Blog: The Landlord says...

It seems like we are into another round of mindless predictions about how low the housing market is going to fall.

There is no doubt the housing market is going to remain soft and subdued for a period of time – just as the Reserve Bank governor Alan Bollard wants.

Two pieces of information came out recently which make a lot of sense around what will happen.

One comes from the ASB in its quarterly confidence survey. Most people agree that there is an issue with affordability. That is when you look at the economics globally it appears New Zealand house prices are expensive relative to income levels.

However that doesn’t mean, as some have wrongly argued, house prices will fall to “where they should be”. Rather, as ASB says, house prices won’t go anywhere fast and they will wait for incomes and earnings to rise and meet them.

The other point, and one which annoys me somewhat, is that many commentators talk of the New Zealand housing market as one big homogenous market. This is rubbish.

QV provided some excellent graphs with its monthly commentary yesterday which show what has happened to houses in the main centres over the past few years. If you haven’t seen them you can find them here.

They are fascinating as they show that each market has its own characteristics. For instance Hamilton and Tauranga show similar trends, but they are different to Auckland.

It seems Auckland is far more bullish than other centres and again this comes through in the ASB survey which shows Aucklanders think their house prices will rise more than other centres.

When it comes to factors driving the market I am not sure house buyers and investors give a single thought to factors like what is happening in international markets.

They think of interest rates, rents and prices.

The one economic factor which does stand out in this market is immigration.

It is here we have seen a big change recently – more people are leaving this country – which will undoubtedly impact on the overall housing market.

This is the week of market data, which is probably why the headline hunters are out. A recurring message is that the market is slow and subdued.

What interests me is why it is like this. Investors appear to be staying in the market, some of the pressure has come off interest rates and it is considered a buyers’ market. Why then is there not more action?

Ha. Just when everyone said that rising interest rates would kill the housing market banks cut their rates.

Kiwibank surprised me yesterday when it took its two-year fixed rate below the 7.00% mark. But what surprised me even more was that most of the other banks followed suit quickly and ANZ and National Banks went one further.

They decided to lower their three, four and five year fixed home loan rates and made major cuts – 74 basis points in one case.

I was surprised as Nigel Stirling at Radio New Zealand asked me earlier in the day whether the conditions were ripe for a mortgage rate war. My answer was no.

A number of factors seemed to suggest otherwise. Banks tend to compete in just one major area at a time. Currently the battle is for term deposits.

Secondly competition tends to be around the times when the housing market is running hot, or when there is good demand for business. Thirdly none of the banks have shown much interest in aggressively fighting for home loan business.

So what happened? One is that things have changed in offshore markets and wholesale money is becoming available at attractive rates. Secondly banks have some pretty big margins at the moment so they have room to move on their interest rates. The third, and a good sign, is maybe some of this conservatism we have seen recently is wearing off.

While there may not be obvious signs that competition is picking up there are some positive developments. One is that non-bank lender NZF is keen to take on the banks in the prime lending market.

The cuts to medium and long term rates do another thing. They change the equation around borrowing strategies. For those on floating rates it looked as though they would have to ride out this part of the cycle at the short end of the yield curve. With two year rates of 6.99% versus floating rates of around 6.00% and forecast to rise the equation becomes quite different.

This maybe one of those short term windows where borrowers can lock in an attractive rate to help them in a rising interest rate environment.

PS: Tonight Westpac has followed ANZ National and cut longer term rates and BNZ has made its changes. Details here

Latest stats confirm that the housing market hasn’t gone anywhere in the lead-up to this year’s Budget.

Now that event is behind us there is plenty of discussion about where to now for house prices.

Certainly the bears have come out of the woods again (even though it is winter) making all sorts of negative predictions ranging from a 5%  fall in house prices right through to 15%.

I’m not going to make any prediction like that – partly because it will mean I’m likely to have to walk the length of the country or apologise for getting it wrong.

