Dear Mr. Newland,  
I have read your latest column which has given me hope, however, I have also read Harry S. Dent’s latest book about The Crash Ahead. His information is based on demographics and spending patterns; and the strategies for inflation vs deflation are opposite. How do you think the slow down that he predicts will impact here in New Zealand? If globally, we are entering the start of a depression, what is your prognosis for New Zealand? Thank you for considering my question.  
Sincerely, Bill  

 
Dear Bill  
I don’t there is the slightest chance of a depression. The most likely scenario is just muddling ahead going now no where for a few years. Just behind that is hyper-inflation which is big risk- because if economies do not improve governments will print their way out of the problem. I have seen this time and again. Inflation is always the lesser evil as compared to deflation or stagflation.  
Regards  
Olly  
 
 
 

Hi Olly, I was wondering what your thoughts are on market leaders differing points of view. On one side you have some economists eg tony alexander and asb economists predicting the property market is going to improve by 4% this year then on the other you have a anz economist saying that our property market is over valued still by 15-25% which if eventuated would result in a fair portion of nz home owners with 0% equity. I just dont understand how these economists that were educated at the same universitys can come up such such different views? your thoughts?
Scott

Dear Scott
You are right. Economists have picked 5 out of the last 3 recessions correctly.
The trouble with numbers, charts and models is that they cannot predict emotion.
I view the scene based on personal experience over 50 years and trust that, as well as keeping up with the latest business and political news on a daily basis- both locally and internationally.
My instincts tell me that prices will stay flat and rents will rise until the tipping point comes where renters go back into the market.
I also believe that politicians cannot live with recession and survive so they will deliberately re-inflate economies- which means inflation.

You can see it already with constantly rising prices which will eventually lead to wage demands, which lead to more price rise and so on and so forth ad infinitum.
Regards
Olly

Olly, aren’t you and most of the market commentators trying to talk up the residential housing market?
With low economic growth worldwide, and the likelihood of limited income growth within NZ you seem to be forgetting the affordability factor of the average tenant or home owner who has limitations on servicing either rent or a mortgage. For rentals this means yields are either going to be remarkably low or prices are going to ease further to fit an acceptable yield platform.
As you have stated banks are getting “tougher”and will continue to be so for a further 6-12months which will influence greatly the prchase price. These new market values will shock most property owners and they will choose not to sell rather than face the reality of the market. A property shortage would in normal times bring about a rise in sale prices but we are not in a normal market situation and I believe we are in for further readjustment downwards.
Statistical means can be manipulated but the reality is NZ and many other nations property has been seriously overvalued for a long time. Past models are no longer valid in this market.
— Richard Jones

Dear Richard
I am not trying to talk up the market. Indeed a down market is more profitable as I can now drive bargains that were unthinkable a few years ago.
From past experience, when property prices rise dramatically (as they did) rent levels are forgotten as investors chase capital gain.
Now with the market flat investors are being much tougher on rent levels and will push these upwards to the maximum. Couple this with virtually no building,
leaky homes, low interest rates and the earthquake and we have a classic scenario for rent rises in the offing. The property market is not the share market.
Things do not happen suddenly and logical reactions do not always appear on time. I believe we are in for a large bout of inflation as the politicians try to get the economies of the world through the recession. This will feed into a push upwards for wage rates and thence into rents.
As you say past models are not valid any more but human nature stays the same.
Greed and Fear will always rule and the models will revert to the norm.
Regards
Olly

Hi Olly,
I am a new property investor and have been actively reading as much material as I can. I’ve recently attended a course where they were promoting techniques such as lease options, sandwich leash options, cash back stop, double settlement, etc.

They were singing virtues of these deals and how realtively simple it is to find a good deal. What are your personal thoughts on this? I realise you have wrote an article titled ‘Dodgy dealers – what to look out for’ in 18 June 2009 about this.

I would very much appreciate your thoughts on this as I am still contemplating whether or not to join their programme.
Thanks for your time. Alex

Dear Alex

If it was that easy why any everyone doing it?
All these “deals” need the other side of the deal agreeing with it and in 99% of the cases they don’t.
Lawyers will never let these deals through especially in this market.
They sound good on paper but in reality they hardly ever succeed- unless the property is a dog and no one wants it.
I don’t know who you are talking about (and I don’t want to know) but any “get-rich-quick” programme is suspect.
I attach my programme which has been tested for over 30 years and based on my real life experiences and reality.
Up to you whether you want dreams or facts?
Cheers
Olly

PS article below:

DODGY DEALS – WHAT TO LOOK OUT FOR

Property, by its very nature, is a big ticket item. It’s no wonder then that the property game attracts a variety of scam artists and fraudsters, as well as those who just push the envelope whenever they think they can get away with it.

We have all read or seen the suffering of those who have already been caught up in dodgy deals. The likes of BueChip, Merlot and the real estate agents from the highly respected firm of Barfoot & Thompson who abused their position in a multimillion dollar mortgage scam.

