For all those property bears out there I have some disconcerting news. The property market is starting to stir and it’s only going to go one way – up.
I was asked if there is a property bubble happening at the moment. To answer the question you have to think about how a bubble is formed.
First you have to have the ingredients then it is a matter of blowing some air into them to create the bubbles. They start as little things but can grow exponentially.
Right now the housing market is perky. Most of the ingredients are there and some air has started blowing. One of the key ingredients is money. Money is cheap. It’s as cheap as it ever will be.
Judging by the reaction to last week’s official cash rate announcement and news that the US Federal Reserve doesn’t expect to hike its cash rate until 2014 we won’t see the cost of money increase quickly any time soon. In fact in the past week and a half ANZ National, ASB and The Co-operative Bank have all cut home loan rates.
The other thing to remember is that banks have become more conservative and wary since the global financial crisis. When it hit they limited the amount they would lend on a house to 80% of it value because they didn’t want to risk losing money if the market turned down some more. Banks have now eased this requirement and will often lend up to 90-95% of a house’s value.
This tells me that they believe values will start increasing.
Then there is the supply and demand equation. This week’s housing consent figures were the lowest in 46 years. We aren’t building enough houses fast enough to house our growing population.
The other sign that things are happening is the news about rents in central Auckland. They are increasing, and have reportedly gone up by more than 20%, and there is tight competition from prospective tenants.
History tells us that the first place a housing bubble starts is central Auckland then it moves outwards into the suburbs.
It’s a little like dropping a pebble (or rock) into a pool of water and watching the circle of waves move out. Over time these waves reach the provincial centres like Rotorua and house process increase.
We hear all this news that houses in New Zealand are unaffordable. One thing that I am sure about is that they are not likely to suddenly become more affordable (unless of course our incomes suddenly rise rapidly).
We have been through the bottom of the housing market cycle and the only way is up.
If there is a positive in this it is simple. Rising house prices make us feel wealthier and we spend more money. That helps economic growth.
So how unaffordable are houses in New Zealand at the moment? If you are like me you will have seen and read heaps about how steep house prices are in New Zealand.
At the end of last year we had The Economist on the topic, since then there have been reports from Massey University and Demographia.
It’s hard to argue with the results of these surveys. But it is much harder to find a solution.
Earlier this week Radio New Zealand invited me onto The Panel , Jim Mora’s afternoon show on National Radio to talk about the subject.
Panellist Gary McCormack was particularly hot on the subject suggesting if we can’t bring house prices down then democracy is stuffed. One answer , he suggested, was to make land more readily available for building on.
If it was only so easy.
What people seem to forget about this argument is that house prices are governed by many factors. Home loan rates, immigration, building costs, land cost, supply and demand and so the list goes on. While there are all these factors their interaction with each other is complex.
Really there is neither a simple answer nor a straightforward solution to this problem.
You can’t, and no government would dare, make a bunch of changes which would drive house prices down just so they were affordable for the small group of people (relatively) wanting to get onto the property ladder.
Housing still remains our biggest financial asset. To make changes like that would wipe billions of dollars off the wealth of New Zealanders.
When you look at the housing market it is clear the bottom of the cycle has been reached. That means there is only one direction that it is likely to head. Upwards.
The reality is that property isn’t going to get more “affordable”.
Instead of looking at all these surveys and complaining that you can’t afford a house. Look at it like this.
Houses are now more affordable than they were in the past four years.
This analogy could easily get misinterpreted, but I will try it anyway. Reading all the latest news on Landlords.co.nz (and with summer coming on) gives me that feeling you get before you catch a wave body surfing.
There is a feeling of excitement and trepidation that it will be a great ride.
Today Barfoot and Thompson put out its latest stats on the Auckland market and the news is that house prices in New Zealand’s biggest city have hit a six month high.
Then we have some research from JP Morgan saying that house prices are just five percent below their November 2007 peak.
More importantly though it’s been a long time since we had a comprehensive guide telling people how to invest in property.
That earlier title came out when the previous cycle started.
Maybe this one is a marker for for the start of the next property wave?
We talked to David Whitburn about the book and will run a couple of videos over the next week. The first one is a little shorty where David talks about his favourite chapters in the book and why he loves property investing.
If there is one town or city in New Zealand we love to hate or hate to love it is Auckland.
Being a Wellingtonian at heart, who spent a bit of time in Auckland, left to live in Rotorua and still supports the Hurricances and Lions, Auckland hasn’t yet won me over. But.
Last week I had a bit of an epiphany. It’s a little weird. In some ways I wouldn’t really take much notice of news stories about a draft plan to revitalise the Auckland CBD.
