Blog: The Landlord says...

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.

Apparently there is no better time than now to buy rental property and this is a new development.
What planet is Bernard Hickey on ? I’ve said for a number of years that the stars have been in alignment for property investment. The two key factors, of many, are low interest rates and a housing market which hit a cyclical bottom.
However, the weight of evidence suggests that investors haven’t been jumping into the market and adding to their portfolios. So, sorry Bernard there is no great new rort for people to jump into.
There are many reasons why investors haven’t taken advantage of the “perfect storm”.
One is that banks haven’t been the most accommodating with finance.
Another is that the previous National-led government did plenty to discourage property investment. Don’t you recall the changes to tax rules which saw the end of LAQCs? Don’t you remember the removal of depreciation allowances?
All these, I would argue, have had a significant impact on investors and made many sell up. We talk to investors all the time and that is what they say.
The bit which is most galling is the simplistic and silly argument that we shouldn’t invest in rental property. Someone has to. The Department of Building and Housing says there is a growing trend for people to chose renting over home ownership.
Buying a property and becoming a landlord is the same as setting up a small business. This business has capital, it has debt, it provides a service (accommodation) and is 100% legitmate.
One of the biggest problems right now is the shortage of homes for New Zealanders to live in.
BNZ chief economist Tony Alexander reckons we are about 5000 houses short at the moment.
Who is going to provide the housing stock needed? Some will be individuals as owner-occupiers. Some will be investors or landlords. The group which isn’t likely to add to New Zealand’s housing stock is the government.
Former housing minster Phil Heatley has made this clear. Most of this slack will be picked up by private landlords and the social housing sector.
It is very simplistic to jump on the Act Party/ Hugh Pavletich argument the answer is to free up more land. Yes it may help, but it isn’t a one shot panacea.
The area with the biggest housing shortages and the most demand for additional housing is Auckland.
Part of the problem there is that there geographical characteristics of the isthmus constrain supply.
The Auckland City Council’s proposed plan is for more intensification rather than expansion of what is already one of the biggest cities (land area) in the world.
Sorry Mr D S Advocate, your argument is more about winding people up for fund (and traffic) rather than encouraging intelligent debate.

PS: Don’t forget there is a capital gains tax and it is enforced. Indeed both Labour and National-led governments have provided millions of dollars to the PCP (Property Compliance Programme) and seen rich rewards for their investment.

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.

Jokes aside go and check out www.theaucklandplan.govt.nz and see what’s planned.

The great home loan rate sale I talked about last week may not actually happen this year. Why this u-turn? Partly it’s to do with the comments from the Reserve Bank governor last week but there are other reasons too.

Alan Bollard, as we all know and expected, left the official cash rate unchanged at 2.50% and made noise that it may stay there for longer than expected.

Those comments tally with what we have been thinking for some time. That is the pressure on interest rates is likely to be downwards rather than upwards. To see a big hike in rates you’d need to see some pretty positive economic news. But as Bollard said last week when you look offshore there are dark clouds everywhere.

Things are much better in this country, but that won’t be enough to trigger rate increases.

There are some interesting things happening at the moment and on balance they are positive for borrowers. The “emergency” 50 point OCR cut earlier this year was made in the wake of the events in Christchurch and to shore up the economy.

There is a growing argument – well one I hear – that the Christchurch factor isn’t the relevant and the cut is actually benefiting other centres, particularly Auckland. In this city the housing market is significantly stronger than the rest of New Zealand.

The argument goes on to suggest the 50 point cut should be removed quickly to slow Auckland down.

And then we come to the banks. It seems none of the big boys are falling over themselves to get into a Spring campaign which invariably comes an expense exercise in getting new business.

Lending growth isn’t that strong at present an there is not enough new business to chase. Rather the banks are focused on customer retention.

With floating rates they have fat margins and there is no need to sacrifice these and get borrowers onto fixed rates.

While there was a growing expectation that the Reserve Bank would increase the OCR 50 basis points in December that is now looking less likely.

For borrowers and property investors the interest rate looks pretty benign and what you see is what you are going to get for some time.

A question I have been pondering, which may well get one into trouble, is how can property investors make money out of Christchurch.

Yes this sounds crass. Making money out of a tragedy of monumental scale.

But it’s not meant to be as mercenary as making money from other people’s misery.

The big boys are doing this. You just have to look at what is happening with companies like Fletcher Building. It is poised to make many millions from the rebuild.

There was a piece on the TV news the other night about someone, it may have been the government, brought in fund managers and institutional investors, to see what the “opportunities” are in the Christchurch rebuild.

There is no reason why residential investors can’t take the same attitude and see what are the opportunities to make money in the Garden City.

How to make a bob in Christchurch though is something which may require some creative thinking and risk taking.

Clearly there is a demand for rental properties so buying up suitable properties maybe one option. I suspect buying properties that can be remediated and tenanted quickly is another area of opportunity.

So too will be in building new homes. Those who own suitable land to build on look to be in a good position, even though getting builders and materials may prove tricky.

Likewise, adding additional dwellings, such as minor dwellings if they are allowed, is probably attractive.

I suspect there are many other options worth considering too.

Investment theory says those that take on the most risk make the most returns. Christchurch is clearly a place where an investor will be taking on risks, but they may well be worth it.

Forget pulling the rug out from someone, Westpac  has gone one better and pulled the rug, floor, foundations, walls -  the whole house in fact.

