Blog: The Landlord says...

Last week I bemoaned the state of the housing market and the fact that we hadn’t seen much positive news in the November real estate numbers.

Well I feel happier this week after reading two surveys on what people are thinking about the housing market.

The key point being that many people are seeing the glass as half full and now is shaping up to be a good time to buy.

The first of the surveys was done by Landlords.co.nz and Mike Pero Mortgages, the second by ASB Bank.

A difference between the two is that the former is of investors while the latter has a more general audience including owner-occupiers.

With this difference in mind it is understandable that the Landlords.co.nz/Mike Pero one was more positive.

Two key trends to emerge are firstly, that people are getting more interested in buying residential property and can see opportunities.

The second, and slightly worrying for vendors, is that both audiences expect house prices to fall some more.

This also makes one of the other points a little more logical. More than half of the investors surveyed have increased rents in the past year, and at the same time interest rates are coming down. Both these factors are positive for investors and compensate, somewhat for the predicted lack of capital gains.

While I was unhappy with the news last week, this week I feel more positive and expect that we will see some more positive things happening in the housing market – however my caveat is don’t expect things to return to the level they were at 12 to 18 months ago. Those times are still years away. Big house price increases (some would argue any increases) are still well into the future.

The time now is for astute purchasers. Are you one of these people?

This year’s election is a critical one for property investors as whoever forms the next government will change the rules around investing.

If National is elected it is likely to remove some of the less landlord-friendly parts from the review of the Residential Tenancies Act which is due to go to a select committee next year.  It is understood that the party’s housing spokesman has already given undertakings to key groups in the property investment sector.

Also it is likely to address issues to do with utility charges, such as water. The NZPIF has lobbied for water charges, to be billed in the same way as other utilities. In the past landlords, particularly in Auckland have had difficulties with water rates.

While both the big parties, Labour and National, have said they are against capital gains tax on property investment, it could be forced onto the agenda in post-election coalition building process.
Both the Green Party and the Maori Party have advocated some sort of capital gains tax.

A Labour-led government may be forced to look at these issues if it forms a government and that it could conceivably include it in its proposed December mini-budget to pay for its election promises.

Sunshine. It’s one factor economists don’t look at when they do their predictions, but I reckon it has a part to play in the housing market.

Over the past week I have been out talking to property people in Rotoura as part of a feature we are doing for the October issue of the NZ Property Investor Magazine. What has surprised me, a little, is how positive everyone is feeling.

Through winter, up until July or August things were pretty bleak in the market. Prices were down, properties weren’t selling and people were staying home.
Indeed three real estate offices have disappeared in the city this year – a true sign of how tough the market is.

Yet, the people we spoke to all told similar stories, that in the past few weeks there has been a real turnaround in sentiment and activity. (One even showed a graph supporting the view that the market had picked up a little, so it wasn’t just real estate sweet talk on show!)

More than one of them looked out the window and suggested that better weather and glorious sunshine were helping the market.

Sure things aren’t going gang-busters, but boy it is a lot more cheerful. A view which was interesting is that Rotorua has always been a popular place for property investors as it was affordable, didn’t have the big swings in house prices and generally investors could get good yields.

With characteristics like that you could argue that it will be one of the first places to attract the attention of buyers again as the market slowly gets to its feet.

If the sun is helping to make the Rotorua market more positive, one could expect that the same is happening elsewhere. I’d love to hear your thoughts, send them to thelandlord@landlords.co.nz

PS: We are looking at Rotorua as the NZ Property Investors Federation is holding its annual conference in the city at the end of the month. More details are at http://www.propertyconference.org.nz

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.

Over the past couple of months we have written about how there is a bit of a Mexican stand-off between vendors and purchasers in the housing market.

The commonly expressed view on this is that would-be buyers are expecting the market to fall even more than it has (because that is what they have read) and vendors are unwilling to quit at such prices. Many of these people have instead opted to rent their properties.

We have been researching the market for the lead article in next month’s issue of the NZ Property Investor magazine to get an up-to-date feel on where things are at.

My take on this is that the big gap between buyers and sellers is likely to suddenly close and maybe close quite quickly, leading to a spike in the number of sales.

The people who will be buying are property investors. The feedback we get is they are out there, attending auctions, checking out mortgagee sales and looking for buys.

Plus there is a huge amount of pre-approved finance just waiting to be drawn down.

They are coming to the conclusion that there is finance out there, vendors aren’t likely to move much lower and financing costs are starting to come down now the Reserve Bank has shaved 25 basis points off its official cash rate.

Adding to the excitement here is that the bank indicated it may cut the rate at each of its next six-weekly reviews this year – that mean cuts in September, October and December.

Then of course there is the prospect of spring just around the corner. Already I am hearing that banks may be more active with spring and summer home loan campaigns as they traditionally do – although they were almost absent last year.  (The main exception being ASB with its win a home campaign).

I know there is a lot of negative sentiment out there about the property market at the moment, but I was a little bit surprised to see just how bearish sentiment is.

The ASB Investor Confidence survey, out today, shows that investors no longer think residential rental property is the asset class which will provide them with the best return. Rather, rental property has fallen off its lofty peaks and is now level pegging with bank term deposits and savings accounts.

It seems there are a couple of factors at play here. One is that banks are being incredibly proactive at the moment, pushing their new savings accounts, which are particularly appealing under new tax rules to people on 39c tax rates.