I heard some news stories at the start of the week and took a little notice. But it was sitting down at a Crockers function to listen to Auckland City Council Manager of Environmental Strategy and Policy Ludo Campbell-Reid changed my view.
He outlined the council’s plans for the downtown area and made me realise why there were all these bits I hate about Auckland; how for years the city has had rubbish leadership; how buses and roads clog streets; how the city has failed to embrace its natural beauty – particularly its harbour.
The vision he outlined seemed simple and visionary. At the least logical. What’s more you could see how, if the plans were implemented Auckland could rival great international cities like Sydney and Melbourne in the future.
Everyone should take notice of what is planned as it will have direct implications for the performance of the New Zealand economy and for the people and businesses which live and trade within the greater Auckland area.
Property investors should too.
Auckland is often considered the centre of the property investment universe in New Zealand – partly because 1.4 million people live there, and its growth and geographical characteristics give it important investment characteristics.
The enthusiasm was slightly dampened when the final slide showed the timelines for these developments. Episode three, as it’s called is planned for 2027-2052.
When those years roll around I won’t be using cycle lines it’ll be more like looking for places with wheelchair, or walking frame access.
Many of the changes will happen in the first episode starting 2012.
Property investors are losing money from delinquent tenants because of delays in getting hearings at the Tenancy Tribunal.
NZ Property Investors Federation president Andrew King said it is a big issue and needs to be fixed quickly as it is costing landlords money.
“At the moment we are losing money,” he says.
Normally landlords can issue a 14-day notice to tenants when there is a problem such as unpaid rent and apply to the tribunal for an order.
King says it was possible to get tenants out of a house in three to four weeks.
In some areas that process is taking up to three months because of delays at the tribunal.
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King says there are a number of reasons for tenants not paying rent, including the state of the economy, however tenants can make applications to WINZ for help.
He says news of this situation is getting known and some tenants are just having a go and not paying rent.
In some cases the tenant leaves and the landlord can chase them for unpaid rent, however some are staying put which means new tenants can’t be housed.
Housing minister Phil Heatley acknowledges there is a problem.
He says issue is about scheduling of court time and the e Department of Justice is making 10% time available to the tribunal for hearings.
Boy we are in for a good debate over tax if these reports that Labour plans a capital gains tax on investment comes to fruition.
I’d been thinking about the idea after reading a couple of piece over the weekend.
The themes which are emerging are that this National-led government doesn’t have a clear (or clearly articulated) economic plan. As an aside it is surprising how many National voters I have come across recently who say they won’t vote for the party this election.
It has, to its credit, revealed a plan to raise money by selling state assets to get the economy back into surplus. This too seems to have luke warm support. I wonder what happens in future economic cycles when we get into a hole and no longer have any state assets to sell. What will happen then?
Another option is to raise revenue by changes to the tax system. The most obvious one is a capital gains tax of some form.
Many, without giving it too much thought, will ridicule Labour’s supposed plan. It will be labeled a left wing, tax the successful, politics of envy sort of thing.
But wait a minute. If you explore the web you will find that many on the so-called right are supportive of the idea of a CGT.
So too are the other side.
We covered this issue in the previous election. The Greens and the Maori party supported a CGT.
Even the NZ Property Investors Federation had some sympathy for a CGT as opposed to other tax options targeted at property investors.
It’s also interesting to look at this in the light of changes the National-led government has made. Its changes to tax laws (depreciation and LAQCs) have neutered the capital growth/negatively geared investment strategy used by many property investors.
Now the standard strategy is cash flow positive with income, as opposed to capital gains. Under this scenario a CGT isn’t too bad.
There is some logic to a CGT. It is pretty much standard practice in other Western economies.
Put aside all the bluster and it may transpire that if this is what Labour proposes then it could be called real leadership and vision.
Well it finally happened. There has been a spring bounce in house prices according to REINZ figures out today.
We often talk about the housing market picking up in spring and until now it has failed to materialise. Looking at the numbers there has been some lift which will no doubt have many of the doomsayers scratching their head.
It isn’t that surprising to see this lift as for a couple of weeks now contacts in the real estate industry have been reporting that there have been increased levels of activity in the market.
Perhaps what has been the most surprising is that the low interest rates haven’t spurred on much activity in the housing market – something Reserve Bank governor Alan Bollard noted last week in the Monetary Policy Statement.
The good news, for investors, out of that statement was that he has now indicated that the official cash rate will be kept low for longer than previously expected.
You’d think this would be seen as a positive sign for the market. However, we put out our quarterly property investment survey today and early submissions flag interest rates as one of the issues for next year. At least it shows investors are thinking about what is happening out there.