The bank took possession of a family home after they failed meet mortgage payments – by carrying the property off on the back of a truck.

They were told they had one hour to remove their belongings from the home they had lived in for 18 years before workmen arrived to chainsaw through the foundations and remove the house.

Westpac refused to comment on the repossession, citing the fact that the legal owner was the ex-wife of one of the homeowners and no longer resident in the property.

However, Aaron Sewell, who serves court documents on people, said that while taking boats and property for mortgagee sales was not unusual, such a literal repossession was a new one for him.

“I’ve never heard of that [taking a house] ever before,” he said.

Going from chalk to cheese – or more appropriately Prince to pauper – Westpac also featured in another property story this week.

The bank’s New Zealand boss George Frazis has vacated his exclusive Paritai Drive property in Auckland and reports suggested he may find himself before the Tenancy Tribunal over allegations he broke a lease agreement and skipped out on $134,000 in rent.

The good news though for home hunters is that the rental is back on the market at just $3,400 a week.

No further details of the dispute between Frazis and the home’s owner, James Kirkpatrick, have been forthcoming, however the Landlord humbly suggests Kirkpatrick could follow the example of a fellow landlord in the UK in future. . .

Simon Everingham has taken a novel approach to stop his tenants skipping off with the GBP15,000 he says they owe him.

He hired ten skips and used them to block off access to his property.

He took the unusual step as American tenants Dan and Christina Herring planned to return to the States and he feared he would never get his money back if they left.

Previous attempts to block access to the property were thwarted when the Herrings employed friends to carry objects – including a piano – through a neighbouring field to a removal lorry, prompting Everingham to order an additional six skips and use mattresses and sofas to further hinder their efforts.

“This isn’t how we imagined our last year,” said Mrs Herring.

Activity in the housing market is still at a very slow and weak pace at the moment. It seems there are no real hard signs that a pick up is around the corner, however Harcourts did say on Friday that it was expecting a lift in activity.

One point which is often discussed is that banks are holding back the housing market by keeping lending criteria tight and keeping properties, which should be going up for mortgagee sale, off the market.

Here are five reasons why banks aren’t deliberately holding back the market or trying to keep house sales at a low level.

1. The real estate market is an important part of the economy employing thousands, probably tens of thousands, of people directly and indirectly. It’s not just the real estate agents here either. It includes lawyers, accountants, valuers, media companies and builders. In fact the list is quite long when you think about it. It seems this industry is nearly at a tipping point. It can’t go much slower without serious damage being done to itself and the economy. This is not in the best interests of the banks.
2. Banks need to make money for their shareholders. Currently they make little in the highly competitive term deposit space as margins are under pressure as they battle for funds (thank the core funding ratio for that). The mainline of business for banks is lending and currently their margins in this space are pretty good. To get an idea of how they have changed check out this graph. During the home loan wars margins were nearly non-existent. Now they are pretty fat. To grow profit banks need to increase their lending. It’s a volume game. Reserve Bank figures show lending growth is weak.
3. At some stage banks will “pull the trigger” and ease up on lending criteria. Sources I have spoken to confirm there are active discussions going on within banks about when to do this and by how much.
4. When the trigger is pulled it will be a substantial fillip for the housing market. One key real estate industry figure summed it up like this: “The volume of sales is not at true market levels.”
   “If banks ease their criteria there could be a 10 to 20% lift in sales volumes.”
5. Finally it is worth noting that mortgagee sales make up a pretty small proportion of houses sold each month. Arguably it is not material enough to have a big impact on the market.

I first heard the story that banks were stock-piling mortgagee properties earlier this year and sent one of my team out to investigate it.

It sounded pretty interesting as the premise was that banks were holding properties back from the market, therefore giving house prices some artificial floor.

I see the story appeared again in the Sunday Star Times. http://www.stuff.co.nz/business/4291388/Banks-drip-feed-mortgagee-sales-to-prop-security

Well, unfortunately it isn’t 100% correct. In New Zealand banks don’t actually take ownership of properties when a borrower defaults – like they do in the United States.

In New Zealand banks manage a sale process to recover their money and during that time the owner could actually sell the property (with the bank’s approval).

Banks have also told us that when borrowers get into difficulty their first step is to try and manage the process and find a solution with a mortgagee sale being the last option.

So this theory banks are propping up the market sounds good, but actually looks different.

If you want more on what banks do when a borrower defaults have a read of this story http://www.landlords.co.nz/read-article.php?article_id=3657

Instead it is purchasers who are keeping downward pressure on house market – especially in the lower end of the market. The more people at the coal face of real estate I talk to the more this message comes through.

One active property investor actually made the comment recently investors aren’t responsible for driving house prices up – as is commonly thought. Rather it is their duty to drive prices down so they can get better deals. (While at the same time pushing rents up!)

We will soon get into another round of house price reporting and everyone is looking for a spring bounce. I’m not sure we will see one – however feedback it that the middle end of the market is doing well. Good prices, reasonably quick sales, but a lack of stock.

It’s the lower end that is struggling. Two factors which will make a difference are some more certainty around tax rule changes which were first announced in the Budget. The second is bank’s willingness – or should that be unwillingness – to lend.

There are tentative signs funding is getting ever so slightly easier. But it is still hard.

Once a bit more money is made available expect to see a lift in house prices.

Considering we are, apparently, through the worst of the global financial crisis, and that banks are making some of their best ever margins on home loan lending at the moment, there is reason to be hopeful around the question of finance.