Blog: The Landlord says...

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.

Each month we have a week where all the real estate housing stats come out telling us how the market is going. The past six days have seen three releases; firstly Barfoot & Thompson’s numbers for the Auckland market, followed by QV’s, then lastly the Real Estate Institute’s.

It’s fascinating to see the reaction to the numbers. As a general rule of thumb they are portrayed in a dark light.

Generally B&T and REINZ always try to put a positive spin on their numbers, while QV is straight down the line.

I wanted to take a bit of a bigger picture look at the numbers, and my conclusion is yes, the rate of growth is slowing, but it ain’t all that bad.

Take QV’s numbers. On a nationwide basis house price growth for the 12-month period to May was 2.4%. This compares with an annual growth rate of 4.9% for the 12 months to April.

Clearly the rate of growth has slowed.

How does that compare with other asset classes like bonds or shares?

Well, figures on the Good Returns website show that in the same 12 month period, the NZX50 was down 15.76%, the Australian All Ords index was up 2.79% and the MSCI, which measures international shares, was down 9.3%.

So property, compared to a growth asset like shares, looks OK.

Against income assets the picture isn’t so good. The New Zealand government bond index was up 6.93%, while international bond indices were all up over 9%.

So overall the housing market still produced positive returns, but much less than previously. When you look into the numbers on a regional basis you see there are some wide variations. For instance some provincial centres, like Gisborne, New Plymouth and Palmerston North, went backwards and others showed good gains.

While there are stories in the media about individuals taking big hits on the sale of a property, these are one-off events.

If you look at how property has performed over the past five years, compared to other assets, then the picture isn’t as bad as it gets portrayed.

A sudden and unexpected easing in home loan rates this week is to the property market, what a bit of rain is to drought-stricken farmers.

The past few days have seen rates in the shorter end of the interest rate curve fall quite significantly – up to 45 basis points in some cases – taking two-year rates down to the 9.40% mark.

While these are not cheap by historical standards, they are significantly better than what homeowners and buyers could have secured a couple of weeks ago.

One of the interesting things about the changes is that that for some time the five-year rates have been the cheapest in the market – and therefore appealing to many borrowers. These rates have remained static over the past week and now we are seeing shorter-term rates on par with longer-term ones, or in some cases lower.

While the falls are good news, they are just the first drops of rain in a struggling market.

There are still two major issues facing buyers. One is that banks are tightening their lending criteria – or more accurately, they have done the tightening and don’t appear to have much intention of loosening things up. Secondly non-bank lenders are struggling, with more falling by the wayside in recent times.

I guess the big issue people are pondering is whether or not these interest rate falls will help stoke up the flame which has been burning under the housing market.

My guess is a muted yes.

For people who can meet the lending criteria or have cash on hand then they are likely to start getting more active.

Also astute buyers will know that it is not easy to pick the bottom of the market. To wait until prices are rising again maybe too late – well, too late to get the best bargain anyway.

As one real estate agent said: “It is very hard to judge the bottom of the market but most people will miss out on the real bargains as they will wait until the prices are going up and confidence returns before buying.”

The Auckland house sale figures from Barfoot & Thompson are fascinating. While the company tried to paint a positive picture of what was happening in New Zealand’s biggest real estate market, others interpreted it far more negatively.

Sure – the numbers weren’t flash with sales down and rents flat. But there may be some good news in the picture as B&T managing director Peter Thompson says.

He says that a growing proportion of sales are taking place in the less than $500,000 bracket, and that the average price in this market has held up.

”This suggests two things. That new buyers entered the market encouraged by the wide range of stock available and that price discounting is nowhere near as prevalent as media reports would have us believe.”

My previous Blog suggested that maybe there is some good news out there – one of those factors being that interest rates may fall sooner than expected.

The B&T sales numbers help support that view, as I note Goldman Sachs JB Were read them and was moved to comment:

“With accumulating evidence of broad-based slowdown in the economy and credit rationing by banks, the need to pursue very tight monetary policy has reversed. We continue to expect interest rate cuts to begin between June and September.”

The other positive bit of news was the ANZ/NZ Property Investors Federation survey of investors.

Overall the respondents were positive. Some may say over-optimistic. (Take off your rose-tinted glass, I hear you say!)

I think it is imperative to look at who the respondents are. To me they look like investors who are experienced and have a good level of knowledge of what is happening in the property market.

These people don’t see a market slow down as a negative. In fact, they see opportunities to buy. These are opportunities they haven’t had for some time as prices have been way ahead of themselves.

Most of the talk in the media is all about bad news in the property market. There is no point listing the sorts of stories they run, but it seems, particularly on the weekends, that negative headlines sell papers.

Here at Landlords we like a bit of balance and reality on the situation. To us it seems there have been a couple of bits of good news for the market in the past week.