Rather it’s worth looking at the factors which drive the market.

The traditional ones that seem to have the most impact are: immigration, interest rates and construction.

House prices are closely correlated to immigration. At the moment it seems immigration is positive and it will remain so for the foreseeable future. Mark this one up as a plus for house prices rising.

Interest rates are on the move. We have hit the bottom of the cycle and the Reserve Bank started its tightening last week. Although banks are yet to move home loan rates it will happen. This is a negative for the housing market.

If you want a positive it is this – home loan rates are not expected to rise as high in this cycle as in previous ones.

Factor three is new construction. Numbers have been down for some time, but there are signs new building is increasing. However not at the rates previously seen.

I hear there aren’t as many builders around now and many who ran their own businesses during the boom time are now working for other builders on wages. This factor is possibly a mild positive for house prices.

Besides the traditional drivers there is one “unique” one at the moment and that is the changes Finance Minister Bill English announced in this year’s Budget.

The changes around deprecation and LAQCs will make property investors evaluate their holdings and in some cases sell.

The majority, who are buy and hold investors, probably won’t be too badly affected and will hold on. However those that are negatively geared and using LAQCs will have to make some decisions.

Many of these properties which have little chance of turning into cash-generating investments in the near future will hit the market.

How many fall into that category are unknown. Some suggest as much as half of the investment property stock could be in this group.

These properties will hit the market but not all at once. They are not likely to be bought by other investors, rather they will become owner occupied. This may be a window of opportunity for first home buyers to get into the market.

The other thing to consider is that many of these properties are in the lower price bands (ie. less than $300,000). It is this part of the market which will suffer. Changes from the Budget are less likely to impact the upper parts of the market.

When people talk about where house prices are heading they should look more closely at different parts of the market rather than talk about it as one big market heading in one direction.

It’s now a week since the Budget where finance minister Bill English tried to put the kibosh on the residential property market.

We’ve just completed a survey at Landlords.co.nz and the results show that while investors are not particularly happy with what Prime Minister John Key and English have done, it’s not enough to deter people from investing in bricks and mortar.

We will have full results from the survey on the site next week.

Looking through the data and the Budget in more detail, it’s clear there’s still plenty of work for property investors to do around their strategies and their property holding.

Perhaps one of the key points though is that much of this work will need to be done before April 1 next year when changes take effect.

The other interesting debate extending from the Budget is what will happen to house prices and rents. With the latter there is no doubt that rents will rise. By how much is one of those how-long-is-a-piece-of-string questions. Investors I have spoken to have a range of views on this from a big increase to small incremental increases over a period of time.

There is far less certainty around what will happen to house prices. One commentator who has had the most attention on this has been Kieran Trass. Funnily enough, his prediction was not too outlandish, rather it was his comment that if house prices didn’t fall by at least 5% in the next six to nine months he would walk the length of the country. (We’ll be keeping a close eye on this.)

My prediction is that house prices for lower-value properties will possibly soften in the short term and this may give some first home buyers the chance to get into the market. But judging from our survey, investors will still be active in the market which will help to put a foundation underneath it.

Maybe my prediction is similar to Kieran’s one? The only difference is I won’t have to leave my office if I’m wrong.

Property investors have been holding their breath for a long period of time waiting to see whether the government’s threats to give them the bash would come true.

They can now breathe a sigh of relief. The government was, as many expected, more mouth than biff.

The Budget included the predictable. Changes to depreciation; no capital gains tax; no stamp duty and no land tax.

The big worry was that some sort of ring-fencing of losses in LAQCs for property investment would be announced.

I have argued many times before that to single out one sector was unfair.

The changes it is making to LAQCs and qualifying companies have some logic to them. What is pleasing is that the changes are across the board, not just to property owning entities.

Also pleasing is that the government is closing down those who are rorting the system through Working For Families. I suspect this is a small minority of investors.

These changes to LAQCs make sense and will encourage investors to look at how they have structured their investments. Structuring has always been a hot topic for investors and will remain so.

