Blog: The Landlord says...

Next week is going to give us a good feel for what is happening with property prices across the country. On Monday we will have the latest QV statistics and, assuming history repeats, the Real Estate Institute figures will be out later in the week.
The feeling is that the market is starting to flatten out. This week’s Auckland house price data from Barfoot and Thompson showed the number of sales are increasing but prices aren’t. One possible theory is that the Mexican standoff between sellers and buyers is easing and vendors are now accepting prices around 9-10% less than they would have a year ago.
Clearly property investors and first home buyers are more active in the market and it wouldn’t be a surprise to see a shortage of stock in the lower price ranges.

What do you think?

The official cash rate cut is good news for borrowers. What’s more the announcement from the Reserve Bank gives home owners and property investors a clear idea of the best borrowing strategy.

The Reserve Bank, on Thursday, lowered the OCR 50 basis points to 2.5%, the lowest the rate has been since it was introduced in March 1999. It has fallen dramatically over the past year, from historical heights of 8.25%, where it sat for 12 months from July 2007, to July 2008 when Bollard’s vigorous cutting cycle began.

The key messages for borrowers to take out of the latest cut is that the rate is likely to stay at current levels until at least the end of 2010 and may even drop further before then, and that floating and short-term fixed rates are the best option at present.

“We expect to keep the OCR at or below the current level through until the later part of 2010,” Reserve Bank governor Alan Bollard said.

Since the previous OCR cut on March 12, many borrowers rushed to fix for three, four and five years in the fear long-term rates had already bottomed out. This will prove to be not such a good strategy.

It was an odd-move by many as long-term rates had risen to be near historical averages and that picture didn’t fit into the current lower rate environment.

At some stage, maybe quite soon, these rates are likely to fall.

On paper fixing for the long term may have looked attractive, but in reality it will prove to be the wrong move.
Bollard reinforced the best option for borrowers this morning, which is rolling over on six-month terms.

After a couple of weeks with no rate movement from the main banks, don’t be surprised if the banks become more aggressive, as the economy shows signs of stabilising and a push for an increase in lending begins.

Following this train of thought, banks will also have to loosen lending criteria if the level of lending is to go up.

The main banks’ current short-term rates are nearly half of what they were this time last year. Floating rates range from 5.99% with Kiwibank, to 6.49% at Westpac.

Six-month rates currently range from 5.39% at Westpac, to 5.70% at Kiwibank and ANZ/National. One-year rates are also currently well below 6%.

Since the OCR announcement the only bank to move rates is Westpac. It has cut its six-month rate 40 points to 5.39%.

To check and compare rates Click here

We’re in that busy monthly period where various firms report on activity in the property market over the past month. Looking at what has been put out so far one wouldn’t be too far wrong to throw their hands up in horror and say “what’s happening?!”

Many of the reports are quite positive, including the latest from REINZ and Barfoot and Thompson, but then others like QV’s report are a bit gloomy. It is saying that house prices are down around 9% on a 12-monthly basis.

This report is worth pondering a little more for two reasons. One is that its numbers are done on a rolling three monthly average. Secondly, in this part of the cycle, where there are a lot of different trends happening, the overall average number can be a little misleading at a headline level.
When you dig into the report you will find some areas and house types are down, while others are up.

One area, outside of these reports, that is attracting interest at the moment is commercial property. As Good Returns reported this week it seems that property syndicates are making a bit of a comeback.

These syndicates are proving attractive to a range of people including those dissatisfied with the returns being offered on bank deposits. Commercial property like the syndicates on offer have returns of around 9% with monthly interest payments that are certainly appealing. But as explained here there are some issues investors need to be aware of.

The people who are putting these syndicates together seem to agree there is a window of between one year and 18-months where the conditions will be ripe for these syndicates to be established. The conditions which are helping are low interest rates, good yields and a group of existing owners who want to quit their properties for a variety of reasons.

They say a week is a long time in politics, but clearly the same can be said for the property market. On Sunday one of the papers had another doom and gloom story with one of the most stupid suggestions imaginable.

If you’re selling your house, drop the price 20% and you will get a flood of buyers. Yeah – no doubt you will, but why give away 20% of its value? If it’s priced appropriately you don’t need to.

