Another Boom, Another Bust (column)

Olly Newland’s column December 2011

Once again there are headlines that suggest the housing market is stirring and that prices are rising. Auckland is, as usual, the leader of the pack, but by a process of osmosis the rest of the country will catch up over the next year or two.

With all the modesty I can muster, let me point out I have been predicting this for a long time now.

Why is this happening?

What is driving the improving market when the headlines are still lurching from one crisis to another ?

Low interest rates are one key factor. Now borrowers can service up to twice as much debt as they could a few years earlier … but at the same cost.

Another key factor is that many savers are tired of getting measly returns (less tax) and are again finding the idea of investing in the property market a more attractive idea.

As for the Global Financial Crisis, people are thoroughly sick of that as well. There seems to be one crisis after another but the world keeps turning. It’s human nature to become immune to an endless, ongoing stream of ‘crisis’ talk – much like the desensitisation practice of tying a horse up to a fence by the road so they get used to traffic.

People cannot fail to notice  that cars still fill the streets, that restaurants are full, exports are solid and that rents are slowly but surely rising.

Now that the “looney left” with their capital gains tax ideas have been well and truly routed at the polls, New Zealanders can get on with their plans — which including investing, buying and selling with the freedom they have always enjoyed.

All in all, these and other factors and we end up with an (un)holy mixture which could result in an even bigger boom that the last one.

Is property a gilt-edged investment? Like this? (click to enlarge)

However I believe there is a risk of some considerable danger so I give this warning:

If we do have another boom, – and the chances of that are increasing daily- encouraged by continuing low interest rates, plus earthquake rebuilding, leaky home renovation etc then the risk of the bubble bursting followed by a nasty crash seems far more likely than ever before.

So my advice is to tread carefully.

By all means enjoy any such boom. Do all the profitable  deals you can find. Make money with both hands but be ready to press the ‘dump button’ at any time. In other words do not get involved in long term speculative projects.

In my view the next boom (when it happens) will be shorter, sharper and could have a very nasty bite at the end.
Coincidently, this report surfaced in the last few days:

“Housing bubble set to burst”
By Anne Gibson NZ Herald

“The Economist” rated New Zealand in the world’s top overpriced markets.
New Zealand homes are overvalued by 25 per cent and the country is one of nine under threat of a housing bubble burst, says the Economist.

But the leading international publication’s feature report – headlined ‘House of Horrors’ – has been rubbished by real estate industry insiders.

“The Economist” ranked New Zealand in the world’s top overpriced markets along with Australia, Belgium, Canada, France, Britain, the Netherlands, Spain and Sweden.

Read the rest here at NZ Herald

How these predictions are made is anyone’s guess but it makes good headlines for the media to shock and horrify us on a daily basis.

I wonder if the pointy head at The Economist ever talked to any buyers of the over-priced shoebox apartments that blot our inner cities?

I bet the original buyers of these would wish their properties were ONLY 25% less than they paid.
I wonder if those who bought lifestyle blocks and seen their equity melt away feel they have made 25% on their purchase? And don’t forget the beach houses, and the mosquito infested lake front sections that Spruikers shamelessly tucked retired farmers into along with naïve buyers that believed the hype that prices would rise forever.

“The Economist” may have called it right but they have called it way too early. They may well be right one day  - but that day has not yet arrived. The next boom is patiently waiting in the wings for the next curtain call.

Then we have this item of news which confirms all of the above:

First home buyers return
Wednesday December 07, 2011 Source: Fairfax

First home buyers appear to be the driving force behind the residential real estate market in New Zealand, according to new research released this morning by BNZ.

The survey, conducted by BNZ Banking Group with the Real Estate Institute of New Zealand, canvassed more than 10,000 licensed real estate agents.

Some 29% of real estate agents reporting first home buyers are prevalent in the market.

BNZ chief economist Tony Alexander said first home buyers nationwide were probably responding to the lower level of interest rates at the moment.

“Since we went into recession in 2008, a lot of young people who may have left home and gone out on their own otherwise have not done so. Maybe they have been living at home, have now built up a deposit and are certainly sick of living with their parents,” Alexander said”.

Read the rest at TVNZ

And if you need more proof …

Property Prices Still Keep Rising
08/12/2011 ww.stuff.co.nz

Residential property prices continue rising nationwide, with the average price of house sales in November up 1.7 per cent from a year earlier according to the latest data from Quotable Value (QV).

Each month since April this year, prices have shown a steady upwards trend and are now only 4 per cent below the last market peak, seen in late 2007.