It will be interesting to see how investors address this issues (email your thoughts to editor@landlords.co.nz or leave a comment below).

The biggest losers are tenants. There is no doubt rents will rise. Investors need to ensure their cash flows remain robust.  In some ways it is no surprise that tenants are the losers when a National-led government is in power.

While a number of commentators have said this is a good Budget for the savings industry and people who invest in financial assets, I don’t think it will make a material change to residential property investment.

Sure there will be some who are less enthused by the sector, but it will still remain popular.

What will change is the sort of strategies used. To move away from highly geared investments which rely on capital gains to work isn’t a bad thing.

Some numbers from Treasury this week show how important housing is to our overall wealth, and why it would be foolish for the government to make too many changes to property investment tax rules next week.

Treasury released its estimates of household assets and liabilities. It showed that houses make up nearly three quarters (74%) of our total gross assets. The actual number is $603 billion verses the $212 billion we have in financial assets (shares, KiwiSaver, deposits etc).

Yes there should be some encouragement to shift the balance so more of our wealth is held in financial assets, but it should be done on a softly, softly basis rather than by using shock tactics.

Plenty of New Zealanders are wary of financial markets and you can’t blame them when you see what has happened to share and bond markets in recent years.

We have seen government’s wipe millions off dollars of savings off New Zealanders before. One of the more recent examples is when the Labour government changed the rules in the telco market and destroyed massive value for Telecom shareholders.

Next week’s budget shouldn’t be National’s version of what not to do to people’s savings.

If it is then Prime Minister John Key could well end up on the menu at the property investors conference.

Housing is an important source of wealth not just in New Zealand, but also across the Tasman. Australia is often heralded as being a nation of sharemarket investors and a country where people own many financial assets because of its compulsory superannuation scheme.

However it still has the majority of its wealth in houses. Figures show that 59%of their wealth is in bricks and mortar, as opposed to our 74%.

Sometimes sitting and waiting for an important appointment is one of the hardest things to do. It feels like that at the moment, as we are just under a fortnight out from what maybe one of the biggest forces to hit the property investment world – the May 20 Budget.

The government has made it clear changes are imminent, but what is in store still remains a mystery. In talking to property investors there is a view that the changes will not be as big, as first indicated. Maybe it will be changes to depreciation rules and a little bit more tinkering.

Then maybe investors are being lulled into some false sense of security, thinking this government isn’t bold enough to make mega-changes which would hurt a core constituency?

While the changes are unknown their pending announcement is being blamed for a subdued housing market.

This week Barfoot & Thompson put out its latest sales stats for the Auckland market. These showed that sale prices dropped by more than $3,000 last month.

Likewise, ASB put out its quarterly housing confidence report. This too showed things are pretty subdued at the moment. Indeed ASB is predicting that house prices could fall 3% to 4% this year due to a lack of buyer appetite.

I think that is a pretty brave call. Many of the factors which influence the market are reasonably neutral at the moment. Perhaps the biggest factor in real estate land is the “wide imbalance” between supply and demand.

I’m wondering if once the Budget comes around people will act quite quickly and try and sell properties (if the news is bad) or whether the opposite happens. That is if the changes are palatable, uncertainty is removed and buyers will act quickly.

Perhaps this situation would be helped by the prospect that interest rates will start increasing in June or July at the latest. Whatever, getting this appointment behind us is something all investors are looking forward to.

There is a view that property investing is easy and making money is a given. Well a story today shows how it can all go terribly wrong.

Last year we profiled in the NZ Property Investor Magazine a young man who was doing some amazing things. The guy, Laurence Pope (22), basically bought a street load of houses in the Waikato town of Paeroa as an investment.

He became pretty popular with the locals as he transformed what was referred to by some as a “ghetto” into a much smarter street.

Meanwhile other property investors where pretty impressed with his deeds.