Next it went on to extol the virtues of tenders as the buyer has to nominate a price.

Well, tenders and auctions are fine. My experience here is that the theory is great but the reality is that it doesn’t work. Having watched quite a few auctions in recent months it is clear bugger-all is sold under the hammer. The most likely to sell are mortgagee properties as the bank just wants whatever money it can get.

Tenders are an alternative. Again it seems to me potential buyers just don’t like this method of selling. Unless they absolutely fall in love with a place and are prepared to pay a silly price then the likelihood of selling this way is low.

My take on the market at the moment is that if you want to sell a property, put a price on it. The market is far too skittish at the moment and vendors are too uncertain on what the value of a property is to make up prices themselves.

The other piece in the papers which caught my attention was the lead story in the Herald: Now’s the time to buy a house.

I loved it, not just because it echoed what I have been saying, but because it is right. If you have some money and are happy to invest in property, rather than shares, corporate bonds, bank deposits or something else, then consider property.

The market is near the bottom, money doesn’t get much cheaper than this, and over time prices will recover.

I’ll be watching this weekend’s media to see if they all get on the bandwagon and start preaching now is the time to buy.

In one of the more significant moves for property investors, the government is planning to change to Residential Tenancies Act (RTA). This act is considered the bible of property management and affects everyone, investors, landlords and tenants. What do you think of the proposed RTA amendments?

I have read about the proposed changes to the act and am relieved that the present government is considering amending some of those proposed changes that were unfair to landlords…

Just one thing that I believe the government is now thankfully considering to leave as the status quo: letting fees charged by agents. I endorse the status quo for a number of significant reasons, especially the huge implications it could have on the letting market with regard to landlords, especially in a tenant’s market. The issue runs far deeper that a new financial cost to landlords.

Without going into lengthy detail..quite simply, it would dramatically skew the residential rental market and empower letting agents and property managers at the expense of landlords, especially those private landlords such as myself who do all their own letting.

I wish the status quo to remain, without me being ‘forced’ to enlist the services of a letting agent during a ‘rental downturn’ in order to find a tenant. Quite simply I would not be able to compete with letting agents and the increasing numbers of private landlords like myself who have come to the realisation that they have to now enlist their services.

I have excellent, stable long-term (fixed-term) tenants and through my selection processes want it to remain that way. That has frequently not been the case when I have enlisted the services of letting agents (and property managers) and I want the freedom of choice to remain.

Were landlords required to pay the letting fee, I would envisage a number of them would exit the market, once the full implications of this change was apparent in the marketplace.

Let’s hope the NZPIF is strongly supporting the status quo, and its largely private landlord base, with regard to this proposed amendment..
Regards,
RAG

I do not agree with the idea that letting agents cannot charge a fee for their services rather than the current situation where tenants usually pay.

Having to pay another letting fee should deter tenants from just up and leaving one place and moving to another one especially if the rental is furnished. In theory people could keep moving round as often as they liked, just transferring their bond as they go.

However, having said that, I believe market conditions will determine whether the tenant or the landlord pays the letting fee. I rely on my letting agent to advise on the response to advertisements for any vacant properties and whether the fee should be negotiable.
BKD

Having seen the goal posts move rapidly because of Tenancy Tribunal clerks’ differing interpretations of the tenancy act, prompts me to advocate a standard set of rulings for common disputes.

There needs to be standardisation of decisions. From our experience, one clerk will require the tenant to honour the signed contract between the tenant and the landlord, another will require the landlord to carry the weight of costs with tenant being obviously favoured.

A common experience for us has been the condition of a property at the final inspection. Generally the tenant is expected to leave the property in the condition it was in when taking up the tenancy, minus fair wear and tear (the accepted amount of fair wear and tear can be subjective of course dependent on the property manager’s experience).

One tenancy clerk advocated the tenant honour the signed tenancy contract as required under the Contracts Act, the next took the position that the RTA took precedence over all other acts and that the landlord had to bear the majority of costs to bring the property up to the expected condition for new tenancy.

The landlord also had to put in the equivalent of six hours of cleaning per property. We were not sure where this interpretation came from, however that was just one example.

