Here is graphic evidence  that there is an “ugly” side of capitalism.

Capitalism is all about growth, the right to profit, and to deal. It is also the right to do nothing and builders are doing just that. The end result will be a chronic shortage of homes and its consequences.

In a relatively short time, the lack of new homes will become a  hot political issue as the shortage leads to over crowding, rising rents and “shock horror” stories.

It also is laying the ground work for the next property boom (hard as it may seem to imagine at this time).

In 5-10 years from now we will look back and wish prices and rents would be so cheap again.

Published 30 June 2011 Bob Dey Property Report

Consents for new homes fell 16.3% in May from a year earlier, to 1139, and the annual consent rate fell 12.4% to 13,917.

The May consent figure was up by 200 from April and the highest monthly tally since November. There were 66 apartment consents, taking the annual tally for apartments to 1010.

Statistics NZ said today 68 Canterbury consents were identified as earthquake-related. The $28 million-worth of earthquake-related consents doubled the value of such consents issued since last September.

Consents were issued for $77 million of alterations & additions and $15 million of outbuildings, taking the total residential consents for May to $389 million, 19.3% below May last year.

The total value for all residential categories, $5.08 billion, is $533 million less than for the previous year, a 9.5% fall.

Auckland consents for the month fell to 236 (321 a year ago), Northland rose by one to 52, Waikato fell to 163 (202), Bay of Plenty fell to 72 (67), Wellington fell to 89 (141), Canterbury rose by 14 to 251, Otago by 10 to 85.

Consents around Auckland – using the old council boundaries except for Franklin, which has been sliced in half – for May were Rodney 52 (63), North Shore 33 (48), Waitakere 28 (40), Auckland 60 (56), Manukau 40 (73), Papakura 14 (21), Franklin 9 (27 for the whole former district).

Non-residential construction for the month rose 17.2% to $350 million ($299 million) but is still down 6.5% for the year to $3.695 billion ($3.95 billion).

Total consents, including the $33 million ($40 million) of non-building construction, fell 6% for the month to $771 million ($820 million) and 8.5% for the year to $9.185 billion ($10.036 billion).

In several previous articles I have warned readers of the risks of hyper inflation (otherwise known as the “speculators friend”) and here we have a respected author saying the same thing.

Inflation can be a blessing for investors as it increases assets prices and thereby reduces debt proportionally.

But it has to be handled carefully, as greed and fear can take control and make people spend wildly in an attempt to keep up with inflation.

Sure, interest rates might rocket, but who cares if you pay 20% interest but make 100% capital gain? You think I’m joking? Nope.

That’s exactly what happened in the 1980s — and human nature hasn’t changed one little bit since then.

Roger J Kerr challenges RBNZ view on inflation – thinks it is being driven by different factors (www.interest.co.nz)

June 27, 2011 – 12:57pm, Roger J Kerr

There has been much analysis and debate in New Zealand over the last six months as to why this economic recovery out of recession back to positive GDP growth is fundamentally different to all other economic recoveries.

The argument goes that this it is entirely different this time because the pick-up in the economy is not consumer spending-led and therefore the inflation risks stemming from stronger growth are less concerning.

Households still have too much debt on board to go crazy buying new fizz-boats, TV’s and holidays homes.

Therefore there is a valid argument that RBNZ can delay increasing the OCR as the inflation risks are different.

I don’t agree with this thinking at all.

The RBNZ gurus like this line of reasoning as they have always seen our inflation risks coming from the demand side of the economy with excessive consumer demand fuelled by housing prices/credit expansion. For this reason the RBNZ are not likely to lift the OCR and return monetary policy settings from ‘super loose’ to ‘neutral’ until they see retail sales, house prices and credit growth increasing significantly.

They don’t see the inflation risks occurring until the demand side increases.

The reality of the NZ economy is that most of the inflation comes from the supply side of the equation, be it commodity prices, oil, rents, electricity or building costs.

Price increases from these sources can still push annual inflation above the RBNZ’s limit of 3.0%.

However, the big question is whether pushing interest rates upwards to slow consumer demand will have any impact on these supply-side sourced inflationary pressures.

Probably not.