First up was the Reserve Bank’s official cash rate announcement. To the ordinary bloke (or sheila) who invests in property, the statement seems pretty bland. But economists, who tend to specialise in decoding these official statements, reckon the bank had changed its stance on easing rates.

This time the central bank said that it “expect(s) that the OCR will need to remain at current levels for a time yet”.

Previously it said that the OCR will stay where it is for “a significant time yet”.
The economists reckon this is a big change and cuts could come earlier that the RBNZ previously suggested.

That’s good news for the market. When rates start falling and banks become a bit more generous, the property market will accelerate.

I still reckon that when the market turns the corner and starts heading up it will do so quickly and sharply.

Secondly we had some migration figures, which again were positive. They showed a slight increase in the number of people coming to New Zealand.

There is a view that migration and the housing market dance together. The reason is pretty obvious. The more people we have coming to live here means that there needs to be more houses.

As BNZ chief economist Tony Alexander said: “This is actually the first positive piece of news for our poor housing market in a very long time.”

While this post is about positives, it would remiss to say there is one negative. That is some research from Westpac which looks and the supply and demand balance for housing. Its key view is that they are roughly in balance. But it does suggest a slight oversupply of houses which is a negative for house prices.

I guess a few more immigrants will get us balanced again?

There should not be too many surprises in the latest set news on house prices in Auckland.

While the fall in the number of sales was huge, 52% on a year-on-year basis it shows, I think, that there is a huge gap between sellers’ expectations (over-inflated) and buyers’ offers.

Added to that getting finance is proving to be a much tougher proposition too.

What has been interesting is the angle from Barfoot and Thompson itself. It rightly points out that compared to last month the prices are up. However, it didn’t say, as this story does, that on a year-on-year basis (the same measure as used for volumes) prices are down.

The B&T numbers, while just Auckland, are useful as the firm is the largest in Auckland, and the numbers are often seen as an indicator of what is happening across the country.

The next set of data from QV and REINZ are due out in the week commencing April 14.

The BNZ’s report on housing prices isn’t necessarily telling us anything new on prices. We know the market is over-valued, and that it has to fall.

Just look at the hundreds of stories we have seen in recent month on home affordability.

All markets go through cycles where assets get over-valued and then come back. Often, like the New Zealand sharemarket at present, they actually become under-valued and present investors with great buying opportunities.

If you go through a sharebroker’s price list at the moment you will see nearly every decent company listed on the NZX is trading at a discount – that is you can buy the shares for less than what their assets are worth.

It’s like having an Easter sale again.

The question for the housing market is how far will house prices fall and will there be “cheap” houses for sale? No doubt about it – yes there will. But not every house will be “cheap”.

People need to be careful about taking predictions about where prices are going and then apply it to every sale.

One of the issues though is that it is getting harder and harder to borrow money from banks.

In the past week the big banks have started to tightened lending criteria and some of the smaller, non-bank players are under pressure too. Some have disappeared already and many of the lo-doc lending products used by property investors have been pulled.

Added to that rates are high. We track home loan rates on landlords.co.nz and there is nothing below 9% and plenty of rates at or over 10%.

Money is expensive.

But the good news is that the housing market won’t crash. Buyers waiting, there is strong employment and at some point (maybe this year) lending rates will come down.

Whenever there is a downturn in any market, whether it is shares or property, there are always one or two people who try to make a name for themselves by predicting all sorts of outlandish doom and gloom.

The latest is one crowd who is saying the housing bubble has been so big that it will take years and years to recover. Indeed, the suggestion is that prices will not rise back above their November 2007 peaks until 2018 at the earliest. The size of the bubble, they say, is so large it may take until 2028 before prices recover and people who invested in 2006 and early 2007 start seeing capital gains again.

While I am not an economist, claims like these seem ludicrous and designed more to create publicity than provide any meaningful insight into the market.

There are a hoard of well-qualified and experienced economists out there making their own predictions, and none I have seen bare any resemblance to the latest, unqualified, soothsayer.

What I have seen and heard is that there are lots of variables that drive the property market, and predicting some of them is very difficult.

For instance, immigration is a key driver of the market. While numbers are down at present, the government can quite easily turn on the tap that will provide a fillip to the market.

There are lots of other factors like the government making houses more affordable, buyers who have been priced out of the market sitting on the sideline and strong employment levels, which arguably provide a good backstop to the market.

There is no doubt the market is falling from its high growth rates of recent years, but that doesn’t mean total darkness is descending on the housing sector.

I hear an increasing number of stories about landlords wanting to sell up and do something else with their money. That is normal behaviour. However, I am also hearing stories, and seeing people get quite excited, about the buying opportunities which are starting to emerge.