I’m sure there are other investors and property managers out there who have many more and differing examples to share.
DB

I think the law should be changed to make the landlords less disadvantaged than they are now. Some more equality please.

Ie, max four weeks’ bond, but the tenant has to be three weeks behind before any approach to the tribunal for eviction, and then how long does that take? Maybe the tribunal should pay the weekly rent from the three weeks until the property is re-tenanted, or at least until the current tenant departs.

With four weeks bond, if the tenant is one week behind, then the landlord should be able to give three weeks notice to evict.

Similarly, if damage has been done to the premises, then the tenant should be able to be evicted quickly so that the bond left can cover repairs.
David

I think tenants who do a runner without paying their rent should be charged with theft – they are in effect stealing the landlord’s money.
Alan

Landlords should pay for agent finder fees. This means that more renters will go through agents, and landlords can get better quality tenants faster/sooner. Renters are scared off by agent fees.

If a tenant damages property directly/indirectly (or anyone else they allow in the house damages property) the tenant is responsible for the damage and should pay for damages (they can reclaim damages from the person who did it).

What humane system would not want this to happen. Landlords should ensure their houses, tenants should ensure any contents they own. If tenant damages the house, the insurance company pays for it to be fixed and claims it back from the tenant (tenant pays excess).

If the damage does not involve an insurance company, the tenant must pay the landlord.
KT

In France, tenants have to give a three-month bond, which is closer to covering potential repair costs than the meagre NZ legal bonds.

On the flip (cohesive) side, I would argue that landlords not be allowed to install cheap inefficient appliances into their property under the pretext that tenants will pay the bill.

The country’s energy supply is too stretched for that kind of short-sighted nonsense to be tolerated any longer. And for the solar water heating installation grant to be bumped up, for the same reason.
This would actually be a great economy-boosting “infrastructure” item (infrastructure as in: equipment that will be benefiting the country for many years).
CG

Hope Sue Bradford has a tenant or two to manage, and she has to go through what some of us have been through. Then she’ll realise what is fair.
R

Tenants do a runner, this could be time-consuming and frustrating to chase the money.

From the current system, you can get an order from the Tenancy Tribunal for more than one month. To enforce the order, you need the service address, while if the tenants is a beneficiary or tax payer, you need another one month to find the address.

Since the Department of Justice, the department of Work and Income and Inland Revenue are all government agencies, can’t they exchange the necessary information to enforce the law?
Charles from Howick

As a tenant in Dunedin and a landlord in Auckland, my experience of property managers has been quite an eye opener.

There is a strong case for a legally enforceable code of conduct for property managers.

I might add I have never been in default in either sector so there is no chip on the shoulder. My view is purely driven from the quality of service provided which could be summed up as the old “she’ll be right” maxim and really abysmal.
Peter

In my discussions with banks and lenders there are some very contrary things going on at the moment.

The key theme which seems to be coming up is that there is a growing number of “problem” lenders at all the banks. There have been reports that default rates have been increasing, as you would expect in this market, and that mortgagee sales are also rising.

While there are no official figures it will be interesting to see how bad this gets. What I do know is that many lenders are actively trying to encourage borrowers to act early if they start getting into trouble and can’t make repayments. If you act early the banks can help, but if you leave it too late then don’t be surprised if you become one of these mortgagee sale statistics.

On the other side, I am hearing stories that lenders are getting significant volumes of applications for pre-approved loans. If you can read into this it means that people with a bit of equity are gearing up to start buying property.

Having your finance in place is a good thing to do if you want to do a deal and going unconditional early is part of your strategy to lock a good price in.

No doubt these two observations fit together and the people with the finance will be the ones buying at the mortgagee sales.

My observations of the market is much of the stock being sold, particularly at auction, are the properties put up for sale by the banks.

While this isn’t great news for the vendor, I suspect it is another good sign for purchasers wanting to pick up a good deal in the market.

I continue my quest to put some reality checks on the property market and what is happening. This week seems to have been dominated by news which I would mainly catergorise as positive.

Yesterday we had some migration numbers. Now you may wonder what is the relevance. Simple – immigration flows and house prices are strongly correlated. When they are strong, house prices are up as these people need somewhere to live.