Herein lays the dilemma of only relying on monetary policy (interest rate changes) as the sole controller of inflation in New Zealand.

The core funding ratio regulation on bank borrowing does provide another lever for the RBNZ to pull, however again this is all about restricting credit growth to the feared residential property sector.

What is the RBNZ doing about the supply-side inflation risks that will potentially cause them to breach their 3.0% inflation ceiling next year?

The answer is sweet bugger all!

The RBNZ are mandated by the Government of the day to control inflation between 1% and 3%, however they seem to think it is someone else’s responsibility to push for proper competition policies and control public sector price increases. Most of our inflation continues to come from these two sources, but you never read about this reality in the RBNZ’s Monetary Policy Statements. Their view of the sources of inflation and how you address those pressures remains far too narrow in my opinion.

Until we have a wider inflation control mandate for the RBNZ to highlight the true sources and prompt change we will have sub-optimal management of inflation in this economy.

If I was the Governor of the RBNZ, I would currently be worried about the following sources of inflationary pressures outside the obvious food and petrol price increases:-

- Inflationary expectations increasing from the high headline inflations rates of late.
- For the last 10 years China has exported deflation to New Zealand with price decreases on imported consumer goods. Massive wage increases in China has now ended this deflationary phenomena.
- Wage demands and settlements will be sharply higher over the coming 12 months as workers seek a catch-up on the zero increases of recent years.
- Building costs have to increase as local construction industry resources cannot meet the Christchurch rebuild demand.
- Rents are also likely to continue increasing as wages lift and residential property construction remains well below historical averages - that is, housing shortages.
- Current low capacity utilisation in the economy will not last much longer as production is ramped-up by agriculture exporters and manufacturing exporters selling into Australia.

Add on constantly rising electricity prices and local body rates and the end-conclusion is elevated inflation risks.

I re-read the 9 June RBNZ Monetary Policy Statement and did not get the impression that these aforementioned inflations risks are well recognised and understood.

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

The “woe all is lost” gloomsters that predicted  the end of the world and the collapse of the property market have been well and truly humbled by this latest report. Those of you who  have followed my columns and talks over past 2-3 years will recall that I always maintained  that the GFC would not effect New Zealand to the same extent as elsewhere. Leaky homes, a moribund building  industry, low interest rates, slow but steady immigration, and the Christchurch tragedy have combined into a cocktail of chronic shortages.

Shortages= price stability and eventually  price rises.

Soon we will see the smug renters who championed renting as the only way to live, scramble back into the market. Renting is fine for those who need to rent, but renting means that you never even own the letter box .

If you don’t need to, then why would you?

Housing More Affordable Now

17/06/2011

Houses are at their most affordable levels in seven years, with falling prices, interest rates at record lows and banks more willing to lend, according to a monthly report into affordability.

The Roost Home Loan Affordability report, released today, shows home loan affordability in May was at its best levels since April 2004.

The report measures affordability for individual income earners and households, based on median house prices, interest rates and incomes. Affordability has been improving since December 2009.

The national median house price fell from $360,000 in April to $350,000 in May. It was a record high of $365,000 in March.

In May, affordability improved in most cities and provincial areas, including central Auckland, Wellington, Hamilton and New Plymouth, because of a drop in median house prices.

However, it worsened around Christchurch and Timaru as demand for houses not damaged by the earthquake drove prices up.

In Auckland, a shortage of supply because of leaky buildings and little new building was adding to firm demand from people moving to the city.

Banks have eased their lending criteria in recent months in an effort to boost lending volume growth from its record lows of around 1.4 percent a year. Lending was growing at 17 percent in 2004.

“We are finding banks are increasingly keen to compete hard to win new business and keep existing customers,” Roost spokeswoman Rhonda Maxwell said.

Banks were offering 90 and 95 percent mortgages and were discounting establishment and legal fees, thanks to strong competition, she said.

The Roost Home Loan Affordability measure for all of New Zealand showed the proportion of a single median after tax income needed to service an 80 percent mortgage on a median was 51.3 percent in May, down from 53 percent in April.

The worst level of affordability was 83.4 percent, seen at the peak of the house price boom in March 2008, when two-year mortgage rates were close to 10 percent.

- NZPA

Need I say more?