In this column and in subsequent articles over the coming weeks, I will set out to describe some of the ‘dirty tricks’ of the property game — to help you remain fully informed and vigilant — lest one of these type of deals is ever presented to you.

Property finders and Sandwich deals

Traditionally property finders — sometimes also known as buyer’s advocates — are licensed real estate agents who specialise in seeking suitable properties for their clients who may not have the time or inclination to look for themselves. This is a respectable and very useful service and is widely practiced both here and overseas.

Unfortunately scam artists have climbed aboard and, trumpeting themselves as property finders (although NOT actually licensed agents), many are effectively playing a game called ‘sandwiching’. Their objective is to simply ‘sandwich’ themselves between a legitimate seller and a legitimate buyer with the aim picking up a quick profit.

Some even hold themselves as property or wealth ‘coaches’, but they are not the least bit concerned about the welfare of either party, nor any stress and suffering they may cause. Most importantly, their scheme is designed to carry no risk to themselves. To the disadvantage of the vendor, these ‘traders’ don’t have the slightest intention of ever buying the property themselves.

How it works

The system is an abuse of the traditional methods used in the majority of property transactions. These self styled ‘finders’ use the standard Agreements for Sale and Purchase obtainable everywhere.

Typically targeting the cheaper end of the market the ‘finder’ puts in multiple offers, often through the internet, on anything listed for sale and always offering a very sharp price. Rarely do they ever set foot on the property let alone inspect it. You can recognise their ‘offers’ as they are inevitably conditional for several weeks and are in the name of the purchaser ‘or nominee’, and the deposit is invariably very small and not payable until the offer is unconditional.

During the period the property is under contract (with what is, in reality, only an option) the finder re-markets the property and hopes to on–sell it or ‘trade’ it by finding a legitimate buyer at a higher price.

If they succeed, they simply nominate the legitimate buyer and step aside — picking up the difference. If they fail to on-sell, they declare the contract void and move on to another sucker.

By the law of averages if they put in enough offers they will succeed often enough to make it a worthwhile exercise — for them.

Auctions and tenders are the only exceptions where the system will not work.

The hurt and inconvenience consequently falls on the honest seller who has been effectively taken out of the market during the ‘option’ period. He or she can only hope for back–up offers, which can be a highly stressful and frustrating situation for all parties — except of course the ‘finder’.

Guarding yourself

To protect yourself against this practice :

1. Warn your real estate agent to be on guard against these offers.
2. Ask for a substantial deposit to be paid up front. (The Americans call it ‘earnest’ or ‘hurt’ money for good reason.)
3. Accept any conditional clauses only for a short duration.
4. Always have a ‘cash out clause’ which allows you to sell to someone else during the conditional period if you receive another satisfactory offer.
5. Do your best to check out the buyer before signing.

Jacking up prices

Another way dodgy dealers manage to borrow more than a property is worth is by jacking up the price through a system called ‘hydraulicking’.

The usual method of valuing a property is by comparing recent sale prices of nearby similar properties and the last sale price of the property in question. What the dodgy dealer does is re-sell his target property to a colleague/partner who is a part of the scheme, often within days or weeks of buying it — but for a considerably higher price than was originally paid. Then his colleague sells it back to him for a yet a higher price. This money-go-round may be repeated a few more times with one sole objective: to have the property appear to be more valuable when the records are searched for sales evidence.

This trick has been used many times and was one of the causes of the massive strain (and sometimes collapse) of lenders who took the apparent sales evidence at face value instead of checking it out properly. The unfortunate result is that a lender can end up advancing too much money against the property, with the mortgage ending upside down and exceeding the real value by a wide margin.

Most competent registered valuers are well aware of this practice but unfortunately these deals (and more sophisticated variations of them) do slip through from time to time.

I have seen for myself a blatant example where a South Auckland home, with a real value of $250,000 at the time, was sold and resold within a few months with the last recorded sale being $550,000. Yet the house was exactly the same as before and prices in the street had hardly moved at all.

The owner had jacked up the value with the sole objective of fooling the bank into lending 80% of the last sale price (i.e.$550,000 x 80% = $440,000) thereby giving him a tidy $190,000 surplus in the hand. This is a totally crooked racket which has fooled many a lender or buyer to their horrendous cost.

Fortunately lending rules are much tighter now. The current generation of lenders is much more careful as a result of the recent carnage the lending market.

Nevertheless, if you’re a buyer, I urge you to stay alert to this practice and always use a registered valuer and their common sense before putting in an offer.