While the numbers weren’t mind-blowingly positive (a small inflow in December of 300 and 3,800 for the year) at least they were positive. One comment I read somewhere was that there was an expectation fewer people would leave New Zealand because of the credit crunch and the difficulty finding work in countries like the UK.

One could also argue the government’s changes to the RMA are good for the market. No doubt they are not negative. However, I have a view that the RMA isn’t a big deal for mum and dad property investors. Sure it is for the big guys and the developers, but for the average property owner? I don’t think so.

If I am wrong and you have stories about how the RMA has hurt your investments, I’d love to hear them.

The other positive news is the continuing fall in home loan rates. While some don’t think that is a driver of the market, investors I know see it as being a big plus.

While this week’s news has some goodness about it, I suspect the same won’t be said next week when the QV stats are released. My prediction is that you will see house prices continue to soften and the 12-month drop will be around the 10% mark for many places. But if the Barfoot numbers this week are an indicator, then we may see a slight firming in prices starting to appear.

Here’s a few predictions to start the year with. Firstly, smart investors are buying and will make some great buys.

In the next issue of the NZ Property Investor we speak to many people who have bought properties in the past couple of months. The stories they tell are quite inspiring as they show that the numbers being achieved in this market are good. Property is starting to stack up as an investment option after years of being too expensive.

One of the reasons is that interest rates are low and continuing to fall.

My second prediction is that we will see home loan rates with a five in front of them within three weeks at the outside. It seems to be a race to see who gets to 5.99% first. It could even happen sooner as we have wholesale rates falling and banks working on what are fat margins (compared to the mortgage war era).

My third prediction is that while money is cheap, it won’t stay that way for very long. Later in the year we will see interest rates start to increase again (just like we have seen petrol prices rise in the past week).

A fourth prediction is that property will look very attractive. At the moment, low interest rates mean that real returns from bank term deposits are close to zero. Investors have to look at growth assets such as shares and property. Shares look ugly as the world markets go through turmoil, while property looks much better.

My fifth prediction comes from the effect of the first three. House prices won’t fall significantly in the next few months, with the exception of high-end property especially coastal retreats.

Buyers are out there looking and if there is enough of them, they will provide sufficient demand to stabilise prices. This won’t just be for properties which stack up as investments, but also for first home buyers and for families looking to take the opportunity to upgrade their home.

These people may even end up buying the property which has been put into the rental market by accidental landlords, the ones who couldn’t sell at a decent price in the second half of last year.

This is far more optimistic that what you will read in other places, but I reckon there are many positive things happening for property investors right now.

There’s a lot of talk about the state of the residential property market at the moment, much of it from commentators rather than people on the ground out there doing it.

Have you bought an investment property since mid-November?

We’re looking to talk to investors who have bought recently or are intending to buy for an article in the NZ Property Investor magazine. If this is you, please can you email your contact details to editor@propertyinvestor.co.nz. We’d like to know more about what, when, where and why investors are buying.

I was hoping for an early Christmas present in the shape of a strong housing market over November. Sad to say though, that the numbers out from both QV and the Real Estate Institute this week were a bit sad.

Depending who you listen to the market is bottoming and could even be showing a little bounce. Maybe the first tentative signs of recovery.

The big issue though is the one of volume. The number of sales is still tiny compared to a year ago and this is what is really hurting many people in the industry.

I would have thought that falling interest rates would be creating more activity in the market. Maybe it is just too early to see it, as it takes time for the deals to come through and be reported.

Likewise the argument that banks have tightened up their lending criteria isn’t likely to be showing through either.

It’s unlikely we will see them next month, as December is traditionally the lowest and slowest month of the year. People are more focused on other things (parties, presents and getting all those jobs done before the year is out).

If one is looking for a ray of hope in the residential property market it is this: Prices haven’t fallen as far as some commentators have predicted. The latest numbers could be a plateau. Only time will tell.

There are signs that support the market such as interest rates, increased affordability and tax cuts. I would argue that as interest rates keep falling people are going to realise that term deposits and the like will be giving very little, if any, return and they will once again look at growth assets like shares and property.

While I didn’t get the early present I was expecting, hopefully Santa will be kind to me in two weeks’ time!