Things looking up in housing market

Natasha Burling  14 June 2011

Just-released Real Estate Institute data shows turnover for May was 10.3% higher than April, which is the strongest month-on-month lift for the year.

It picked up in almost every region, apart from Wellington, Central Otago lakes and Otago.

ASB economist Chris Tennent-Brown says turnover has picked up almost every month of this year, which is encouraging.

“Although for the real estate industry, turnover is still a long way short of the level of activity we saw when the housing market was really booming.”

However, Mr Tennent-Brown says it’s a long way from the depths of despair the industry has been in over the last two or three years.

 

First Australia- next NZ. While interest rates are low, and prices stable, if you don’t buy now you may be locked out for ever.

Paying rent for a life time is a hiding to no where.

Never mind if the house is not up to your standard. Too many people want to start where their parents left off.  So rough it a while, improve, save and you will be surprised how the next steps are that much easier.

 

Home ownership an elusive dream for ‘generation rent’

MELISSA DAVEY

Last updated 10:54 11/06/2011

They’re being dubbed ”generation rent” – twenty and thirty-somethings who are resigned to never owning a home.

In Australia, the number of first-time buyers taking out home loans is at the lowest level since 1994, as many taking a more conservative approach to their borrowing.

Home ownership is particularly hard in NSW, which has been the least affordable state or territory in which to own a home for the past 15 years, according to the REIA Deposit Power Housing Affordability Report.

The average proportion of income required to meet home loan repayments here is 34.5 per cent – 3 per cent higher than the national average.

”That is an enormous amount of people’s income,” said David Airey, the president of the Real Estate Institute of Australia.

”First-home buyers have been on the decline since 2009, after the government’s first home-buyers’ boost ended, and high interest rates combined with high house prices are other contributing factors.”

Even those with qualifications and steady jobs were not counting on earning enough to buy a home.

Tom Cawsey will finish his degree in biomedical science this year, but said he didn’t expect a full-time job in his field to lead to home ownership.

”My goal is to be able to afford a better rental property, not to buy my first home,” said the 24-year-old, who rents in Sydney with two friends for A$690 per week.

”Some young people are waiting to inherit their parents’ homes, but it’s not an option for everyone.”

This attitude is being replicated elsewhere. A report from Britain’s Independent newspaper said an online survey of 8000 Britons aged 20 to 45 found more than three-quarters who did not own property would like to, but 64 per cent believed that their prospects of buying their own home were nil. Like in Europe, living in rented property for life is becoming the norm there.

Lyndon Chan, a surgical registrar, said he could afford to buy in Sydney but did not think it was worth it.

”None of my friends who are doctors around my level in Sydney are even thinking about buying here, at least until they become consultants,” the 30-year-old said.

”But I also think it is a generational thing. My parents scrimped and saved to buy their home and we rarely did things like go out to dinner. I by no means live extravagantly, but maybe this generation doesn’t want to work hard only to sacrifice their lifestyle just to be able to buy a home.”

Daniel Benhar is 28 years old, and has been in full-time work for five years. ”I’ve realised that I’m on an above-average income, yet I can’t afford an average home,” he said. An animator and designer, he lives with his girlfriend, Tara McAvoy, 26, in Sydney’s Newtown with one other person, between them paying A$550 per week.

”I wouldn’t feel comfortable buying unless I had saved up at least 30 per cent of the cost of the home,” he said.

- Sydney Morning Herald

Olly Newland’s June 2011 Column

I have in several previous articles and columns predicted the rise in rentals, starting in Auckland and spreading like ripples in a pond throughout the country.

Having just been to Australia and with the benefit of my own investments there, I have always looked at the Aussie property market to pick trends at home. House prices in Aussie are sky high and $1million buys you little. Now rentals are moving as their market cools.

The natural disasters that have swept Australia have knocked The Lucky Country around. I predict before long the exodus of Kiwis will slow, stall and then reverse.

See The Age: Softening property market, new home sales slow

New Zealand

With regard to the local market, it remains (as I predicted two years ago) more or less flat with very little new building coupled by little demand. Why is this? Why are new houses, especially modest new houses, so hard to build?

The answers are simple.