Olly Newland
June 2009

Which of the following strategies seems like the best for someone entering retirement; 1. Buy one 4BR new townhouse 500K 2. Buy one 2 BR new townhouse 320K 3. Buy two 2 BR 25y/o flats 450K I’m assuming for retirement that no mortgage is best?? — Rick

Dear Rick
I would buy the two x 2 brm units as 25 years is not a great age for property. Remember new properties carry a 15% GST component in  them which makes any capital growth that much harder to get.
In general the rent from a tidy but older unit is not proportionally less as compared to a new unit so you would get a little more rent for the same outlay.
No mortgage in retirement is best of course, but a property with a manageable mortgage is no bad thing in any event.
Regards
Olly

Hi Olly,
What is the true definition of “Price by Negotiation” in the NZ property market. Can the listing agent take 3 offers to the vendor and start a negotiation process, thus giving the vendor an added advantage or do they have to deal by negotiating fairly on a first come first served basis?
Thanks/Regards, Clayton

Dear Clayton
“Price by Negotiation” is just a pompous way of asking for offers, without revealing the asking price.
It is a most irritating method of marketing as, from my experience, most people lose interest in a property if they have no idea of the vendors price expectations. An agent can take as many offers as he likes to the vendor and the vendor can deal with them in any order they like. It becomes a bit of a silent auction in the end and can be very frustrating for all parties, unless the agent has a good control over the situation.
Regards
Olly

As a rule of thumb: What, typically, would you currently expect to earn (net per annum before tax) from: a) A clean & tidy 3 bed residential property in say, Balmoral/Sandringham? b) A tidy $2m commercial property in industrial East Tamaki? What do you reckon is the quickest and least painful way to really learn about commercial property? (Work as a researcher for you for free?) Do you think we are experiencing a Great Property Market Correction where, instead of house prices seriously tanking, rents will climb to the point where it will become worthwhile to hold residential in the absence of significant annual appreciation? I conscientiously read and enjoy your newsletters.
Best wishes Diana
PS Didn’t attend ’2011:The Outlook’ but I did get the workbook and audio programme (Queens Road, Panmure – brilliant!)

Dear Diana
As a rough guide you can expect around 3-4% yield from the Balmoral/Sandringham property- but it all depends on the number of bedrooms, condition and many other factors so this figure cannot be relied upon.
The commercial property in East Tamaki could return anywhere form 6.5% to 10% depending on the quality of the tenant and the property. There are so many variables in these exercises that far more detail would be required to come up with a better answer. I think rents are due for a big correction
again depending on position ad quality. Poorer areas cannot afford big rent rises so investing to more affluent areas would be the way to go.
Cheers, Olly

Hi Olly,
I really enjoy reading your articles. With all the talk about house prices and the market, I am surprised not to see any commentary (from you or others) about the next ‘lot’ of teaser loans that will come off the books in the USA. For others benefit, the teaser loans were a pre cursor in the sub prime market in USA. Low interest loans for a couple of years, that then have the interest rates jacked up = people cannot afford the new repayments = they lose their house. Could you possibly offer your opinion on this, as I feel it may have an impact in NZ in 2012/13.
Many thanks, Rob

Dear Rob
I too have heard about the “teaser loans” but NZ didn’t go in for these to the same extent so the impact here will hopefully be limited.
Furthermore I believe the Authorities in the US will not allow them to get out of control by printing more money = inflation.
They have had plenty of notice and practice.
Cheers, Olly

Hello Olly,
My wife and I are looking at a leasehold property in Kohimarama, there is 1 year remaining on the lease which is owned by [snip] Holdings, the lease is currently $7500 per annum. According to the CV the house is worth $150,000 but it needs some serious TLC to make it liveable, asking price $95,000,. The land is valued $560,000.
Is there a maximum amount they can increase the lease?
If we contact [snip] Holdings are they obligated in telling us how much they intend to increase the lease?
Is there any way for us to get information like this?
We don’t want to buy the place and get stung by a huge increase in the land lease. Do you think it is wise to buy a leasehold property? The property in question is in a great location in a very quiet cul-da-sac, walking distance to school and walking distance to beach, just a few steps from [snip], we think it would be a great investment if the land lease won’t reach an outrageous amount.
What’s your opinion and your advice?
Thank you so much for your time,
Kind Regards,
Matthew.

Dear Matthew
The Lessor may give you an indication of what the lease rental will be, so there is no harm in asking them. However you can get a good idea by yourself by taking the land value (in this case $560,000) and use 6%-7% as the likely ground rent to be charged i.e. $33,600-$39,200 per annum.
Should the land be worth less, then naturally the likely rental will be less but it will give you a rough idea … should the lessor not want commit themselves just yet.
Regards
Olly

Hi Olly
If you were selling a property in the current market, and buying another property, would you think it was better to buy a property at the same price you sold for ….. or for more and get a mortgage, or less and save the difference???
Thanks, Caroline.

Dear Caroline
If you can find a nice house for less than what you sold for, and save the difference that would be a good idea.
In theory it works well, but in practice people often get frustrated when selling down as the house they move down to is not as nice as the one they left.
Cheers
Olly