Blog: The Landlord says...

We Kiwis have a bit of a fascination with house price stats, which probably is no surprise considering our so called love affair with bricks and mortar.

I suspect this penchant to look at house price stats will become even more interesting following the awful events in Christchurch earlier this month.

It’s our second biggest city and accounts for its fair share of house sales each month. However following the quake the market has stopped dead in its tracks.

Part of the reason is to do with insurance, or the lack of appetite for insurers to issue cover at the moment.

In coming months this is likely to distort the numbers produced by organisations like QV and REINZ.

But the quake also raises lots of other questions which will no doubt test the minds of property investors. One is that we often talk about the best house to buy as investments are low maintenance brick and tile properties.

Following the quake it seems most of the damage has been to these types of property rather than the wooden, weatherboard, tin roof type houses.

Also you have to wonder what will happen to house prices in the Garden City once sales start again. Will people, including investors, still want to buy property there? Or will they opt for other areas?

Maybe, if they are buying in Christchurch the criteria for may change and premiums will be paid for good quality buildings which have withstood the destruction unharmed?

Another thought which has crossed my mind is that maybe there is a potential “leaky home” type crisis brewing. Engineers certify a building is sound following the quake but years later some damage is found which is expensive to repair and impacts on the value of the property.

We’ve been keeping an eye on what is happen on Landlords.co.nz and the next issue of NZ Property Investor will have a feature on what the quake means for property investors. We’d love to hear your thoughts on what the big shake has meant for the property market and particularly investors. Leave a comment here or email your thoughts to editor@landlords.co.nz

Last week, with little fanfare, the Residential Tenancies Act was finally been passed after years of mucking around. Oops I mean consultation and discussion.

The RTA, which is the rulebook landlords and tenants live by, has generally been given the thumbs up.

However the latest issue of the NZ Property Investor Magazine sent out this week we take a deeper look into the changes.

While there are some things landlords will like it appears that running a rental property may get quite a bit harder. Also there is a raft of different things fines can be levied on.

In writing the article we discussed the changes with many people who will have to help manage the rules when they take effect and they made the point there was quite a few areas were there was uncertainty.

The only way definition was going to come into the rules was once there had been some test cases.

It is a sure thing some of the recalcitrant tenants will try out these new rules and use them to have a go at landlords.

I would suggest, if you are a landlord, you have a read of the article and learn what the changes will mean for you. Another option of course is to engage a property manager to take over the job.

To find out more about what is in this issue of the NZ Property Investor Magazine click on this link. If you want to save some money then think about subscribing this month as the cover price and subscription rates will increase when the government increases the gst rate to 15%.

Subscribe now for just $99 a year

The little theme of this week’s newsletter is about looking ahead at the property market and what is happening. Pondering the market is something we often do and it is worth addressing again as there is so much uncertainty and change.

While the news has been pretty gloomy and the housing market appears to be dead, I wonder if it is as bad as some make out?

As readers know we try to be a bit more balanced in our view on the market and look for positives as well as negatives.

One thing that strikes me is winter is always a moribound season for house sales; this year is no different.

Some interesting figures from Alistair Helm yesterday show that the trend quite well. Often when we enter the spring period the market lifts quite swiftly.

On a month by month basis the last set of numbers looked sad. However its worth looking at them with a longer term view.

Helm’s reports says sales fell by 2.9% from June to July, and a total of 4,411 property sales were recorded by licensed real estate agents in July.

Back in July 2009 the total sales was 6,014. On a moving annual basis sales are up 2.8% with 63,701 sales in the past 12 months as compares to 61,952 in the prior 12 months.

The stratified price fell from $363,925 in June to $359,525 in July. The June price is up just 1.8% as compared to July 2009.

Sale prices across the country has remained fairly stable over the past nine month with some small ups and downs. The current price is still 3.1% below the peak price in the market back in November 2007.

Looking ahead there are a couple of warming signs. One is my discussions with real estate agents. No-one shies away from the fact June and July were awful periods. However, word getting back to us is that August has been far better with more buying activity and more stock coming onto the market.

While we put together the September issue of the NZ Property investor Magazine we also came across comments that were far more supportive of the market than one would believe if they listened to only some commentors and media.

Everyone agrees it is a buyers’ market and those in the position are doing just that. Again comment which came through was that it’s better now as “there has been a clean-out of timewasters, dreamers and fly-by-nighters.”

The other slightly positive factor was last week’s immigration numbers. (Read about them here).

And if I had to add another it would interest rates. The emerging view is that the next official cash rate will come later rather than sooner, and overall the increases will be less than what we have seen in other cycles.