(1) New houses carry a GST component of 15% on every door knob, piece of timber and blade of grass — this makes them immediately uncompetitive with second hand houses — which may only be across the road.

If the Government wants to revive the building industry then this is an area that should be looked at carefully. Some of the actions that could be taken to help first home buyers include a serious effort to provide grants towards the purchase of first homes up to a certain price limit (which would vary from area to area).

There is a ‘Welcome Home’ grant supposedly available from Housing Corporation but it appears not to be actively promoted. I haven’t ever come across one single person who has received one of these grants. It seems likely it was created as a mere political stunt to anaesthetise the masses rather than a genuine attempt to help. (Call me cynical.)

• A cash grant of up to 5% of the purchase up to a certain price limit (which would vary from area to area)
• A subsidised interest rate for the first 5 years.
• The ability to capitalise all or part of the Working For Families benefit to create a deposit. (http://www.workingforfamilies.govt.nz/)
• Making interest payments for first home buyers tax deductible
• Waiving or substantially reducing the GST content on new home …

Read the rest of this column

Building consents dropped yet again and we have a market now that is close to a Zombie State. This may be bad for builders who now must rely on re-cladding and refurbishments to make ends meet. But it’s great news for investors as the looming shortage that must follow comes closer. Virtually no new houses keeps property prices stronger, and pushes up rents.  Our cantankerous banking system doesn’t help either as lenders blow hot and cold from week to week.

Published 5 June 2011
Bob Dey Report

Building consents for new homes fell 34% in April from a year earlier, and by 160 consents from March to 927. Excluding the more volatile apartment sector, consents were down 32% from April last year to 893.

Statistics NZ put a modestly bright slant on things, saying its seasonally adjusted count rose 3.3% in March then 3.8% in April. Countering that, Statistics NZ’s trend series including & excluding apartments were down a third in a year to the lowest level since the series including apartments was started in 1982.

Consents for new homes fell by 476 from November to 994 in December last year and have stayed down – 867 in January (comparatively high for the month that’s normally quietest of the year), 973 in February, a lift to 1087 in March (but that’s normally one of the big months of that year and the level this March was down 28% from the 1501 a year earlier) and 927 in April.

The annual consent level fell 10.4% to 14,138 (15,772 the previous year). That included 971 apartment consents, down 12.3% for the year. There were 34 apartment consents in April, which beat the 13 in February 2010 but was still the fifth-quietest month in 2 years.

April was also a quiet month for alteration & addition consents at $65 million (only January 2011, at $64 million, was lower in the past 2 years). The value of all residential consents for April was $354 million, down $66 million from March and 26% – $126 million – below the level a year earlier.

The annual decline has been lighter in percentage terms – 6.6% for the April year to $5.174 billion, but that’s a decline of $366 million without taking rising inflation into account. Residential consents were at $7.7 billion in 2008, so the latest year is down by $2.53 billion – 33%, again without taking inflation into account.

Around the regions:

Auckland consents fell from 306 in April 2010 to 259, Northland from 66 to 34, Waikato from 169 to 104, Bay of Plenty from 79 to 63, Hawke’s Bay from 80 to 23, Wellington from 112 to 68, Canterbury from 266 to 198, Otago from 92 to 36. Gisborne was steady on 9 and Tasman rose from 12 to 16.

Around Auckland (using old council boundaries but chopping Franklin in half):

Rodney was down by one to 46, North Shore fell from 50 to 36, Waitakere was down by 3 to 43, Auckland consents were halved from 93 to 48, Manukau rose from 34 to 64, Papakura fell from 16 to 13 and Franklin was down from 29 to 9.

Non-residential:

Non-residential building consents for the April year were down 4.4% by floor area to 2.165 million m² and down 12% by value to $3.6 billion – 21% & $1 billion lower than the $4.6 billion in 2008. Non-building construction for the year was down 14.9% to $417 million.

For the month, the $34 million of consents was $2 million above March and $2 million below April 2010.

Total authorisations for the month, at $640 million, were down 24% ($197 million) from a year earlier and $156 million down from March. Total consents for the year were down 9.2% to $9.2 billion – a $936 million fall. From the peak of $12.64 billion into early 2008, the fall is 27% ($3.4 billion).