Coming back to the latest stats one has to be careful about extrapolating them as it is, after all, only one month. There are still plenty of positive and negative factors battling each other and this could just be a blip, or as some say a dead cat bounce.
Immigration and interest rates are positives; however affordability and a still weak economy are negatives.
The next two months are unlikely to give much more of an indication on where things are heading as they are traditionally pretty dormant. However we did get the spring bounce in summer so who knows.
PS: The latest issue of NZ Property Investor Magazine is in the shops now. In it we have pitted the North Island against the South Island to see which has the best investment opportunities.
We’re into the next round of monthly house sales data with Barfoot and Thompson, yesterday, releasing stats on sales in Auckland.
The story seems to have a recurring theme to it. Prices good but volumes low.
I’ve been looking at the big question about where house prices maybe heading and was sent a set of slides from a presentation ANZ did recently. It has lots of regular themes in it, but also a couple of graphs which grabbed my attention.
The first is one we used a year ago which show house prices through their peaks. (Click on image below to see it).
The most recent housing boom lasted for 24 quarters and prices rose something like 80%-plus. The idea is that the bust time would be quite long and house prices would fall 20-25% from their peak.
At the time this graph was put together the falls had run for 12 quarters yet prices were down only 11%.
What’s fascinating is after they came off their peak they bounced again.
The message is that it seems that the housing market just want crash.
The ANZ economist Khoon Goh, behind these slides has also written about the affordability issue in the latest issue of the NZ Property Magazine. It’s worth reading, but in summary says although homes are becoming more affordable they are still on the expensive side. The way this is going to close up is that incomes will rise rather than prices come down.
The second graph is the one at the end of the presentation where two housing cycles were compared. The results are uncanny at how closely correlated they are. Click on the image to the left and see a bigger version of the graph.
I’ve put a red circle in to show the current time point. Assuming the trend continues we are likely to see house prices come back some more then rally and do so quite strongly.
We Kiwis have a bit of a fascination with house price stats, which probably is no surprise considering our so called love affair with bricks and mortar.
I suspect this penchant to look at house price stats will become even more interesting following the awful events in Christchurch earlier this month.
It’s our second biggest city and accounts for its fair share of house sales each month. However following the quake the market has stopped dead in its tracks.
Part of the reason is to do with insurance, or the lack of appetite for insurers to issue cover at the moment.
In coming months this is likely to distort the numbers produced by organisations like QV and REINZ.
But the quake also raises lots of other questions which will no doubt test the minds of property investors. One is that we often talk about the best house to buy as investments are low maintenance brick and tile properties.
Following the quake it seems most of the damage has been to these types of property rather than the wooden, weatherboard, tin roof type houses.
Also you have to wonder what will happen to house prices in the Garden City once sales start again. Will people, including investors, still want to buy property there? Or will they opt for other areas?
Maybe, if they are buying in Christchurch the criteria for may change and premiums will be paid for good quality buildings which have withstood the destruction unharmed?
Another thought which has crossed my mind is that maybe there is a potential “leaky home” type crisis brewing. Engineers certify a building is sound following the quake but years later some damage is found which is expensive to repair and impacts on the value of the property.
We’ve been keeping an eye on what is happen on Landlords.co.nz and the next issue of NZ Property Investor will have a feature on what the quake means for property investors. We’d love to hear your thoughts on what the big shake has meant for the property market and particularly investors. Leave a comment here or email your thoughts to editor@landlords.co.nz
Last week, with little fanfare, the Residential Tenancies Act was finally been passed after years of mucking around. Oops I mean consultation and discussion.
The RTA, which is the rulebook landlords and tenants live by, has generally been given the thumbs up.
However the latest issue of the NZ Property Investor Magazine sent out this week we take a deeper look into the changes.
While there are some things landlords will like it appears that running a rental property may get quite a bit harder. Also there is a raft of different things fines can be levied on.
In writing the article we discussed the changes with many people who will have to help manage the rules when they take effect and they made the point there was quite a few areas were there was uncertainty.
The only way definition was going to come into the rules was once there had been some test cases.
It is a sure thing some of the recalcitrant tenants will try out these new rules and use them to have a go at landlords.
I would suggest, if you are a landlord, you have a read of the article and learn what the changes will mean for you. Another option of course is to engage a property manager to take over the job.
To find out more about what is in this issue of the NZ Property Investor Magazine click on this link. If you want to save some money then think about subscribing this month as the cover price and subscription rates will increase when the government increases the gst rate to 15%.
Boy we are in for a good debate over tax if these reports that Labour plans a capital gains tax on investment comes to fruition.
