagee sales are conducted by banks, yet they are responsible for more than 80% of all home loans written.

That suggest second tier lenders, particularly finance companies and mortgage funds, are the ones fuelling this market along.

The latest stats, yet to be released by Terralink, will show that the number of mortgagee sales have increased yet again from just over 200 in March to more than 250 in April. No doubt this will be trumpeted as some additional sign of doom and gloom for the property market.

However, if this market is being driven by the second tier lenders rather than that banks, then it wouldn’t be out-of-line to assume that they are well through the process of liquidating their loan books and the number will start falling again.

So for investors looking to nab a bargain (according to QV the sale price of a property is on average 16% below market value), then they better get in quick.

The other thing which came up when researching this area was that banks actually want to avoid mortgagee sales.

As one said: “It is in the bank and customer’s best interests to not force the sale of a property, due to increased costs and the risk of the end sale price being lower than what could have been reached through a normal sale.”

A little while ago I commented on the coverage of mortgagee sales in New Zealand. This week there was a useful bit of information put out which was, arguably, the more definitive research with real numbers.

The stories written in the past had been reasonably sensationalist and not particularly scientific. The new survey, from Terralink, is based on registered mortgagee sales.

What is interesting is that the percentage and actual numbers of properties sold by this method is pretty small; 191 properties nationwide in January. But growing.

We shouldn’t be surprised that the number is growing.

The points which are useful to note are that many of the sales are being done by second tier finance crowds, not the mainstream banks. I’m not sure many people knew finance companies were involved in this market.

Secondly there are always winners and losers in these types of transactions. The winners will be the buyers as it seems often the vendor will let the properties go at whatever price they can get.

For investors mortgagee sales are useful to look at, but as we reported in NZ Property Investor Magazine, there can be fish hooks in these sorts of transactions and buyers need to be aware of what is happening.

The other trend we may see is a spike in mortgagee sales while finance companies cash up their loans, and then the mortgagee market will be more focussed around what banks are doing. The message I am hearing across the market is that banks are finding more and more of their lenders are running into trouble or difficulties with repayments, but to their credit (no pun intended) some are setting up divisions within the bank to identify potential problem clients and help them before it is too late.

When it gets to the too-late stage there is little option but to go to a mortgagee sale.