However, things have gone wrong. His parents who acted as guarantors are reportedly in some difficulty and the bank probably hasn’t done too well either.

Bayleys have sold eight of the properties in mortgagee sales to other investors across the region.

The homes sold under the hammer for between $64,000 and $90,000, yet Pope had paid around $120,000 for each of the properties and improved many of them.

It’s sad to see someone who made a difference in a town like this fail, but it also shows some of the risks involved in residential property investing.

On the upside the sale also demonstrates what we talk about in the May issue of NZ Property Investor magazine – that is the return to positive cash flow investing.

The article has a comprehensive table showing readers areas throughout the country where you can find cash flow positive properties. Not surprisingly many of them are in the provincial regions.

According to Bayleys Pope’s Paeroa properties sold on rental yields of seven to 10%. These are well above comparable investments in the likes of Auckland, Wellington or Christchurch, and show that by looking outside the square, there are plenty of excellent investment opportunities available in the residential sector.

I wasn’t expecting an Auckland University think tank on retirement income was the sort of crowd who would drop a bombshell on the Tax Working Group, but that’s exactly what they did yesterday.

The Retirement Policy and Research Centre, headed by well-known superannuation commentator Michael Littlewood released a paper which questioned the accuracy of one of the TWG’s numbers on the property market. By questioning the group’s predictions on the size of the residential investment market it also casts significant doubt over the assumptions made about how much revenue the government can raise by putting new taxes on property investors.

To his credit Finance Minister Bill English was quick to comment on the research and even acknowledged it may mean changes to their thinking.

He says Treasury analysis was showing that changes to property tax would make a smaller contribution to government tax revenue than what was estimated by the TWG.

Pity his side kick Peter Dunne on the revenue side hasn’t listened. He made a speech today with the same old line that changes to the tax treatment of property were likely, to make the rules fairer and more equitable for all taxpayers.

Some of the questions one has to ask is what other fundamental errors did the TWG make? Also one wonders whether they were in fact just a ginger group set up to stir up a debate and prepare Kiwis for radical – and unpopular changes – as opposed to an objective working group.

I know last week’s Blog, where we talked about some numbers produced by the NZ Property Investors Federation. It calculated that if the government goes ahead with changes to depreciation rules for residential property investment then rents are likely to rise. Landlords, it estimates, would lose on average $1750 a year if they lost the tax deduction and this amounted to $34 a week, which would be passed on to tenants.

These calculations provoked a response that that this numbers from the federation where use political statements lacking analysis.

Judging by what we have seen from the Retirement Policy and Research Centre there are questions that need to be asked about the TWG and its plans.

The good news out of this is that maybe there is hope that the government will not be as harsh on the residential property sector as first indicated. We will know on May 20 – Budget Day.

It was pleasing to see the NZ Property Investors Federation come out and put the issue of rent rises on the agenda this week.

For those who missed it NZPIF vice president Andrew King calculates that if the government goes ahead with changes to depreciation rules for residential property investment then rents are likely to rise.

He says landlords would lose on average $1750 a year if they lost the tax deduction and this amounted to $34 a week, which would be passed on to tenants.

There is no doubt that any changes to investment rules will impact on the economics of property investment.

After all it is an economic equation which needs to balance up. There is little point in making an investment if the returns are not there. You need to remember that most investors are after cash flow and income; they are not speculators chasing quick capital gains.

Rents are one of the key inputs into this equation and another, from a cash flow perspective, are depreciation claims.

It seems absolutely logical that if you change the rules around depreciation it will have an impact on rents.

So Prime Minister John Key sounds like he has had some dud advice when he told TVNZ that the advice he has received is that proposed changes will have little impact on rents. (We’re looking to find this piece of advice at the moment).

Likewise arguments that tenants set rent is only part of the picture.

What hasn’t been touched on is that if other changes are made to penalise Kiwis who choose to prepare for their retirement by investing in property then there is absolutely no doubt rents will rise.