The returns being offered for essentially low risk, liquid investments are up around the 9% range. Pretty attractive.

Another factor in the mix is that the media have been highly bearish on the property market and running plenty of stories about individuals or families who have taken a haircut on their property at sale time.

This is something the real estate industry picked up on a while back, claiming that the media was talking down the market. (Maybe these journalists are keen to get the market themselves!)

There is no doubt the market has changed from where it was a year ago, or even six months ago. The point which is worth making is that when markets are down, and this is any market, that is the time astute investors (and the ones who make lots of money) start buying.

Most people tend to operate the opposite way and buy at the top of a cycle and sell at the bottom. I can understand why this happens (and have even done that myself), but to me we are entering a time when people should be actively looking for opportunities to invest – whether it be property or shares. Those with the courage (and the money) will be thankful that they did so in a couple of years time.

The next week is likely to see lots of news on what’s happening with house prices around the country.

First up is likely to be the QV data, followed closely by numbers from the Real Estate Institute.

The things I will be looking for are more evidence that the market is flattening out, rather than falling further and whether the stand-off between vendors and purchasers is continuing.

As noted previously there has been a bit of a Mexican stand-off with purchasers believing the mainstream media stories that house prices are going to fall 30% and when they get that low it is time to buy, while vendors are refusing to take such a big haircut.

This has, as mentioned last week, led to an increase in the number of properties being put into the rental pool. I see this week there has been more comment from one of the bank economists about this emerging trend.

One of the other key things to look at with the house sale stats will be the number of listings.

If the recent Barfoot & Thompson numbers are anything to go by some sellers have moved to meet buyers.

ASB Bank has suggested that on a nationwide basis sales turnover could well stabilise in June.

It says that the decline in the median house price has been very mild to date, though in part that is because the sales distribution is getting skewed.

“Sales turnover is dropping most noticeably amongst the bottom price bracket, implying the median price overstates the ‘true’ price level.”

There are some early encouraging anecdotes on the housing supply front – which has built up very sharply over the past year. The demand/supply imbalance in the market may now be starting to cap the flow of listings onto the market.

While that is the overall picture it is a little different from an investor’s point of view. It looks like the positive cash flow properties may return to the market again. For a long time prices and interest rates were so high that it was very difficult to find a property which had a half decent yield on it.

The www.landlords.co.nz  website started a new section recently, Investment Gems, which is designed to showcase properties for sale which may be of interest to investors.

Some of the key requirements are that a property has to have one of these factors: a yield of at least 8%, instant equity (that is the purchase price has to be 10% less than the latest government valuation), have some vendor finance included, or have subdivision or do-up potential.

Judging by the number of listings there are, there is a good supply of investment properties available at present.

A little piece of news that hasn’t been widely reported this week should be of concern to property investors.

There was an article on landlords.co.nz reporting that rental prices on residential properties had fallen in the month of May. The piece, quoting Massey University research showed that rents had fallen from a high of $300 a week to $295.

It doesn’t sound like much, but it can make a difference. It will make a bigger difference if the trend continues.

The property market is a funny thing, but one of the trends we have seen before is that when house prices rise, rents stay flat or can even fall. Under this scenario, which is what we have had for many years, yields on rental properties look extremely poor.

However, when prices stop rising or fall, it is often the case that rents start to pick up.

This increase in rent provides a bit of a fillip for investors. It can be particularly useful in markets like the present to offset some of the high costs such as interest rates.

It’s still early days and unclear what is behind this fall in rents. One theory, which has a lot of credence, is the emergence of what I call the “accidental landlord.”

These are people who have a house on the market – maybe because they are heading overseas, or maybe because they have moved into a new home – and they can’t sell it for the price they expect.

Instead of accepting a lower price they put the house into what I call the “rental pool”.

Discussions with real estate agents and property managers show there is growing evidence that more and more rentals are in the market. This increased supply can pull down demand, especially if kids decided it’s too expensive to flat and move home (something else we hear is happening).

Should investors be worried about this rental fall? Not yet, but it is worth watching and seeing what is happening.

The other thing is that landlords should be proactive to see what they can do to keep tenants and even increase rents. Often small little things make the difference between having a tenanted property and a vacant one.

One thing all property investors and landlords should be aware of now is the long-winded re-write of the Residential Tenancies Act (RTA).

As, hopefully, all landlords know the RTA is the bible for how to manage your rentals and sets the rules around what tenants and landlords can do.

The RTA rewrite has been a torturous process. It started eight years ago and nearly got derailed last year when another competing bill was presented to Parliament – but then withdrawn.

The final bill is 67 pages long and tough reading.

What has been fascinating is that although this is the central book of instructions for landlords, very few have seen the bill which has been presented back from the select committee. And even organisations you would expect to have read it, such as the National Party housing spokesman, hadn’t done so when the NZ Property Investor magazine first contacted them.

One of the most contentious items in the bill is the issue of making tenants liable for only four weeks of rent for any damage.

Feedback so far is that this is far too low and that it is not something the officials discussed with the industry reference group which was consulted about the changes.

Another change is that rental property owners must appoint an agent if they are going to be out of the country for more than 21 days and also let the bond centre know who the agent is.

The key point is that this piece of legislation is now on the runway and getting ready to take off. All investors should be aware, or at least find out, what these changes mean for them.