QV research director Jonno Ingerson said most of the main centres had seen an increase in new listings after the Rugby World Cup ended in October, with more houses expected to be coming onto the

Read the rest at stuff.co.nz

While on the subject of the “looney left” …  just read what the Greens are suggesting to help the first home buyer:

“The government is being urged to boost the supply of affordable housing to help wean people off a state rent subsidy which could cost NZ$2.2 billion a year – almost twice as much as official predictions – by 2016.

But any fix could require a large up-front investment in state house building, and/or require action from the private and community sectors to help increase housing supply, and therefore affordability, at the lower end of the price spectrum.

The Green Party has called on the government to see whether spending on the Accommodation Supplement could be more effectively spent elsewhere, with the party touting construction of more state houses as one solution to problems of housing and rent affordability. Co-leader Meteria Turei has attacked the Accommodation Supplement in Parliament as a subsidy for landlords. Turei told interest.co.nz high house prices, with constrained supply, meant higher rents and therefore costs to the government through the rent subsidy.”

Read the rest at interest.co.nz

This long whinge from the Greens and other sectors can be summarised in one simple sentence:

The Government (i.e. the rest of us) should pay for housing the people that are too lazy to get off their bums and house themselves as their parents and grand parents once had to.

Before the “We are the 99” mob camp at my office door let me add that Government housing is necessary for the truly poor and afflicted — but that is all.

If the Government really wanted to help, it would do what I have suggested previously. That is:

(1) Throw out the ill-thought-out rules limiting depreciation so that the most efficient sector- the private sector -can get on with the job.

(2) Rebate all or part of the oppressive GST imposition for first home buyers ( think how that would help the building industry and create jobs)

(3) Revamp the Residential Tenancy Act  which remains a huge disincentive to investors particularly the bond limitations.

(4) Encourage savers by indexing their deposits against inflation. Banks cannot lend if they cannot attract savers so would have to level the playing field some how.

Mark my words: Housing shortages and rising rents will be the next scandal on our doorsteps, and never mind what happens in Europe or the rest of the world.

The commercial market

Good quality commercial property is selling for lower and lower yields (i.e. higher an higher prices). Typically a block of solid block of shops or retail would may have sold  at a 10% cap rate a few years ago, now often sell for 6% yields or less. Or put the other way: they are selling for nearly twice as much as before .

examples:
Cambridge, corner Alpha & Victoria Sts, 425m² 2-level bank building, on 653m² high profile site with off-street parking within the main shopping precinct of Cambridge, occupied by Westpac on 3-year lease from May 2010, with 2×3-year right of renewal, sold at auction for $1.3 million at a 6% yield (Blair Hutcheson)

Birkenhead, 13 Birkenhead Avenue, 141m² character building on a 114m² site, shop occupied since 2007 by specialty food & beverage retailer Ashore Fine Foods, which has exercised the first of 2 3-year rights of renewal; potential to add another floor to the building, which has harbour & Auckland CBD views from the rear, sold for $510,000 at a 4.9% yield (Christina Heaven & Claire Rawkins)

(source Bob Dey report)

Other commercial properties typically sell for around 7%-8%  yields which is much better than money in the bank because of tax advantages and the prospect of capital gain

Summary

Within the next couple of years the recession will be five years old and if history is anything to go by, it should be soon coming to an end.
Time and again, in almost all  the previous booms and busts people endure the hardships for a maximum five years before becoming restless.

The ensuing public disquiet leads to political pressure which in turn forces corrective measures (mostly wrong ones) from the legislators who then must find solutions or face political ruin.

The end result is always the same. Despite the rhetoric, Governments print money and printing money eventually leads to inflation sooner or later. Just look at property prices over the last 25 years, if it’s proof you are wanting.

Real estate is all about timing. If  you can get the timing right you will profit mightily. I rest my case.

Olly Newland
December 2011
www.ollynewland.co.nz
© 2011 Olly Newland. All rights reserved. See Olly’s books and audio products.

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Posted in News & Articles | Tagged , , , | 4 Replies

4 thoughts on “Another Boom, Another Bust (column)

  1. Pingback: Olly on Morning Report 9 Dec 2012 « Olly Newland

  2. Pingback: Olly Newland on Morning report | The Paepae

  3. Hi Olly. I really appreciate your expert overview. As a complete outsider, may I ask why you are so opposed to capital gains tax – “looney left” idea etc? It seems to me that not taxing that income is by definition tilting the level playing field. I don’t think I’m looney or left but maybe I am…

  4. Most residential property investing is unethical and most property investors are either ignorant or psychopathic. The residential property market will improve when it drops to a level that is affordable. The best thing that could happen to New Zealand right now would be if the property market crashed by at least 50%. I challenge you or anyone else to provide proof that high propery prices are good for the economy and society.

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