So the next set of numbers will give us a good feel for whether these positive signs turn into activity.

I started by talking about looking ahead and finding out what is happening in the market. You can help do that too. The annual ANZ/NZPIF survey is on. You can take part here (and go in the draw to win a prize).

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?

It’s often said that New Zealanders have a real love for property, but I wonder how far it will stretch?

We know the government has been trying to break up this long term love affair, but with little success. Judging by two surveys, one run by Landlords.co.nz and the other by QV, investors are going to remain property investors.

However this week we have had more evidence that the local housing market is pretty flat and there are low sales volumes. In a word it’s lethargic.

Investors have been used to active markets in recent years and could well be interested in something more exciting than the local market.

It seems quite a few New Zealanders have bought property in Australia but I wonder how attractive the “lucky country” is currently.

I did read a piece which said the Australia has one of the most expensive house markets in the world.

One of the “new” things that I’m hearing about in the market is a number of companies wanting to promote the idea that Kiwis buy residential property in the United States.

Yes this sounds a little outlandish at face value, but the numbers being bandied around will look attractive.

I assume a lot of these properties are ones where the lenders have foreclosed on them and wanting out.

I have come across this idea before. One of the first times was when I profiled a quite remarkable Rotorua-based property investor Tracey Hintz. She owned lots of property in New Zealand and employed many different strategies.

However she also bought some property in the United States and made some good money.

There is a warning with this story. It’s not all plain sailing and the US housing market is remarkably different to ours and how it operates. No doubt this is more we will hear about soon.

I’m interested to see how many investors would consider investing in the US? Once I have some examples of the numbers being talked about I’ll post them here.

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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.

One of the questions at the moment is whether property investors are selling up post the Budget or continuing on?

Reading the headlines there are conflicting views. Our survey at Landlords.co.nz shows that very few investors are planning to quit the market due to the removal of the ability to claim depreciation and changes to LAQC rules.

However, others suggest that there is a sell off happening.

Of course I will be a little subjective on this and say that our survey sums up the mood of the market pretty accurately.

We are finding little evidence of a mass sell off and looking at real estate listings it doesn’t appear landlords running for the hills. Indeed if you look at REINZ’s numbers today it is becoming more of a buyers’ market and investors will be in on the action.

It was suggested that maybe the survey is a little skewed as readers of the NZ Property Investor Magazine and Landlords.co.nz are, let’s say, a little more professional and do some more research on their investments than others. (I couldn’t possibly comment).

Then there was this story yesterday that residential property investors in Canterbury are quitting “en masse”.

A sale of 20 properties in a metropolitan city doesn’t seem like en masse. On closer inspection the story is actually good news.

Investors are selling for a variety of reasons. Some of them are getting rid of underperforming assets. Others are highly leveraged and have investments don’t stack up. Others have had bad experiences and poor advice.

What is good about this? The fact that investors are getting rid of non-performing assets is good. Why continue to hold onto a dud? Maybe these people will buy more property? Yes, the Budget will force out some people who probably shouldn’t have invested in property in the first place.

As for whether there will be a wholesale exodus from investment property I say no. Many people like property as it is an investment they can touch and feel and have control over. In fact it is one asset class where the investor can actually add value.

Many investors have no desire to put money into shares, bonds and finance companies – partly because they do not trust the people who run them and they can’t “see” what happens to their money.

There’s a saying that taxi drivers are a good barometer of what is happening in the world and that they have a good idea of what people are talking about. Why do I mention this?

Well on Wednesday I took a taxi out to Auckland airport to catch a plane home and the driver asked, as they do: “What do you do?”

Since this chain of cabs had magazines for their customers I mentioned the NZ Property Investor Magazine.

“I’ve read that,” he said. It turned out this chap, who I guess was getting on towards retirement age, owned four properties. Two in Auckland and two in Australia.

From here to the airport we had a good yarn about investing.

In many ways my driver was probably typical of a lot of investors. Started out not knowing too much; learnt along the way and was doing it to prepare for retirement.

Just an ordinary bloke who had the wherewithal to get off his butt and look after himself.

Of course our discussion turned to the Budget and what it means for him and his wife, as property investors. The answer was that he wasn’t too worried. Clearly not impressed with Finance Minister Bill English, but the changes won’t derail his property investing activities.

The story is interesting as this driver, as I said, is probably pretty typical of many investors. They are not speculators or people trying to rort the system as many suggest.

Are these people, the ones Rob Muldoon would have called Kiwi Battlers really the people the government should be picking on?

Hell no.

These politicians spend plenty of time in taxis (at our expense). Maybe they should engage with their people and see some reality.

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.